ACC 442 Lecture Notes - Lecture 8: Constructive Receipt, Gross Income, Qualified Dividend

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indigolion532

18 May 2018

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Cash Receipt Method

Cash, property, or services received are included in the taxpayer's gross income in the same year or

constructive receipt by the taxpayer

The rationale of Constructive Receipt

the taxpayer should not be allowed to postpone income recognition

Under the cash receipt method, a note received in payment for services will be recognized at...

Fair Market value of the note

The 2 Requirements of the Accrual Method

1. all events have occurred that grant the right to receive income

2. the amount to be received can be reasonably determined

Claim of right doctrine

A payment received before a settled dispute must be recognized in the gross income at receipt

When a taxpayer's right to income is contested

Gross income is only recognized when payment has been received (with the exception of claim of right

doctine)

2 Conditions of Construction Receipt

1. the amount is ready for taxpayer

2. the entitled receipt is not subject to restrictions

Constructive Receipt

The income has not actually been received but the it will be taxed as if it were

Assignment of income (connected with fruit and tree metaphor)

assigning income to another party to avoid tax liability

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Document Summary

Cash, property, or services received are included in the taxpayer"s gross income in the same year or constructive receipt by the taxpayer. The rationale of constructive receipt the taxpayer should not be allowed to postpone income recognition. Under the cash receipt method, a note received in payment for services will be recognized at The 2 requirements of the accrual method: all events have occurred that grant the right to receive income, the amount to be received can be reasonably determined. A payment received before a settled dispute must be recognized in the gross income at receipt. When a taxpayer"s right to income is contested. Gross income is only recognized when payment has been received (with the exception of claim of right doctine) 2 conditions of construction receipt: the amount is ready for taxpayer, the entitled receipt is not subject to restrictions. The income has not actually been received but the it will be taxed as if it were.

Related Questions

At June 30, 2017, the end of its most recent fiscal year, Primrose Comp Consultantsâ post-closing trial balance was as follows:

	Debit	Credit
Cash	$5,860
Accounts receivable	1,340
Supplies	770
Accounts payable		$450
Unearned service revenue		1,250
Common stock		4,000
Retained earnings		2,270
	$7,970	$7,970

The company underwent a major expansion in July. New staff was hired and more financing was obtained. Culver conducted the following transactions during July 2017, and adjusts its accounts monthly.

July	1	Purchased equipment, paying $4,000 cash and signing a 2-year note payable for $22,400. The equipment has a 4-year useful life. The note has a 6% interest rate which is payable on the first day of each following month.
	2	Issued 22,400 shares of common stock for $56,000 cash.
	3	Paid $4,200 cash for a 12-month insurance policy effective July 1.
	3	Paid the first 2 (July and August 2017) monthsâ rent for an annual lease of office space for $4,500 per month.
	6	Paid $4,300 for supplies.
	9	Visited client offices and agreed on the terms of a consulting project. Culver will bill the client, Connor Productions, on the 20th of each month for services performed.
	10	Collected $1,340 cash on account from Milani Brothers. This client was billed in June when Culver performed the service.
	13	Performed services for Fitzgerald Enterprises. This client paid $1,250 in advance last month. All services relating to this payment are now completed.
	14	Paid $450 cash for a utility bill. This related to June utilities that were accrued at the end of June.
	16	Met with a new client, Thunder Bay Technologies. Received $13,400 cash in advance for future services to be performed.
	18	Paid semi-monthly salaries for $12,300.
	20	Performed services worth $31,400 on account and billed customers.
	20	Received a bill for $2,500 for advertising services received during July. The amount is not due until August 15.
	23	Performed the first phase of the project for Thunder Bay Technologies. Recognized $11,200 of revenue from the cash advance received July 16.
	27	Received $16,800 cash from customers billed on July 20.

Adjustment data:

1.		Adjustment of prepaid insurance.
2.		Adjustment of prepaid rent.
3.		Supplies used, $1,400.
4.		Equipment depreciation, $550 per month.
5.		Accrual of interest on note payable.
6.		Salaries for the second half of July, $12,300, to be paid on August 1.
7.		Estimated utilities expense for July, $900 (invoice will be received in August).
8.		Income tax for July, $1,340, will be paid in August

*Journalize July Transactions**

brownwolf69

1. Which of the following statements is true about apartnership?

a. One capital and one drawings account is used for eachpartnership.

b. The capital account is used to record each partner'sinvestment and that partner's designated share of the earnings.

c. Partnerships are subject to separate income taxes.

d. The drawings account is closed to retained earnings at theend of the period.

2. Which of the followingstatements does not correctly describe preferred stock?

a. Preferred shareholders have a preference with respect todividend payments.

b. Preferred shareholders have a preference with respect toassets in the event of dissolution.

c. Preferred shareholders have voting rights on a per sharebasis.

d. Preferred stock typically has a fixed dividend rate.

3. Which of the followingstatements is false?

a. Common stockholders have a residual claim on assets in theevent of liquidation.

b. Shares of stock held in the treasury are subtracted from thenumber of issued shares in the determination of the number ofoutstanding shares.

c. Common stockholders have voting rights at annual stockholdermeetings.

d. Corporations are governed by their stockholders.

4. Which of the following would not be reportedas a financing activities cash flow?

a. Issuing common stock for cash.

b. Cash dividend payments.

c. Purchasing treasury stock.

d. Purchase of a building by signing a note payable.

5. Which of the following is not reported as acash flow from investing activities?

a. Sale of a depreciable asset for cash.

b. Purchasing land in exchange for common stock.

c. Selling a long-term investment at a loss for cash.

d. Purchase of a patent in exchange for cash.

6. Which of the following transactions would be reported withinthe investing section of the cash flow statement?

a. The cash sale of land at a loss.

b. The purchase of a building in exchange for common stock.

c. The receipt of a stock dividend from a stock investment.

d. The cash receipt of a dividend from a stock investment.

7. Which of the following would be subtracted from net incomewhen determining cash flows from operating activities under theindirect method?

a. A decrease in utilities payable.

b. Patent amortization expense.

c. A decrease in prepaid rent.

d. A loss on the sale of a depreciable asset.

7. Which of the following would be added to net income whendetermining cash flows from operating activities under the indirectmethod?

a. A decrease in accounts payable.

b. Patent amortization expense.

c. An increase in prepaid insurance.

d. A gain on the sale of a depreciable asset.

8. Which of the following would not be a cashflow from financing activities?

a. Issuance of common stock for cash.

b. Borrowing cash on a long-term note payable.

c. Collection of a cash dividend.

d. Repayment of principal on a long-term note payable.

9. The cash payment of a previously declared dividend increaseswhich of the following ratios?

a. Debt-to-equity.

b. Earnings per share.

c. Price/earnings ratio.

d. Asset turnover.

10. The debt-to-equity ratio measures which of thefollowing?

a. Liquidity.

b. Solvency.

c. Profitability.

d. Market strength.

11. Negative financial leverage occurs when the:

a. Average net (after tax) interest rate on borrowed funds isless than the company's earnings rate on its assets.

b. Return on assets is more than return on equity.

c. Return on equity is more than return on assets.

d. Operating expenses exceed gross profit.

12. Which of the following ratios is notconsidered to be a test of profitability?

a. Current ratio.

b. Profit margin.

c. Return on assets.

d. Earnings per share.

13. Home Depot's operating strategy is to offer a broadassortment of high-quality merchandise and services at competitiveprices using highly knowledgeable service-oriented personnel andaggressive advertising. Which of the following isnot as critical to achieving Home Depot'sstrategy?

a. Cost control

b. Product differentiation

c. High level of customer service

d. High sales volume

13. Which of the following ratios is not partof the DuPont model?

a. Asset turnover.

b. Debt-to-equity.

c. Net profit margin.

d. Return on equity.

Which of the following statements is notcorrect?

Purchasing fixed assets through debt financing decreases thefinancial leverage ratio.

Accruing an expense will affect the net profit margin ratio.

Return on equity may increase even when the financial leverageratio decreases.

Purchasing treasury stock results in a decrease in assetturnover.

orchidgoldfish574

Which of the following characteristics may result in theclassification of a liability being changed from current tononcurrent:

a) violation of a subjective acceleration clause

b) violation of a objective acceleration clause

c) a demand provision for payment

d) refiancing after the balance sheet date

Pending litigation would generally be considered:

a) nonmonetary liabilty

b) contingent liability

c) estimated liability

d) current liability

Barrons Co. current ratio is 2:1. Which of the followingtransactions would normally increase Barney's current ratio?

a) purchasing inventory on account

b) borring money by signing a long-term note

c) collecting an account receivable

d) purchasing land for cash

On multiple step income statement, gains or losses on sale ofequipment would be shown

a) before gross profit on sales

b) after gross profit on sales but before income from conitnuingoperations

c) after income from continuing operations but before incomefrom extraordinary items

d) after income before extraordinary items but before netincome

A single step income statement is a format that

a) compares the current years income with last year's income

b) recongnizes subtotals at intermediate stages such as grossmargin

c) combines revenues and gains and subtracts from them expensesand losses, resulting in income from operations

d) reports sales revenue, cost of goods sold, gross margin, andall other expenses

In contrast with a multiple-step income statement, a single stepincome statement does NOT show the amount of

a) income taxes on continuing operations

b) cost of goods sold

c) gross profit

d) earnings per share

The amount of income reported for tax purposes

a) is nomally greater than the net income reported tostockholders

b) must be computed according to GAAP

c) is used to compute earnings per share

d) may differ from the amount of income detemined for financialreporting purposes

Under the general rule of revenue recognition, revenue isrecognized when

a) marketability and market price are assured

b) a contractual agreement exists, and cash collection isassured

c) the earnings process is complete, and a valid promise ofpayment has been received

d) all related expenses have been incurred

Seaworth Company's gross sales in 2014 were 3930000. Assumingsales returns and allowances were 74000 sales discounts were 35000and freight-out was 28000 what were Seaworthy's net sales in2014?

a) 3792000

b) 3821000

c)3856000

d) 3930000

On June 30, 2014 Sonata COmpanys operating facilities inNebraska were detroyed by a flood. The loss of $700000 was notcovered by insurance. Sonata's tax rate for 2014 is 40 percent. InSonatas income statement for the year ended sept 30 2014 this eventshould be reported as an extraordinary loss of

a) 0

b) 280000

c) 420000

d) 700000

In a statement of cash flows, payments to acquire debtinstruments of other entities would typically be classified as cashoutflows for

a) financing activities

b) equity activities

c) operating activities

d) investing activities

A gain on the sale of a plan asset in the ordinary course ofbusiness should be presented in a staement of cash flows preparedusing the indirect method as

a) a cash inflow from investing activities

b) a cash inflow from financing activities

c) a deduction from net income

d) a addition to net income

In a statement of cash flows, proceeds from issuing equityinstruments should be classified as cash inflows from

a) brokerage activities

b) financing activities

c) investing activites

d) operating activities

When preparing a statement of cash flows using the indirectmethod, the amortization of trademarks should be reported as a

a) increase in cash flows from investing activities

b) reduction in cash flows from investing activities

c) increase in cash flows from operating activities

d) reduction in cash flows from operating activites

A loss in the sale of machinery in the ordinary course ofbusiness should be presented in a statement of cash flows( indirectmethod) as

a) an addition to net income

b) a deduction from net income

c) an inflow and outflow of cash

d) an outflow of cash

In preparing a statement of cash flows, which of the followingtransactions would be considered an investing activity?

a) sale of a business segment

b) Issuance of bonds payable at a discount

c) purchase of treasury stock

d) sale of capital stock

In a statement of cash flows (indirect method), depreciation istreated as an adjustment to reported net income becausedepreciation

a) is an inflow of cash to reserve account for assetreplacement

b) reduces the reported net income and involves an inflow ofcash

c) reduces the reported net inome but does not involve anoutflow of cash

d) usually represents a significant portion of operatingexpense

orchidfrog938

ACC 442 Lecture Notes - Lecture 8: Constructive Receipt, Gross Income, Qualified Dividend

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