Ben Was Diagnosed with a Terminal Illness

question 88

Multiple Choice

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy, and he collected
$50,000, the cash surrender value of the policy.Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

• A)Neither Ben nor Henry is required to recognize gross income.
• B)Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income.
• C)Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income.
• D)Ben must recognize $38,000 ($50,000 - $12,000) of gross income, but Henry does not recognize any gross income.
• E)None of these.

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Definitions:

Dividends Declared

Profits distributed by a company to its shareholders, usually determined by the board of directors, and not yet paid out.

Normal Balance

The side (debit or credit) of an account that is typically increased; for assets and expenses, it's a debit; for liabilities, equity, and revenue, it's a credit.

Debit

An entry recorded on the left side of an account in bookkeeping, indicating an increase in assets or expenses or a decrease in liabilities, equity, or income.

T Account

A T Account is a visual representation used in accounting to depict the debit and credit transactions affecting a particular account.