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:

Consumer Surplus

The difference between the maximum price consumers are willing to pay for a product and the actual market price they pay.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and the actual amount they receive due to market price.

Supply Curve

A graphical representation showing the relationship between the price of a good and the quantity of that good that suppliers are willing to sell in the market.

Producer Surplus

The difference between the amount a producer is willing to accept for a product and the actual amount they receive in the market, indicating economic benefit.