In 2013, Joan accepted and received a $10,000 award for
outstanding civic achievement. Joan was selected without any
action on her part, and no future services are expected of her as a
condition of receiving the award. What amount should Joan
include in her 2013 adjusted gross income in connection with
(d) The requirement is to determine the amount of a
$10,000 award for outstanding civic achievement that Joan
should include in her 2013 adjusted gross income. An award for
civic achievement can be excluded from gross income only if the
recipient was selected without any action on his/her part, is not
required to render substantial future services as a condition of
receiving the award, and designates that the award is to be directly
transferred by the payor to a governmental unit or a taxexempt
charitable, educational, or religious organization. Here,
since Joan accepted and actually received the award, the $10,000
must be included in her adjusted gross income.
In 2012, Emil Gow won $5,000 in a state lottery. Also in
2012, Emil spent $400 for the purchase of lottery tickets. Emil
elected the standard deduction on his 2012 income tax return.
The amount of lottery winnings that should be included in Emil’s
2012 taxable income is
(d) The requirement is to determine the amount of
lottery winnings that should be included in Gow’s taxable income.
Lottery winnings are gambling winnings and must be
included in gross income. Gambling losses are deductible from
AGI as a miscellaneous deduction (to the extent of winnings) not
subject to the 2% of AGI floor if a taxpayer itemizes deductions.
Since Gow elected the standard deduction for 2012, the $400
spent on lottery tickets is not deductible. Thus, all $5,000 of
Gow’s lottery winnings are included in his taxable income.
Lake Corp., an accrual-basis calendar-year corporation, had
the following 2012 receipts:
Advanced rental payments where the lease ends in 2014 $125,000
Lease cancellation payment from a five-year lease tenant 50,000
Lake had no restrictions on the use of the advanced rental payments
and renders no services. What amount of income should
Lake report on its 2012 tax return?
(d) The requirement is to determine the amount of
advance rents and lease cancellation payments that should be
reported on Lake Corp.’s 2012 tax return. Advance rental payments
must be included in gross income when received, regardless
of the period covered or whether the taxpayer uses the cash
or accrual method. Similarly, lease cancellation payments are
treated as rent and must be included in income when received,
regardless of the taxpayer’s method of accounting.
Paul Bristol, a cash-basis taxpayer, owns an apartment building.
The following information was available for 2012:
• An analysis of the 2012 bank deposit slips showed recurring
monthly rents received totaling $50,000.
• On March 1, 2012, the tenant in apartment 2B paid
Bristol $2,000 to cancel the lease expiring on December
• The lease of the tenant in apartment 3A expired on
December 31, 2012, and the tenant left improvements
valued at $1,000. The improvements were not in lieu of
any rent required to have been paid.
In computing net income from that apartment building for 2012,
Bristol should report gross income of
(c) The requirement is to determine the amount to be
reported as gross income. Gross income includes the $50,000 of
recurring rents plus the $2,000 lease cancellation payment. The
$1,000 of lease improvements are excluded from income since
they were not required in lieu of rent.
Emil Gow owns a two-family house that has two identical
apartments. Gow lives in one apartment and rents out the other.
In 2012, the rental apartment was fully occupied and Gow received
$7,200 in rent. During the year ended December 31,
2012, Gow paid the following:
Real estate taxes $6,400
Painting of rental apartment 800
Annual fire insurance premium 600
In 2012, depreciation for the entire house was determined to be
$5,000. What amount should Gow include in his adjusted gross
income for 2012?
Royce Rentals, Inc., an accrual-basis taxpayer, reported rent
receivable of $25,000 and $35,000 in its 2012 and 2011 balance
sheets, respectively. During 2012, Royce received $50,000 in
rent payments and $5,000 in nonrefundable rent deposits. In
Royce’s 2012 corporate income tax return, what amount should
Royce include as rent revenue?
(a) The requirement is to determine the amount to be
reported as rent revenue in an accrual-basis taxpayer’s tax return
for 2012. An accrual-basis taxpayer’s rent revenue would consist
of the amount of rent earned during the taxable year plus any
advance rent received. Advance rents must be included in gross
income when received under both the cash and accrual methods,
even though they have not yet been earned. In this case, Royce’s
rent revenue would be determined as follows:
Rent receivable 12/31/11 $35,000
Rent receivable 12/31/12 25,000
Decrease in receivables (10,000)
Rent collections during 2012 50,000
Rent deposits 5,000
Rent revenue for 2012 $45,000
The rent deposits must be included in gross income for 2012
because they are nonrefundable deposits.
John Budd is single, with no dependents. During 2012,
John received wages of $11,000 and state unemployment compensation
benefits of $2,000. He had no other source of income.
The amount of state unemployment compensation benefits that
should be included in John’s 2012 adjusted gross income is
(a) The requirement is to determine the amount of state
unemployment benefits that should be included in adjusted gross
income for 2012. Unemployment compensation benefits received
must generally be included in gross income.
A cash-basis taxpayer should report gross income
(d) The requirement is to determine the correct statement
regarding the reporting of income by a cash-basis taxpayer.
A cash-basis taxpayer should report gross income for the year in
which income is either actually or constructively received,
whether in cash or in property. Constructive receipt means that
an item of income is unqualifiedly avail-able to the taxpayer without
restriction (e.g., interest on bank deposit is income when
credited to account).
Which of the following taxpayers may use the cash method
(b) The requirement is to determine which taxpayer
may use the cash method of accounting. The cash method cannot
generally be used if inventories are necessary to clearly reflect
income, and cannot generally be used by C corporations, partnerships
that have a C corporation as a partner, tax shelters, and
certain tax-exempt trusts. Taxpayers permitted to use the cash
method include a qualified personal service corporation, an entity
(other than a tax shelter) if for every year it has average gross
receipts of $5 million or less for any prior three-year period (and
provided it does not have inventories), and a small taxpayer with
average annual gross receipts of $1 million or less for any prior
three-year period may use the cash method and is excepted from
the requirement to account for inventories.
In 2012, Stewart Corp. properly accrued $5,000 for an income
item on the basis of a reasonable estimate. In 2013, after
filing its 2012 federal income tax return, Stewart determined that
the exact amount was $6,000. Which of the following statements
(b) The requirement is to select the correct statement
regarding the $1,000 of additional income determined by
Stewart, an accrual method corporation. Under the accrual
method, income generally is reported in the year earned. If an
amount is included in gross income on the basis of a reasonable
estimate, and it is later determined that the exact amount is more,
then the additional amount is included in income in the tax year
in which the determination of the exact amount is made. Here,
Stewart properly accrued $5,000 of income for 2012 on the basis
of a reasonable estimate and discovered that the exact amount
was $6,000 in 2013. Therefore, the additional $1,000 of income
is properly includible in Stewart’s 2013 income tax return.