Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

1. Introduction to Accounting

Useful Information

Financial Accounting

1. Introduction to Accounting

Useful Information

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Multiple Choice

Which of the following statements regarding the taxation of modified endowment contracts (MECs) is FALSE?

Death benefits paid from a MEC to a beneficiary are always subject to income tax.

Distributions from a MEC are subject to income tax on the earnings portion before age 59½, and may also incur a 10% penalty.

Loans and withdrawals from a MEC are taxed on a last-in, first-out (LIFO) basis.

Premiums paid into a MEC are not tax-deductible.

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Verified step by step guidance

Step 1: Understand the concept of Modified Endowment Contracts (MECs). MECs are a type of life insurance policy that fails the 7-pay test, meaning the premiums paid into the policy exceed certain limits set by the IRS. This classification impacts the taxation of distributions from the policy.

Step 2: Review the taxation rules for MECs. Distributions, including loans and withdrawals, are taxed on a last-in, first-out (LIFO) basis, meaning earnings are taxed before the principal. Additionally, distributions taken before age 59½ may incur a 10% penalty unless an exception applies.

Step 3: Examine the tax treatment of premiums paid into a MEC. Premiums are not tax-deductible, which aligns with the general tax treatment of life insurance premiums.

Step 4: Analyze the tax treatment of death benefits from a MEC. Death benefits paid to a beneficiary are generally not subject to income tax, which is a key feature of life insurance policies, including MECs.

Step 5: Identify the false statement. Based on the rules above, the statement 'Death benefits paid from a MEC to a beneficiary are always subject to income tax' is false because death benefits are typically tax-free.