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Integrative Problem






Integrative Problem:


85. Edna, 63, is a widow and works for Rhododendron Corporation. Her annual salary


is $40,000. Rhododendron provides the following benefits to all employees:


• Medical insurance—The cost of Edna’s policy is $1,800. She incurs $950 in valid


medical expenses and is reimbursed for $760 of the expenses by the company policy.


• Group term life insurance—Each employee is provided with $90,000 worth of


coverage under the policy.


• Qualified pension plan—Rhododendron matches employee contributions up


to $2,000. Edna contributes 8% of her salary to the plan.


Edna has the following other items that may affect her current-year taxes:



a. She receives $125 per month from a qualified annuity. The annuity cost


$9,100. Edna is to receive the annuity for life. She began receiving the payments in January, when her life expectancy was 15 years.


b. She receives a $200 refund of last year’s state income taxes during the current


year. Last year, her itemized deductions totaled $6,900. In the current year,


Edna’s itemized deductions are $4,300.


c. She has a separate medical policy she purchased to cover costs that her


employer-provided policy does not cover. She pays $1,400 for the policy,


which reimburses her for $350 of her medical expenses.


d. She owns 6% Puerto Rico bonds with a face value of $40,000. The bonds pay


interest annually on December 20.


e. She sells stock she owned for $20,000 on July 1. She had paid $26,000 for the


stock three years earlier. Edna invests the proceeds from the sale of the stock


in a money-market savings account that pays 4% interest.


f. Her brother dies and leaves her the farm he had inherited from their father.


The farm is valued at $160,000. Edna leases the farm to a local farmer and


receives $8,000 in rent during the current year.


g. On April 1, she gives $5,000 of Kao Corporation bonds she owns to her


granddaughter. The bonds pay annual interest of 8% on December 31.


h. She receives a watch worth $300 from Rhododendron for her twenty years of


loyal service. Rhododendron does not routinely give out length-of-service awards.


i. She sells land that she had held as an investment for $19,000 on October 1.


She had paid $17,000 for the land two years earlier. Edna invests the proceeds


in state of Oregon bonds that pay 4% interest annually on December 31.


Compute Edna’s gross income, adjusted gross income, taxable income, and her


income tax liability. Edna has no dependents.


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