For each of the following tax treatments, explain the application of the income tax concept(s) that form(s) the basis for the treatment.
a.Antonio uses his automobile 60% of the time in his insurance business and 40% of the time for personal purposes. Antonio is only allowed to deduct 60% of the cost of operating the automobile. b.Teresa is a university student majoring in accounting. Teresa became a friend with her neighbor who owns an electronics store. In return for setting up an accounting system for her neighbor's store, Teresa is given an iPod worth $600. Teresa must include the value of the iPod in her gross income. c.Larry bought 300 shares of Shamrock common stock in April for $6 per share. At December 31, Shamrock common stock is selling for $8 per share. Larry does not have to recognize any income from the Shamrock common stock in the current year. d.Allan bought $10,000 par value of 8% Lake City Water Improvement District bonds for $9,200 several years ago. During the current year, Allan receives $400 in interest on the bonds before selling them for $9,600. Allan's only recognized income from the bonds is the $400 gain on the sale of the bonds. e.Anita is an author of history books. In 2018, she signed a contract to write a book on the history of the Tea Party. At that time, she received a $5,000 advance on her royalty payments. The terms of her contract required her to return the advance if she does not complete the book or if her royalties are insufficient to cover the advance. Anita finishes the book in 2018. Anita must include the $5,000 income in her 2018 tax return.
What will be an ideal response?
| a. | The business purpose concept for the 60% and the lack of the same for the 40% personal usage. The legislative grace concept is necessary for any deduction. |
| b. | The all-inclusive income concept applies as Teresa provided a service and was compensated with something of value (cash-equivalent approach). The realization concept states that Teresa must recognize the income once the exchange is complete. |
| c. | According to the realization concept, no income is recognized until realization (sale of the stock) occurs. |
| d. | The realization concept provides for the gain recognition on the sale of the bonds. The all-inclusive-income concept provides for including income from the sale. The capital recovery concept limits the gain to the amount realized in excess of the cost of the bonds. The legislative grace concept provides for the exclusion from gross income of the interest from municipal bonds. |
| e. | Under the claim-of-right doctrine, income is realized when it is received without any clear obligation to repay the income. The fact that Anita may have to repay the advance does not negate her claim of right or her ability to control the $5,000 advance. If Anita is required to make a repayment in the future, she would be allowed a deduction at that time. Anita has a realized income of $5,000 when she receives the advance royalty. |
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The cash disbursement clerk performs all of the following tasks except
a. reviews the supporting documents for completeness and accuracy b. prepares checks c. signs checks d. marks the supporting documents paid
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Answer the following statement true (T) or false (F)
Venue refers to:
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