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Exam 16: Accounting Periods and Methods

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Question 21

Multiple Choice

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When the IRS requires a taxpayer to change accounting methods:

A) The taxpayer may be subject to penalties and interest.
B) The taxpayer generally is required to make the change as of the beginning of the earliest open year.
C) The adjustments due to the change cannot be spread over subsequent years.
D) Only a.and b.are correct.
E) a., b., and c.are correct.

F) All of the above
G) C) and D)

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Question 22

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If an installment sale contract does not charge interest on the sale of a capital asset, the IRS will impute interest and thereby increase the taxpayer's capital gain and interest income.

A) True
B) False

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Question 23

Multiple Choice

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Which of the following statements regarding a 52-53 week tax year is not correct?

A C corporation provides lawn maintenance services to various businesses and homeowners. The corporation has average annual gross receipts of $3,500,000.The corporation may use the cash method of accounting.

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, 2012, and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2012 (exclusive of interest) is:

A CPA practice that is incorporated earns 40% of its annual revenues in the months of March and April. Although the CPA practice is a professional services corporation (PSC), it may use a fiscal year ending April 30th.

Color, Inc., is an accrual basis taxpayer.In December 2013, the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2014. Also, in December 2013, the company received a bill of $800 for office supplies that had been purchased and used in November 2013.The bill was not paid until January 2014. In January 2014, the company received a claim for $600 for defective merchandise purchased in 2013.Color paid the customer the $600 in February 2014.Assuming Color uses the recurring item exception to economic performance, the company's deductions for 2013 as a result of the above are:

Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $8 million in the year of the sale and a note for $12 million, payable in three years with interest at the Federal rate.Gold's basis in the stock was $2 million.Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

Franklin Company began business in 2008 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2008 through 2012.As a result of an audit by the IRS, Franklin was required to change to the accrual method of accounting beginning with 2013. The net adjustment due to the change is a positive adjustment to income. The adjustment may be spread equally over 2013 and the three following years.

A C corporation is required to annualize its income:

Which of the following taxpayers is required to use the accrual method of accounting?

In 2004, a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30, 2012, he received a salary of $180,000.During the period from October 1, 2012 to December 31, 2012, the corporation paid the doctor a total salary of $50,000, and paid him $200,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30, 2013, is limited to $200,000.

Robin Construction Company began a long-term contract in 2012.The contract price was $600,000.The estimated cost of the contract at the time it was begun was $450,000.The actual cost incurred in 2012 was $300,000.The contract was completed in 2013 and the cost incurred that year was $180,000.Under the percentage of completion method:

Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2012, the company entered into a contract to construct a building for $960,000.Camelia estimated that the cost of constructing the building would be $720,000.In 2012, the company incurred $240,000 in costs under the contract.In 2013, the company incurred an additional $450,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

In 2012, Godfrey received a $50,000 sales commission on a long-term contract. But in 2013, the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer. Under the bonus agreement, Godfrey was required to repay the employer $20,000 of the bonus. Godfrey was in the 35% marginal tax bracket in 2012 but he is in the 25% marginal tax bracket in 2013.

Todd, a CPA, sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.

Laura Corporation changed its tax year-end from July 31st to December 31st in 2012.The income for the period August 1, 2012 through December 31, 2012 was $35,000. The corporate tax rate is 15% on the first $50,000 of income, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000. A portion of Laura's June - December 2012 income will be taxed at 34%.

The taxpayer had incorrectly been using the cash method of accounting. For 2012, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2012 was $120,000 (positive) . The adjustment as calculated as of the end of 2012 was $80,000 (positive) .As a result of the change in method, the company must:

In 2012, Father sold land to Son for $150,000 cash and an installment note for $450,000 due in 2016.Father's basis was $240,000.In 2013, after paying $27,000 interest but nothing on the principal, Son sold the land for $600,000 cash.As a result of the second disposition, what gain must Father recognize in 2013?

The installment method can be used for which of the following sales with payments being made in the year following the year of sale?