Earned and Unearned Income, Transfers from Others (LO. 2, 3) Has the taxpayer in

Question

Earned and Unearned Income, Transfers from Others (LO. 2, 3) Has the taxpayer in each of the following situations received taxable income? If so, when should the income be recognized?

a. Charlotte is a lawyer who specializes in drafting wills. She wants to give her husband a new gazebo for Christmas. In November, she makes a deal with Joe, a local handyman, to build a gazebo. In return, Charlotte is to draft a will for Joe's father. The gazebo normally would cost $3,000, which is approximately what Charlotte would charge for drafting the will. Joe builds the gazebo in time for Christmas. Charlotte drafts the will and delivers it to Joe the following January. Assume that both use cash basis of accounting. Charlotte has taxable income of $_______ in December when she receives the gazebo; Joe has taxable income of $_________ in January when he receives the will.

b. Ed buys 500 shares of Northstar stock in January 2017 for $4,000. On December 31, 2017, the shares are worth $4,600. In March 2018, Ed sells the shares for $4,500. Ed has taxable income of $______ resulting from the gain on the sale.

Explanation / Answer

Hey,

A) For Cash basis of accounting, Income is recognized when it is actually received or constructively received.

Joe Provides services in December, which means he is liable to receive income in December but he receives in January so he will recognize income in January.

Charlotte provides services in January, which means he is liable to receive income in January but he already received in December so she will recognize in December.

B) Taxable Income= Amount realized - Adjusted basis of the asset sold.

So, here asset has a basis of $ 4,000 and it is sold for $4,500 so the taxable income is $500.

Hope this helps you understand the concepts.

Thanks.

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