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Diane is the beneficiary of a $70,000 insurance policy on the life of her mother, Juanita. To...

Question:

Diane is the beneficiary of a $70,000 insurance policy on the life of her mother, Juanita. To date, Juanita has paid premiums of $20,000. What amount of gross income must be reported in each of the following cases?

1. Juanita cancels the policy and received $25,000, the cash surrender value of the policy.

2. Juanita dies and Diane receives the face amount of the policy, $70,000.

3. Juanita dies and Diane elects to receive $20,000 per year for four years.

Gross Income:

The income which is earned by any organization by selling their products to its customer. In gross income, the various expenses are not included such as administrative, selling expenses.

Answer and Explanation:

1.

Juanita cancels the policy and receives $25,000 so, the cash surrender value of the policy is

{eq}\begin{align*} &= \$ 25,000 - \$ 20,000\\ &= \$ 5,000 \end{align*} {/eq}

2.

Junita dies and Diane receives the face amount of the policy $70,000

So, taxable gross income is $0 as life proceeds are tax-free.

3.

Junita dies and Diane elects to receive $20,000 per year for four years

{eq}\begin{align*} {\rm{Proceeds}} &= \left( {4 \times \$ 20,000} \right)\\ &= \$ 80,000 \end{align*} {/eq}

Face value =$70,000

{eq}\begin{align*} {\rm\text{Gross income will be}} &= \left( {\$ 80,000 - \$ 70,000} \right)\\ &= \$ 10,000 \end{align*} {/eq}


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