ACCT553

Week 2 Homework - Solutions

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Please provide your answer to each question in the space provided below.
When finished, submit to the DropBox.
Chapter 4
1. Your brother is short on cash and cannot pay his rent this month. You pay his rent
for him. Is this taxable income to your brother? Do you get a deduction? (2 pts)
This transaction likely does NOT represent a taxable transaction. You either lent the
money to your brother or you gave it to him as a gift. (4,325)

2. Which of the following items would be excluded from income?

(a) $100 bill found under the sugar caddy at the restaurant
(b) Inheritance of a car from your grandmother valued at $5,000
(c) Loan from your father-in-law to start your business
(d) Child Support received totaling $16,500.
(4 pts)
(a) Found money (aka "treasure trove") represents taxable income. (b) The value of
an inheritance is NOT taxable for income tax purposes. (c) A loan is not included in
income unless it is forgiven. (4,485) (d) Child support received is not taxable.
(4,451) In summary, (b), (c), and (d) are excluded from taxable income.
Chapter 5
3. Shaun and Kayla earned the following in 2013: Interest on a savings account of
$36, interest on a U.S. Series EE Savings Bond of $25 (no special election made),
interest on a CD that has not matured yet of $20. How much taxable interest
income must they report on their 2013 tax return? (4 pts)
36 + 20 = $56 taxable interest. The interest on the savings bond is not taxable until
the bond matures and is redeemed. (5,075)

4. Explain what a cafeteria plan is (hint: it has nothing to do with what you eat
between classes :-)). (5 pts)
Similar to when you go out to eat and look at a menu; employers often offer
employees a choice between taking cash or certain qualified benefits. If an
employee chooses a benefit, then there is no tax consequence to the participant.
However, if an employee chooses cash over a benefit, then the amount would be
includible in gross income as compensation. (5,195)

Chapter 6
5. Explain the limitations placed on the deductibility of business gifts? What code
section dictates this treatment? (5 pts)
IRC 274(b) allows a deduction for business gifts up to $25 per recipient, per year.
The amount is deductible by the business, and not included in income by the
recipient. (6,515) Think about the $75 fruit basket that a vendor sends to your
office. Is that deductible? Yes, and likely the entire $75 is deductible because it was
sent to several people (i.e. the accounting office).