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Exam 16: Accounting Periods and Methods

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Question 31

True/False

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Franklin Company began business in 2010 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2010 through 2014. As a result of an audit by the IRS, Franklin was required to change to the accrual method of accounting beginning with 2015. The net adjustment due to the change is a positive adjustment to income. The adjustment may be spread equally over 2015 and the three following years.

A) True
B) False

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Question 32

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In 2014, Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2018. Father's basis was $100,000. In 2015, after paying $8,000 interest but nothing on the principal, Son sold the land for $300,000 cash. What gain, if any, must Father recognize in 2015?

A) $0.
B) $75,000.
C) $100,000.
D) $200,000.
E) None of the above.

F) C) and D)
G) A) and E)

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Question 33

Multiple Choice

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Which of the following must use the accrual method of accounting?

Wendy sold property on the installment basis in 2012 for more than her basis in the property. Wendy was to receive installment payments at the end of each year for the next five years. In 2014, Wendy was killed in a car accident and the note was transferred to her estate.

In 2014, Beth sold equipment used in her business. Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation) . Beth sold the property for $400,000, with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate) due in 2015. Beth's recognized gain from the installment sale in 2014 is:

Ramon sold land in 2014 with a cost of $80,000 for $200,000. The sales agreement called for a $50,000 down payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years. What would be the consequences of the following (treat each part independently and assume Ramon uses the installment method whenever possible): a. In 2014, Ramon gave one of the $50,000 installment obligations to a close relative. b. In 2014, Ramon transferred the installment obligations ($50,000) to his 100% owned corporation. c. Ramon collected the $50,000 plus $12,000 interest on January 1, 2015, and died on January 2, 2015.

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2014, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%. During 2014, the corporation paid $24,000 on its estimated state income tax liability for that year. The remaining $6,000 of 2014 state income tax was paid in April 2015. In June 2014, the corporation paid $9,000 on its year 2013 state income tax liability, as a result of an audit of the 2013 return that was conducted in 2014. The company has elected to use the recurring item exception to economic performance. As a result of the above, the corporation should deduct in 2014 on its Federal income tax return state income taxes of:

The DEF Partnership had three equal partners when it was formed. Partners D and E were calendar year taxpayers and Partner F's tax year ended on June 30th before he joined the partnership. The partnership may use a calendar year and partner F may continue to use the tax year ending June 30th.

A C corporation's selection of a tax year, generally, is independent of the tax year of its principal shareholders.

Gold Corporation sold its 40% of the Ruby Corporation common stock. Gold received $10 million in the year of the sale and a note for $15 million, payable in three years with interest at the Federal rate. Gold's basis in the stock was $5 million. Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

Gold Corporation, Silver Corporation, and Copper Corporation are equal partners in the GSC Partnership. The partners' tax year­ends are as follows: Gold December 31st Silver April 30th Copper September 30th

Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?

Dr. Stone incorporated her medical practice and elected to use a fiscal year ending September 30th. For the fiscal year ending September 30, 2014, the corporation earned $40,000 profits each month, before Dr. Stone's salary and income tax. Dr. Stone received a salary that averaged $30,000 per month. Next year (fiscal year ending September 30, 2015), Dr. Stone expects the average monthly profits before salary and taxes to be $48,000. What is the minimum salary Dr. Stone can receive for the last three months of calendar year 2014 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2015?

In 2014, Cashmere Construction Company enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000. Cashmere estimates the total cost to complete the cottage to be $400,000. In 2014, Cashmere incurred $300,000 of costs on the contract, and in 2015 the contract was completed at a total cost of $425,000. Cashmere is not required to recognize any income from the contract until 2015.

The tax year of one of the principal partners may determine the partnership's tax year.

In regard to choosing a tax year for a business owned by individuals, which form of business provides the greater number of options in regard to the tax year?

Andrew owns 100% of the stock of Crow's Farm Inc., an S corporation, that raises cattle and corn. The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.

In 2014, Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses. The total amount of the expense for 2013 was $300,000, $60,000 of the item was included in the ending inventory that year and $240,000 was deducted as cost of goods sold.

Abby sold her unincorporated business which consisted of equipment and goodwill. The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000) . Abby had no basis in the goodwill. The sales price for the business was $250,000, with $150,000 for the equipment and $100,000 for the goodwill. The buyer agreed to pay $120,000 on June 30, 2014, and $130,000 (plus interest at the Federal rate) in two years. Abby's gain to be reported in 2014 (exclusive of interest) is: