Home Office, Inc., an accrual basis taxpayer, leases a copying machine to a new customer on December 27, Year 1. The machine was to rent for $500 per month for a period of 36 months beginning January 1, Year 2. The customer was required to prepay 6 months rent at the time the lease was signed on December 27, Year 1. The customer was also required to pay a $2,000 damage deposit at the time the lease was signed. The damage deposit will be returned to the taxpayer at the end of the lease if no damage occurs.

Determine the amount of gross income Home Office recognizes in Year 1.

Kathy, an accrual basis taxpayer, operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $300 ($300/12 = $25 per month); a two-year membership costs $576 ($576/24 = $24 per month). Cash payment is required at the beginning of the membership. On July 1, Year 1, Kathy sold a one-year membership and a two-year membership. Assume both customers started using the memberships on July 1, Year 1.

a. Determine the amount of income Kathy recognizes in Year 2 from the one-year contract b. Determine the amount of income Kathy recognizes in Year 2 from the two-year contract

On January 1, Year 1, Marge made a $60,000 interest-free loan to her son, Steve, who used the money to start a new business. Steves only sources of income were $50,000 ordinary income from the business and $1,200 of net investment income from a corporate dividend. The relevant federal interest rate was 5%.

(a) What is taxable interest (if any) of this interest-free loan? (b) What is the net effect of the taxable interest (if any) of the interest-free loan on the Year 1 taxable income of Marge. (c) What is the net effect of the taxable interest (if any) of the interest-free loan on the Year 1s taxable income of Steve.