Becker CPA Review Questions

ExplanationChoice "B" is correct.Based on IRS tables, Mary is expected to receive 192 (16 years x 12 months) annuity payments.Her investment in the annuity is $70,000 and her return of capital for each annuity payment is $70,000/192 = $364.58.The return of capital portion of each annuity payment is not taxable (not included in gross income).Mary must include the excess received ($500.00-364.58) of $135.42 in her gross income.Choice "A" is incorrect.Based on IRS tables, Mary is expected to receive 192 (16 years x 12 months) annuity payments.Her investment in the annuity is $70,000.Therefore her return of capital for each annuity payment is $70,000/192 = $364.58,which is not taxable.She must include the excess $135.42 in her gross income.Choice "C" is incorrect.This is equal to the amount that is a nontaxable return of investment on the annuity, rather than the taxable income portion of each payment.Choice "D" is incorrect.