Acct 324

Question 1. | Question : | (TCO 2) In 2009, Ted purchased an annuity for $60,000. The annuity is to pay him $1,500 per month for the rest of his life. His life expectancy is 120 months. |

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  | Student Answer: | |  Ted is not required to recognize any income until he has collected 40 payments (40 $1,500 = $60,000). |

  | | |  If Ted collects 24 payments and then dies in 20x1, Ted's estate should amend his tax returns for 2009 and 2010 and eliminate all of the reported income from the annuity for those years. |

  | | |  If Ted lives and collects on the annuity for 130 months, then the amounts received in the last 10 months are excludable from his gross income. |

  | | |  For each $1,500 payment received in the first year, Ted must include $1,000 in gross income. |

  | | |  None of the above |

  | Instructor Explanation: | The annuity exclusion formula is investment/expected return = $60,000/($1,500* 120) = $60,000/$180,000 = .333. Therefore, when Ted collects $1,500, he must recognize $1,500 (1 - .333) = $1,000 gross income. Answer B is incorrect. Instead of amending prior returns, Ted will be allowed to deduct a loss on his final return for the cost of the annuity less the amount previously excluded as a return of capital. REF: p. 4-29 to 4-31 |

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  | Points Received: | 2 of 2 |

  | Comments: | |

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Question 2. | Question : | (TCO 3) Iris, a widow, elected to receive the proceeds of a $100,000 face value life insurance policy on the life of her deceased husband in annual installments of $12,500 over the remainder of her life, estimated to be 10 years. |

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  | Student Answer: | |  None of the payments received are included in gross income because their source is the life insurance policy. |

  | | |  All of the payments are included in Iris' gross income because she paid nothing for the right to receive the payments. |

  | | |  Iris will not recognize income until the ninth year, after she has recovered...