1. The document provides practice problems from accounting textbooks for Unit 2 Chapters 4 and 5. It includes 29 problems of varying complexity that assess understanding of concepts like gross income, taxation of life insurance proceeds, compensation, and evaluating equivalent job offers. 2. The problems require calculating gross income in situations involving stock trades, gifts, insurance payouts, scholarships, punitive damages awards, and compensation excluding room and board. 3. Students must demonstrate comprehension of when amounts are included in or excluded from gross income according to IRS rules.

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AC 309 Unit 2 Chapter Problems
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Unit 2 Chapter Problems
Perform Chapter 4 Problems 29, 35, 40, 53 (pages 4-38,39,40 & 43 in the text) and Chapter
5 Problems 5, 8, 9, 11, 17 (pages 5-31 & 32 in the text)
29. LO.1 Determine the taxpayer’s gross income for tax purposes in each of the following
situations:
a. Deb, a cash basis taxpayer, traded a corporate bond with accrued interest of $300 for
corporate stock with a fair market value of $12,000 at the time of the exchange. Deb’s cost
of the bond was $10,000. The value of the stock had decreased to $11,000 by the end of
the year.

2. b. Deb needed $10,000 to make a down payment on her house. She instructed her broker
to sell some stock to raise the $10,000. Deb’s cost of the stock was $3,000. Based on her
broker’s advice, instead of selling the stock, she borrowed the $10,000 using the stock as
collateral for the debt.
c. Deb’s boss gave her two tickets to the Rabid Rabbits rock concert because she met her
sales quota. At the time she received the tickets, each ticket had a face price of $200 and
was selling on eBay for $300. On the date of the concert, the tickets were selling for $250
each. Deb and her son attended the concert.
40. LO.3 Rusty has been experiencing serious financial problems. His annual salary was
$100,000, but a creditor garnished his salary for $20,000; so the employer paid the creditor
(rather than Rusty) the $20,000. To prevent creditors from attaching his investments,
Rusty gave his investments to his 21-year-old daughter, Rebecca. Rebecca received
$5,000 in dividends and interest from the investments during the year. Rusty transferred
some cash to a Swiss bank account that paid him $6,000 interest during the year. Rusty
did not withdraw the interest from the Swiss bank account. Rusty also hid some of his
assets in his wholly owned corporation that received $150,000 rent income but had
$160,000 in related expenses, including a $20,000 salary paid to Rusty. Rusty reasons that
his gross income should be computed as follows:
53. LO.4 The LMN Partnership has a group term life insurance plan. Each partner has
$150,000 of protection, and each employee has protection equal to twice his or her annual
salary. Employee Alice (age 32) has $90,000 of insurance under the plan, and partner Kay
(age 47) has $150,000 of coverage. Because the plan is a “group plan,” it is impossible to
determine the cost of coverage for an individual employee or partner.
Chapter 5
5. LO.2 Dolly is a college student who works as a part-time server in a restaurant.
Herusual tip is 20% of the price of the meal. A customer ordered a piece of pie and said
that he would appreciate prompt service. Dolly abided with the customer’s request. The

3. customer’s bill was $8, but the customer left a $100 bill on the table and did not ask for a
receipt. Dolly gave the cashier $8 and pocketed the $100 bill. Dolly concludes that the
customer thought that he had left a $10 bill, although the customer did not return to
correct the apparent mistake. The customer had commented about how much he
appreciated Dolly’s prompt service. Dolly thinks that a $2 tip would be sufficient and that
the other $98 is like “found money.” How much should Dolly include in her gross income?
8. LO.2 Sarah, who has a terminal illness (i.e., one year or less), cashed in her life
insurance policy (cost of $24,000 and proceeds of $50,000) to go on an around-the-world
cruise (recommended by her physician). Ed paid $24,000 of life insurance premiums
before cashing in his life insurance policy for the $50,000 cash surrender value. He
decided he could invest the money and earn a higher rate of return. Tom’s wife died, and
Tom collected $50,000 as the beneficiary on a group term life insurance policy purchased
by her employer. Determine the amounts that Sarah, Ed, and Tom should include in their
gross income.
9. LO.2 Joe is a graduate student who works as a resident adviser (RA) in the college
dormitory. As compensation for serving as an RA, he is not charged the $2,200 other
students pay for their dormitory rooms for the fall 2014 semester. As an RA, he is required
to live in the dormitory. He is also paid $1,500 for being available to dormitory residents at
all hours during the fall semester. Joe also has a scholarship that pays him $12,000 to be
used for his tuition for the academic year. He uses the scholarship proceeds to pay $6,000
of tuition in August 2014. In January 2015, he pays $6,000 for his spring semester tuition.
What is Joe’s gross income for 2014?
11. LO.2 Wes was a major league baseball pitcher who earned $10 million for his 20 wins
this year. Sam was also a major league baseball pitcher before a career-ending injury
caused by a negligent driver. Sam sued the driver and collected $6 million as
compensation for lost estimated future income as a pitcher and $4 million as punitive
damages.

4. 17. LO.2, 5 Wilbur has been offered a job at a salary that would put him in the 25%
marginal tax bracket. In addition to his salary, he would receive health insurance
coverage. Another potential employer does not offer health insurance but has agreed to
match the first offer on an after-tax and insurance basis. The cost of health insurance
comparable to that provided by the other potential employer is $9,000 per year. How much
more in salary must the second potential employer pay so that Wilbur’s financial status
will be the same under both offers?