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. (TCO 2) The taxpayer's marginal tax bracket is 45% (combined federal and state rates).

Which would the taxpayer prefer? (Points: 2)


$1.45 taxable income rather than $1.00 tax-exempt income. $.54 tax-exempt income rather than $1.00 taxable income. $1.75 taxable income rather than $1.00 tax-exempt income. $1.00 tax-exempt income rather than $1.55 taxable income. None of the above.

2. (TCO 3) Iris, a widow, elected to receive the proceeds of a $100,000 face value life
insurance policy on the life of her deceased husband in annual installments of $12,500 over the remainder of her life, estimated to be 10 years. (Points: 2) None of the payments received are included in gross income because their source is the life insurance policy. All of the payments are included in Iris's gross income because she paid nothing for the right to receive the payments. Iris will not recognize income until the 9th year, after she has recovered her investment. Iris must include $2,500 in gross income each year for the first 10 years she collects on the policy. None of the above.

3. (TCO 3) In 2010, Khalid was in an automobile accident and suffered physical injuries. The
accident was caused by Rashad's negligence. In 2011, Khalid collected from the insurance company. He also received $15,000 for loss of income, $5,000 punitive damages, and $8,000 for medical expenses which he had deducted on his 2010 tax return. His other medical expenses exceeded 7.5% of his AGI, and his total itemized deductions were $20,000. As a result of the above, Khalid's 2011 gross income is increased by: (Points: 2) $0. $5,000. $13,000. $20,000. $28,000.

4. (TCO 3) The taxpayer is an appliance dealer and has the following items of inventory on
hand at the end of the year: Replacement Cost Expected Selling Price

Item

Cost

20 Big Screen TVs 200 DVD Players 100 Stereo Systems

$10,000 20,000 24,000 $54,000

$14,000 16,000 21,000 $51,000

$18,000 18,000 35,000 $71,000

Under the lower-of-cost-or-market inventory method, the ending inventory value is:

(Points: 2)
$54,000. $52,000. $51,000. $47,000. None of the above.

5. (TCO 7) Martha participated in a qualified tuition program for the benefit of her
son. She invested $5,000 in the fund. Four years later her son withdrew $7,500, the entire balance in the program, to pay his college tuition. (Points: 2) Martha must include the $2,500 ($7,500 - $5,000) in her gross income when the funds are used to pay the tuition. Martha must include the portion of the $2,500 accumulated each year in her gross income (i.e., interest). Martha's son must include the $2,500 ($7,500 - $5,000) in his gross income when the funds are used to pay the tuition. Martha's son must include the portion of the $2,500 accumulated each year in his gross income (i.e., interest). None of the above.

6. (TCO 7) Karen, an accrual basis taxpayer, sold goods in October 2009 for $10,000.
The customer was unable to pay cash. So the customer gave Karen a note for $10,000 that was payable in April 2010. The note bore interest at the federal rate. The fair market value of the note at the end of 2009 was $9,000. Karen collected $10,000 from the customer in April 2010. Under the accrual method: (Points: 2) Karen must recognize $10,000 of income in 2009. Karen must recognize $9,000 of income in 2009. Karen must recognize $10,000 of income in 2010. Karen must recognize $1,000 of income in 2010. None of the above.

7. (TCO 7) Hal sold land held as an investment with a fair market value of $100,000
for $36,000 cash and a note for $64,000 that was due in two years. The note bore interest of 11% when the applicable federal rate was 7%. Hal's cost of the land was $40,000. Because of the buyer's good credit record and the high interest rate on the note, Hal thought the fair market value of the note was at least $74,000. (Points: 2) Hal can elect to treat the $36,000 as a recovery of capital. Hal must recognize $70,000 gain in the year of sale. Hal must recognize $60,000 gain in the year of sale. Unless Hal elects not to use the installment method, Hal must recognize $21,600 gain in the year of sale. None of the above.

8. (TCO 7) Joe sells property to Jack for $10,000 cash plus Jack's note (fair market
value and face amount of $90,000). Joe's basis for the property was $15,000. What is the recognized gain/loss? (Points: 2) $20,000 $15,000 $85,000 $90,000 None of the above

9. (TCO 7) The installment method CANNOT be applied to the following: (Points: 2)


Gains on property held for sale in the ordinary course of business. Depreciation recapture under Section 1245 or Section 1250. Gains on stocks or securities traded on an established market. All of the above. None of the above.

10. (TCO 2) Which of the following is an exclusion from wage and salary taxable income: (Points: 2)
Long-term care insurance. Child adoption expenses. Employee discounts. Qualified transportation fringe.

All of the above.