Tax Accounting - Chapter 3 questions
with correct answers.
Concepts of English ANS - Economic Concept
Accounting Concept
Tax Concept
Economic Concept of Income ANS - the amount an individual could consume during a period and
remain as well off at the end of the period as at the beginning of the period
Economists would include as income:
1. unrealized gains
2. Gifts & Inheritance
Economists also adjust for inflation in measuring income
Accounting Concept of Income ANS - Values are measured by a transaction approach
Income
Income is "realized" as result of completed transaction
Use historical cost
Accountants believe economic concept is too subjective for financial reporting
Tax Concept of Income ANS - Tax law has adopted accountant's concept of income:
1. Administrative convenience - economic concept is considered too subjective
2. Wherewithal to pay - a tax should be collected when the taxpayer can most easily pay (exampled 15
year installment sale shouldn't have requirement to pay ALL taxes for total sale at once)
Conditions to Make Income Taxable ANS - 1. There must be an economic benefit to taxpayer (does not
have to be cash)
2. Income must be realized when the earnings process is complete
, 3. Income must be recognized
Gross Income Defined ANS - Section 61(a) defines gross income as "all income from whatever source
derived" including (but not limited to) the following items:
Compensation, income derived from business, gains from dealings in property, interest, gains from
dealings in property, interest, rents, royalties, dividends, alimony, annuities, life insurance, pensions,
discharge of indebtedness
Form of receipt
Gross income is not limited to cash
Section1.61-1A income may be "realized in any form, whether in money, property, and services" (did
taxpayer receive an economic benefit?)
Includes barter transactions
Indirect Economic Benefit
Items indirectly benefiting taxpayers are excluded from gross income
Protective clothing for on the job
Sleeping accommodations
Annual health checkups
To Whom is Income Taxable? ANS - assignment of income
Allocating income between married people
Income of minor children
Assignment of Income ANS - Supreme Court in Lucas v. Earl (1930) - ruled that individual providing
services is required to recognize income even though he/she may have assigned the right to receive the
income to another
Helvering v. Horst (1940) - ruled that income from property (ex: interest or rent income) should be
taxable to the owner of the property
Allocating Income between Married People ANS - For FIT purposes, Income is allocated between
spouses depending on state of residence:
with correct answers.
Concepts of English ANS - Economic Concept
Accounting Concept
Tax Concept
Economic Concept of Income ANS - the amount an individual could consume during a period and
remain as well off at the end of the period as at the beginning of the period
Economists would include as income:
1. unrealized gains
2. Gifts & Inheritance
Economists also adjust for inflation in measuring income
Accounting Concept of Income ANS - Values are measured by a transaction approach
Income
Income is "realized" as result of completed transaction
Use historical cost
Accountants believe economic concept is too subjective for financial reporting
Tax Concept of Income ANS - Tax law has adopted accountant's concept of income:
1. Administrative convenience - economic concept is considered too subjective
2. Wherewithal to pay - a tax should be collected when the taxpayer can most easily pay (exampled 15
year installment sale shouldn't have requirement to pay ALL taxes for total sale at once)
Conditions to Make Income Taxable ANS - 1. There must be an economic benefit to taxpayer (does not
have to be cash)
2. Income must be realized when the earnings process is complete
, 3. Income must be recognized
Gross Income Defined ANS - Section 61(a) defines gross income as "all income from whatever source
derived" including (but not limited to) the following items:
Compensation, income derived from business, gains from dealings in property, interest, gains from
dealings in property, interest, rents, royalties, dividends, alimony, annuities, life insurance, pensions,
discharge of indebtedness
Form of receipt
Gross income is not limited to cash
Section1.61-1A income may be "realized in any form, whether in money, property, and services" (did
taxpayer receive an economic benefit?)
Includes barter transactions
Indirect Economic Benefit
Items indirectly benefiting taxpayers are excluded from gross income
Protective clothing for on the job
Sleeping accommodations
Annual health checkups
To Whom is Income Taxable? ANS - assignment of income
Allocating income between married people
Income of minor children
Assignment of Income ANS - Supreme Court in Lucas v. Earl (1930) - ruled that individual providing
services is required to recognize income even though he/she may have assigned the right to receive the
income to another
Helvering v. Horst (1940) - ruled that income from property (ex: interest or rent income) should be
taxable to the owner of the property
Allocating Income between Married People ANS - For FIT purposes, Income is allocated between
spouses depending on state of residence:
