Al and Peggy Divorce in the Current Year

question 117

Multiple Choice

Al and Peggy divorce in the current year. As part of their divorce agreement, Peggy is to pay Al $70,000 for his share of their home the home's fair market value is $140,000) . Also, Peggy agrees to pay Al $1,000 monthly. The payment represents the financial support for their 15-year-old son, Bud. It will cease upon Bud's 23rd birthday or college graduation-whichever comes first. Which of the following explains) the tax effects of these events? I. Peggy can deduct $12,000 annually for the monthly payments made this year. II. Al does not recognize the $1,000 monthly payments as income.

• A) Only statement I is correct.
• B) Only statement II is correct.
• C) Both statements are correct.
• D) Neither statement is correct.

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Definitions:

Units Produced

The total number of finished products that a company manufactures during a specific period.

Variable Costing

A method of costing that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of goods sold and treats fixed manufacturing overhead as a period expense.

Absorption Costing

A method of accounting that encompasses all costs involved in manufacturing, including direct materials, direct labor, and both variable and fixed manufacturing overhead, as part of a product's cost.

Net Operating Income

The profit a company makes from its core business operations, excluding deductions of interest and taxes.