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Flashcards: CPA Exam

For the current year, The Echo Company possessed the following income:

$\textup{Profit from operations}=\$110,000$

$\textup{Dividends from 20\%-owned taxable domestic operation}=\$1,100$

In the Echo Company's current year taxable income, how much should be included for dividends received?

$\$220$

$\$330$

$\$350$

$\$240$

Cannot be determined

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Flashcards: CPA Exam

For the current year, The Echo Company possessed the following income:

$\textup{Profit from operations}=\$110,000$

$\textup{Dividends from 20\%-owned taxable domestic operation}=\$1,100$

In the Echo Company's current year taxable income, how much should be included for dividends received?

Your answer:

$\$330$

Your answer:

$\$350$

Your answer:

$\$240$

Your answer:

Cannot be determined

Correct answer:

$\$220$

Explanation:

This problem is asking us to determine the amount of dividends to be included in the Echo Company's taxable income for the current year. The dividends were received from 20%-owned taxable domestic corporations; therefore, they are eligible for an 80% dividends received deduction. We can compute this value using the following formula:

$\textup{Dividends}=\$1,100-(80\%\times \$1,100)$

$\textup{Dividends}=\$1,100-\$880$

$\textup{Dividends}=\$220$

Flashcards: CPA Exam

Jack Snell named his wife—Angelica—the beneficiary of a $\$150,000$ (face amount) life insurance policy. According to this policy, upon Jack's death, the proceeds would be paid to Angelica with interest over her current life expectancy. If Angelica's life expectancy was was calculated to be thirty years and she received a payment of $\$6,100$ from the insurance company, then what amount should she include in her gross income for that year?

$\$1,100$

$\$1,500$

Cannot be determined

$\$1,400$

$\$6,100$

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Flashcards: CPA Exam

Your answer:

$\$1,500$

Your answer:

Cannot be determined

Your answer:

$\$1,400$

Your answer:

$\$6,100$

Correct answer:

$\$1,100$

Explanation:

We need to find the amount of the life insurance payments that need to be included in Angelica's gross income. It is important to note that life insurance payments paid by reason of death are excluded from income if they are paid in lump sums or installments. If the payments are received in installments, then then the principle amount of the policy divided by the number of annual payments is excluded each year.

Let's start by calculating the principle amount of the policy to be received every year.

$\frac{\textup{Principle amount of the policy}}{\textup{Number of annual payments}}$

$\frac{\$150,000}{30}=\$5,000$

In order to calculate the gross income to be reported, subtract this amount from the annual installment.

$\$6,100-\$5,000=\$1,100$

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