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Wiley CPAexcel Exam Review 2014 Study Guide, Regulation by O. Ray Whittington

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Multiple-Choice Answers and Explanations

Answers

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Explanations

1. (c) The requirement is to determine the pension (annuity) amounts excluded from income for 2012, 2013, and 2014. Brown’s contribution of $12,000 will be recovered pro rata over the life of the annuity. Under this rule, $100 per month (12,000 ÷ 120 months) is excluded from income.

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2. (b) The requirement is to determine the amount of life insurance proceeds that must be included in gross income by Decker, on the death of Fuller’s parent. Life insurance proceeds paid because of the insured person’s death are generally excluded from gross income. However, the exclusion generally does not apply if the insurance policy was obtained by the beneficiary in exchange for valuable consideration from a person other than the insurance company. Here, Decker purchased the policy from Fuller for $25,000 and paid an additional $40,000 in premiums, so Decker must include in gross income the excess of insurance proceeds over his investment in the policy [$200,000 − ($25,000 + $40,000) = $135,000.

3. (b) The requirement is to determine the amount of life insurance payments to be included in a widow’s gross income. Life insurance proceeds paid by reason of death are excluded from income if paid in a lump sum or in installments. If the ...

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