Question
Comprehensive Problems

73. [LO 1, LO 2, LO3] Charlie was hired by Ajax this year as a corporate executive and a member of the board of directors. During the current year, Charlie received the following payments or benefits paid on his behalf.

Salary payments $ 92,000
Contributions to qualified pension plan 10,200
Qualified health insurance premiums 8,400
Year-end bonus 15,000
Annual director’s fee 10,000
Group-term life insurance premiums (face=$40,000) 750
Whole life insurance premiums (face=$100,000) 1,420
Disability insurance premiums (no special elections) 4,350

a. Charlie uses the cash method and calendar year for tax purposes. Calculate Charlie’s gross income for the current year.

b. Suppose that Ajax agrees to pay Charlie an additional $100,000 once Charlie completes five years of employment. Will this agreement alter Charlie’s gross income this year relative to your part (a) answer? Explain.

c. Suppose that in exchange for his promise to remain with the firm for the next four years, Ajax paid Charlie four years of director’s fees in advance. Will this arrangement alter Charlie’s gross income this year relative to your part (a) answer? Explain.

d. Assume that in lieu of a year-end bonus Ajax transferred 500 shares of Bell stock to Charlie as compensation. Further assume that the stock was listed at $35 per share and Charlie would sell the shares by year-end, at which time he expected the price to be $37 per share. Will this arrangement alter Charlie’s gross income this year relative to your part (a) answer? Explain.

e. Suppose that in lieu of a year-end bonus Ajax made Charlie’s house payments (a total of $23,000). Will this arrangement alter Charlie’s gross income this year relative to your part (a) answer? Explain.

74. [LO 1, LO 2, LO3] Irene is disabled and receives payments from a number of sources (see below). The interest payments are from bonds that Irene purchased over past years and a disability insurance policy that Irene purchased herself. Calculate Irene’s gross income.

Interest, bonds issued by City of Austin, Texas $ 2,000
Social Security benefits 8,200
Interest, U.S. Treasury bills 1,300
Interest, bonds issued by Ford Motor Company 1,500
Interest, bonds issued by City of Quebec, Canada 750
Disability insurance benefits 19,500
Distributions from qualified pension plan 5,400

75. {Tax Forms} [LO1, LO 2, LO3] Ken is 63 years old and unmarried. He retired at age 55 when he sold his business, Understock.com. Though Ken is retired, he is still very active. Ken reported the following financial information this year. Assume Ken files as a single taxpayer. Determine Ken’s gross income and complete page 1 of Form 1040 for Ken.

a. Ken won $1,200 in an illegal game of poker (the game was played in Utah, where gambling is illegal).

b. Ken sold 1,000 shares of stock for $32 a share. He inherited the stock two years ago. His tax basis (or investment) in the stock was $31 per share.

c. Ken received $25,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for 20 years, for $210,000.

d. Ken received $13,000 in disability benefits for the year. He purchased the disability insurance policy last year.

e. Ken decided to go back to school to learn about European history. He received a $500 cash scholarship to attend. He used $300 to pay for his books and tuition, and he applied the rest toward his new car payment.

f. Ken’s son, Mike, instructed his employer to make half of his final paycheck of the year payable to Ken. Ken received the check on December 30 in the amount of $1,100.

g. Ken received a $610 refund of the $3,600 in state income taxes his employer withheld from his pay last year. Ken claimed $6,150 in itemized deductions last year (the standard deduction for a single filer was 6,100).

h. Ken received $30,000 of interest from corporate bonds and money market accounts.

76. {Tax Forms} [LO 1, LO 2, LO 3] Consider the following letter and answer Shady’s question.

To my friendly student tax preparer:

Hello, my name is Shady Slim. I understand you are going to help me figure out my gross income for the year…whatever that means. It’s been a busy year and I’m a busy man, so let me give you the lowdown on my life and you can do your thing.

I was unemployed at the beginning of the year and got $2,000 in unemployment compensation. I later got a job as a manager for Roca Cola. I earned $55,000 in base salary this year. My boss gave me a $5,000 Christmas bonus check on December 22. I decided to hold on to that check and not cash it until next year, so I won’t have to pay taxes on it this year. Pretty smart, huh? My job’s pretty cool. I get a lot of fringe benefits like a membership to the gym that costs $400 a year and all the Roca Cola I can drink, although I can’t really drink a whole lot. As part of my manager duties, I get to decide on certain things like contracts for the company. My good buddy, Eddie, runs a bottling company. I made sure that he won the bottling contract for Roca Cola for this year (even though his contract wasn’t quite the best). Eddie bought me a Corvette this year for being such a good friend. The Corvette cost $50,000 and he bought it for me out of the goodness of his own heart. What a great guy!

Here’s a bit of good luck for the year. Upon leaving my office one day, I found $8,000 lying in the street! Well, one person’s bad luck is my good luck, right?

I like to gamble a lot. I won a $22,000 poker tournament in Las Vegas this year. I also won about $5,000 over the year playing the guys at our Friday night poker game. Can you believe that I didn’t lose anything this year?

Speaking of the guys, one of them hit me with his car as we were leaving the game one night. He must have been pretty ticked that he lost! I broke my right leg and my left arm. I sued the guy and got $11,000 for my medical expenses, $3,000 to pay my psychotherapist for the emotional problems I had relating to the injuries (I got really depressed!), and I won $12,000 in punitive damages. That’ll teach him that he’s not so tough without his car!

Another bit of bad luck. My uncle Monty died this year. I really liked the guy, but the $200,000 inheritance I received from him made me feel a little better about the loss. I did the smart thing with the money and invested it in stocks and bonds and socked a little into my savings account. As a result, I received $600 in dividends from the stock, $200 in interest from the municipal bonds, and $300 in interest from my savings account.

My ex-wife, Alice, is still paying me alimony. She’s a lawyer who divorced me a few years ago because I was “unethical” or something like that. Since she was making so much money and I was unemployed at the time, the judge ruled that she had to pay ME alimony. Isn’t that something? She sent me $3,000 in alimony payments this year. She still kind of likes me, though. She sent me a check for $500 as a Christmas gift this year. I didn’t get her anything, though.

So there you go. That’s the year in a nutshell. Can you figure out my gross income and complete page 1 of Form 1040 for me? And since you’re a student, this is free, right? Thanks, I owe you one! Let me know if I can get you a six-pack of Roca Cola or something.

77. {Tax Forms} [LO 1,LO 2, LO 3] Diana and Ryan Workman were married on January 1 of last year. Diana has an eight-year-old son, Jorge, from her previous marriage. Ryan works as a computer programmer at Datafile Inc. (DI) earning a salary of $96,000. Diana is self-employed and runs a day care center. The Workmans reported the following financial information pertaining to their activities during the current year.

a. Ryan earned a $96,000 salary for the year.

b. Ryan borrowed $12,000 from DI to purchase a car. DI charged him 2 percent interest on the loan, which Ryan paid on December 31, but would have charged Ryan $720 if interest was calculated at the applicable federal interest rate. Assume that tax avoidance was not a motive for the loan.

c. Diana received $2,000 in alimony and $4,500 in child support payments from her former husband.

d. Diana won a $900 cash prize at her church-sponsored Bingo game.

e. The Workmans received $500 of interest from corporate bonds and $250 of interest from a municipal bond. Diana owned these bonds before she married Ryan.

f. The couple bought 50 shares of ABC Inc. stock for $40 per share on July 2. The stock was worth $47 a share on December 31. The stock paid a dividend of $1.00 per share on December 1.

g. Diana’s father passed away on April 14. She inherited cash of $50,000 and his baseball card collection, valued at $2,000. As beneficiary of her father’s life insurance policy, Diana also received $150,000.

h. The couple spent a weekend in Atlantic City in November and came home with gambling winnings of $1,200.

i. Ryan received $400 cash for reaching 10 years of continuous service at DI.

j. Ryan was hit and injured by a drunk driver while crossing a street at a crosswalk. He was unable to work for a month. He received $6,000 from his disability insurance. DI paid the premiums for Ryan but they reported the amount of the premiums as compensation to Ryan on his year-end W-2.

k. The drunk driver who hit Ryan in part (j) was required to pay his $2,000 medical costs, $1,500 for the emotional trauma he suffered from the accident, and $5,000 for punitive damages.

l. For meeting his performance goals this year, Ryan was informed on December 27 that he would receive a $5,000 year-end bonus. DI (located in Houston, Texas) mailed Ryan’s bonus check from its payroll processing center (Tampa, Florida) on December 28th. Ryan didn’t receive the check at his home until January 2.

m. Diana is a 10 percent owner of MNO Inc., a Subchapter S corporation. The company reported ordinary business income for the year of $92,000. Diana acquired the MNO stock last year.

n. Diana’s daycare business collected $35,000 in revenues. In addition, customers owed her $3,000 at year-end. During the year, Diana spent $5,500 for supplies, $1,500 for utilities, $15,000 for rent, and $500 for miscellaneous expenses. One customer gave her use of his vacation home for a week (worth $2,500) in exchange for Diana allowing his child to attend the day care center free of charge. Diana accounts for her business activities using the cash method of accounting.

o. Ryan’s employer pays the couple’s annual health insurance premiums of $5,500 for a qualified plan.

Required:

A. Assuming the Workmans file a joint tax return, determine their gross income.

B. Using your answer in part A, complete page 1 of Form 1040 through line 22 for the Workmans.

Diane & Ryan Workman

Form 1040, Line 21 Detail Schedule

Cash Prize

900

Gambling Winnings

1,200

Punitive Damages

5,000

Line 21 Income $7,100

C. Assuming the Workmans live in California, a community property state, and that Diana and Ryan file separately, what is Ryan’s gross income?

Ryan Workman

Form 1040, Line 21 Detail Schedule

Cash Prize

450

Gambling Winnings

600

Punitive Damages

2,500

Line 21 Income $3,550