Question

Charlie was hired by Ajax this year as a corporate executive and a member of the board of directors. During the current year, Charlie received the following payments or benefits paid on his behalf.

Salary payments	$	140,500
Contributions to qualified pension plan		10,300
Qualified health insurance premiums		12,150
Year-end bonus		13,900
Annual director’s fee		19,100
Group-term life insurance premiums (face = $40,000)		865
Whole life insurance premiums (face = $100,000)		1,810
Disability insurance premiums (no special elections)		5,050

a. Charlie uses the cash method and calendar year for tax purposes. Calculate Charlie’s gross income for the current year.

    

b. Suppose that Ajax agrees to pay Charlie an additional $172,000 once Charlie completes five years of employment. Will this agreement alter Charlie’s gross income this year relative to your part (a) answer?

  

	Yes
	No

c. Suppose that in exchange for his promise to remain with the firm for the next four years, Ajax paid Charlie four years of director’s fees in advance. Will this arrangement alter Charlie’s gross income this year relative to your part (a) answer?

   

	Yes
	No

d. Assume that in lieu of a year-end bonus Ajax transferred 1,390 shares of Bell stock to Charlie as compensation. Further assume that the stock was listed at $34 per share and Charlie would sell the shares by year-end, at which time he expected the price to be $38 per share. Calculate the value of compensation Charlie would report and gain on the sale that would be included in Charlie's gross income.

    

e. Suppose that in lieu of a year-end bonus Ajax made Charlie’s house payments (a total of $30,000). Calculate the value of the house payments Charlie would report as income.

     

Answer 1

Answer :-

a) Charlie's Gross Income Calculation

		Included in gross income
Salary payments	$	140,500
Contributions to qualified pension plan		0
Qualified health insurance premiums		0
Year-end bonus		13,900
Annual director’s fee		19,100
Group-term life insurance premiums (face = $40,000)		0
Whole life insurance premiums (face = $100,000)		1,810
Disability insurance premiums (no special elections)		0
Gross Income		$175,310

Note :- The pension plan contributions, health insurance premium, group-term life insurance premium, and disability insurance premiums are excluded from Gross Income.

b)The is no change in Charlie’s gross income this year relative to your part (a) answer.As Ajax agrees to pay Charlie an additional $172,000 once Charlie completes five years of employment.This is future payments that a reason it not included in Gross income.

c)Yes this agreement will result in change of Charlie’s gross income this year Because Ajax paid Charlie four years of director’s fees in advance.Charlie received the Income so it includes in Gross income whether it earned or not earned is not matters.

d) Computation of Value of compensation and Gain on sale :-

Value of compensation = Transferred share to Charlie × Listed stock per share

Value of compensation = 1390 shares × $34 par share = $ 47,260

Charlie would report and gain on the sale that would be included in Charlie's gross income.

Gain on sale = 1390 × ($38 - $34) = $ 5,560

Gain on sale $5,560 would be included in Charlie's gross income.

e) The value of the house payments of $30,000 ,Charlie would report as gross income.