Swan Finance Company, an Accrual Method Taxpayer, Requires All of Its

question 51

Multiple Choice

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance.If a customer dies, the company receives from the insurance company the balance due on the customer's loan.Ali, a customer, died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company, Swan:

• A)Must recognize $1,500 income from the life insurance proceeds.
• B)Must recognize $1,300 income from the life insurance proceeds.
• C)Does not recognize income because life insurance proceeds are tax-exempt.
• D)Does not recognize income from the life insurance because the entire amount is a recovery of capital.
• E)None of these.

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Definitions:

Apparent Authority

A situation where a person appears to have been given the power to act on behalf of another, leading third parties to reasonably believe in that authority.

Actual Authority

Legal power that an agent has been deliberately given by a principal to act on their behalf in business dealings.

Limited Liability Partnerships (LLPs)

A form of partnership in which some or all partners have limited liabilities, protecting personal assets from business debts and liabilities.

Incorporation

The process of legally defining a company as a separate entity from its owners, providing limited liability and other benefits.