. Lime Finance Company requires its customers to purchase a credit life insurance policy associated with the loans it makes. Lime is the beneficiary of the policy to the extent of the remaining balance on the loan at the time of the customer’s death. In 2012, Lime wrote off as uncollectible a $5,000 account receivable from Wally, which included $1,500 of accrued interest. When Wally died in 2013, the life insurance policy was still in force and Lime received $3,500. Is the $3,500 of life insurance proceeds received by Lime included in its gross income? Explain.
8. LO.2 Sarah, who has a terminal illness, cashed in her life insurance policy (cost of $24,000 and proceeds of $50,000) to go on an around-the-world cruise. 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 2013 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 2013. In January 2014, he pays $6,000 for his spring semester tuition. What is Joe’s gross income for 2013?
10. LO.2 Billy fell off a bar stool and hurt his back. As a result, he was unable to work for three months. He sued the bar owner and collected $100,000 for the physical injury and
$50,000 for the loss of income. Billy also collected $15,000 from an income replacement insurance policy he purchased. Amber was away from work for three months following heart bypass surgery. Amber collected $30,000 under an income replacement insurance policy purchased by her employer. Are the amounts received by Billy and Amber treated the same under the tax law? Explain.
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. Do the amounts that
Wes and Sam receive have the same effect on their gross income? Explain.