Question

Norman and Ciara are trying to calculate their gross income for the current year. Which of the following items should they exclude from their gross income? -1- Cash inherited by Ciara from her mother. -2- Money borrowed by Norman and Ciara from First City Bank. -3- Gain from the sale of Norman and Ciara's boat. -4- Interest earned on a loan made by Norman to his cousin Vinnie.a. 1 and 2.b. 3 and 4.c. 1, 2 and 3.d. 1, 2 and 4.

Answer 1

A: 1 and 2

Step-by-step explanation:

Lets first understand what gross income is. Gross income is the total of all the cash inflows received especially on a recurring and regular basis including cash inflows from profits, salaries, wages and other forms of earnings before any tax and/or other deductions that come from ordinary courses of business operations.

Now in this question, the first option relates to the cash which is inherited by Ciara from her mother. Inherited cash doesn't form part of income since it is a one time cash flow and may not be received on a regular basis.

The second option relates to money borrowed from first city bank. The money borrowed may improve the liquidity position of Norman and Ciara but doesn't form part of the gross income. Funds borrowed increase the liability of Norman and Ciara which will not necessarily be received on a regular basis nor it comes from ordinary course of business.

Therefore option A: 1 and 2 should be excluded from their gross income.