Tax Practice Exam 3
Name: ________________________ Class: ___________________ Date: __________
ID: A
ACCT217 - Sample Exam 2
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
____
____
____
1. Taupe Corporation is considering deferred compensation plans for its executive employees over age 55. One plan is to allow the employee to make an election at the end of the year to collect his or her bonus when the employee retires, at which time the executive would receive the deferred pay plus 6% interest.
a. The interest is original issue discount and must be included in gross income before retirement. b. The employee cannot defer the income (both the bonus and the interest) for tax purposes because it is constructively received each year.
c. The employee must recognize the bonus each year, but can defer the interest.
d. The bonus and the related interest can be deferred from inclusion in gross income until they are received.
e. None of the above.
2. Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:
a. The OID will not be included in gross income until the end of the third year.
b. The OID will be amortized by the straight-line method (e.g., $75 per year.)
c. All of the OID must be recognized as gross income in the first year.
d. The interest income for the first year will be less than the interest income for the third year. e. None of the above.
3. Dorothy purchased a certificate of deposit for $10,000 on January 1, 2007. The certificate’s maturity value in two years (December 31, 2008) is $10,816, yielding 4% before-tax interest.
a. Dorothy must recognize $400 (.04 $10,000) gross income in 2007.
b. Dorothy must recognize $816 gross income in 2008.
c. Dorothy must recognize $816 gross income in 2007.
d. Dorothy must recognize $408 ($816/2) gross income in 2007 and 2008.
e. None of the above.
4. With respect to the prepaid income from services,
ID: A
ACCT217 - Sample Exam 2
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
____
____
____
1. Taupe Corporation is considering deferred compensation plans for its executive employees over age 55. One plan is to allow the employee to make an election at the end of the year to collect his or her bonus when the employee retires, at which time the executive would receive the deferred pay plus 6% interest.
a. The interest is original issue discount and must be included in gross income before retirement. b. The employee cannot defer the income (both the bonus and the interest) for tax purposes because it is constructively received each year.
c. The employee must recognize the bonus each year, but can defer the interest.
d. The bonus and the related interest can be deferred from inclusion in gross income until they are received.
e. None of the above.
2. Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:
a. The OID will not be included in gross income until the end of the third year.
b. The OID will be amortized by the straight-line method (e.g., $75 per year.)
c. All of the OID must be recognized as gross income in the first year.
d. The interest income for the first year will be less than the interest income for the third year. e. None of the above.
3. Dorothy purchased a certificate of deposit for $10,000 on January 1, 2007. The certificate’s maturity value in two years (December 31, 2008) is $10,816, yielding 4% before-tax interest.
a. Dorothy must recognize $400 (.04 $10,000) gross income in 2007.
b. Dorothy must recognize $816 gross income in 2008.
c. Dorothy must recognize $816 gross income in 2007.
d. Dorothy must recognize $408 ($816/2) gross income in 2007 and 2008.
e. None of the above.
4. With respect to the prepaid income from services,