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Exam 18: Accounting Periods and Methods

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Question 31

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Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2014,the company entered into a contract to construct a building for $900,000.Camelia estimated that the cost of constructing the building would be $600,000.In 2014,the company incurred $150,000 in costs under the contract.In 2015,the company incurred an additional $500,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

A) Camelia must report $300,000 of income in 2014.
B) Camelia is not required to report any income from the contract until 2015 when the contract is completed.
C) Camelia must recognize $75,000 of income in 2014.
D) Camelia should amend its 2014 tax return to decrease the profit on the contract for that year.
E) None of these.

F) None of the above
G) A) and B)

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Question 32

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If an installment sale contract does not charge interest on the sale of a capital asset,only capital gain will be recognized over the life of the contract.

A) True
B) False

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Question 33

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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.

Which of the following statements regarding the matching principle is correct?

Albert is in the 35% marginal tax bracket.He sold a building in the current year for $450,000.Albert received $110,000 cash at closing,the buyer assumed Albert's mortgage for $120,000,and the buyer gave Albert a 6% note for $220,000 due in two years.The Federal rate was 6%.Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straight­line depreciation).Assuming he did not elect out of the installment method,Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts? $\begin{array}{ll}\text { Section } 1231 \text { Gain }&\text { Unrecaptured } \S 1250 \text { Gain Taxed at } 25 \%\\\text { a. } \$ 66,000 & \$ 0 \\\text { b. } \$ 0 & \$ 66,000 \\\text { c. } \$ 90,000 & \$ 90,000 \\\text { d. } \$ 90,000 & \$ 0 \\\text { e. } \$ 0 & \$ 110,000\end{array}$

Generally,an advantage to using the cash method of accounting,as compared to the accrual method,is that under the cash method income is not recognized until it is collected,rather than being taxed as soon as the taxpayer has the right to collect the income.

A cash basis taxpayer sold investment land in 2014 for $200,000.He received $40,000 in the year of sale and $160,000 in 2015.The cost of the land was $80,000.Under the installment method,the taxpayer would report a $24,000 gain in 2014.

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:

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 C corporation that does not have a natural business year must use a calendar year as its tax year.

In applying the lower of cost or market for tax purposes,the market price is the replacement cost of the goods,rather than their expected selling price.

Crow Corporation has used the LIFO inventory method for the past 10 years.During that time,the prices Crow pays for the inventory have increased by 50%.Its inventory value when it first adopted LIFO was $5,000,000.The company began using a just-in-time inventory system the same year it adopted LIFO,and although sales have increased,the quantities of goods on hand at year end has not changed in the past ten years.The corporation's marginal tax rate has been 35% in all of the years.As a result of the LIFO election:

The installment method applies where a payment will be received after the tax year of the sale:

Blue Mart operates a large chain of retail stores.The company has four warehouses that are located in various parts of the country.The cost of operating the warehouses can be expensed immediately because it is a cost that is incurred even though the goods were not sold during the year.

The taxpayer does need the IRS's permission to change from the FIFO inventory method to the LIFO method.

Mallard Auto Parts,Inc.has on hand 1,000 fenders for 1953 Studebakers.Mallard purchased the fenders in 1965 for $30 each and the selling price is $400 each.Only rarely does Mallard sell a Studebaker fender and it is highly unlikely that more than 100 of the remaining fenders will ever be sold.However,Mallard has ample storage space and feels an obligation to Studebaker owners.Therefore,the company will not salvage the fenders and will continue to sell them for $400 each.Scrap value of the fenders is $5 each.Under the lower of cost or market inventory method:

Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2014.Gold and Silver use a calendar tax year,and Platinum's tax year ends June 30th.GSP is not a seasonal business.

Alice,Inc. ,is an S corporation that has been in business for five years.Its annual gross receipts have never exceeded $1 million.The corporation operates a retail store and also owns rental property.The sales from the retail store and the rental income may be reported by the cash method,unless Alice previously elected the accrual method.

Charlotte sold her unincorporated business for $600,000 in 2014.The sales contract allocated $120,000 to equipment,$300,000 to land,and $180,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $150,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?

Computer Consultants Inc. ,began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is,the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year,the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?