Federal Taxation - Exam 2 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Gross Income Definition - CORRECT ANSWER - All income from whatever source derived
Formula to Calculate Gross Income - CORRECT ANSWER - Total Income
-Exclusions from Income
=Gross Taxable Income
-Deductions
=Taxable Income
-Credits
-Tax Payments
=Balance Due or Return on Tax
Forms of Receipts for Gross Income - CORRECT ANSWER - 1)Receives an economic
benefit - Quantifiable in financial terms
2)Realizes income - Measurable change in property rights
3)The law does not specifically provide for an exclusion or deferral of income
Types of Taxable Years - CORRECT ANSWER - 1)Calendar Year - 12 months ending on
December 31st
2)Fiscal Year - 12 months ending on the last day of any month other than December (52/53 week
year) on the last Friday or Saturday of the month
, 3 Different Types of Accounting Methods - CORRECT ANSWER - 1)Cash Receipts method
2)Accrual method
3)Hybrid method
General Rules of Cash Receipts Method - CORRECT ANSWER - Based upon year of actual
payments. Only recorded when cash actually moves into or out of the business. Cash basis
taxpayers must generally use a calendar year end.
What is a Constructive Receipt for Cash Basis Taxpayers? - CORRECT ANSWER - Prevents
a taxpayer from deferring income recognition by refusing to accept payment when the payment
is practically available.
Ex. If you buy equipment to reduce income, it must be placed in service immediately.
General Rules of the Accrual Method - CORRECT ANSWER - Income is accounted when
earned, and expenses when incurred. Everything is recognized when its generated, not when
money actually changes hands.
What is the Claim of Rights Doctrine in Accrual based accounting? - CORRECT ANSWER -
Causes a taxpayer to realize income received even though they do not have a fixed right to the
income.
What is the hybrid method of accounting? - CORRECT ANSWER - It is the combination of
cash receipt & accrual method of accounting. You must elect it and stick with it unless the IRS
allows change.
List all main categories of income - CORRECT ANSWER - 1)Personal Service income
2)Property income
3)Life insurance income
ACTUAL Exam Questions and CORRECT
Answers
Gross Income Definition - CORRECT ANSWER - All income from whatever source derived
Formula to Calculate Gross Income - CORRECT ANSWER - Total Income
-Exclusions from Income
=Gross Taxable Income
-Deductions
=Taxable Income
-Credits
-Tax Payments
=Balance Due or Return on Tax
Forms of Receipts for Gross Income - CORRECT ANSWER - 1)Receives an economic
benefit - Quantifiable in financial terms
2)Realizes income - Measurable change in property rights
3)The law does not specifically provide for an exclusion or deferral of income
Types of Taxable Years - CORRECT ANSWER - 1)Calendar Year - 12 months ending on
December 31st
2)Fiscal Year - 12 months ending on the last day of any month other than December (52/53 week
year) on the last Friday or Saturday of the month
, 3 Different Types of Accounting Methods - CORRECT ANSWER - 1)Cash Receipts method
2)Accrual method
3)Hybrid method
General Rules of Cash Receipts Method - CORRECT ANSWER - Based upon year of actual
payments. Only recorded when cash actually moves into or out of the business. Cash basis
taxpayers must generally use a calendar year end.
What is a Constructive Receipt for Cash Basis Taxpayers? - CORRECT ANSWER - Prevents
a taxpayer from deferring income recognition by refusing to accept payment when the payment
is practically available.
Ex. If you buy equipment to reduce income, it must be placed in service immediately.
General Rules of the Accrual Method - CORRECT ANSWER - Income is accounted when
earned, and expenses when incurred. Everything is recognized when its generated, not when
money actually changes hands.
What is the Claim of Rights Doctrine in Accrual based accounting? - CORRECT ANSWER -
Causes a taxpayer to realize income received even though they do not have a fixed right to the
income.
What is the hybrid method of accounting? - CORRECT ANSWER - It is the combination of
cash receipt & accrual method of accounting. You must elect it and stick with it unless the IRS
allows change.
List all main categories of income - CORRECT ANSWER - 1)Personal Service income
2)Property income
3)Life insurance income
