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Exam 16: Accounting Periods and Methods

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Question 31

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This year, Yuan started a business selling computer parts both in store and online. He purchased $60,000 of goods during the year via credit card. His ending inventory was $9,000. For tax purposes, Yuan adopted the cash method and the treatment of inventory as deductible when purchased per his books. His deduction for inventory for the year is:

A) $51,000.
B) $60,000.
C) $69,000.
D) None of these.

E) A) and D)
F) All of the above

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Question 32

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In the case of an accrual basis taxpayer, an item of income:

A) Is not recognized until cash is received.
B) From services is never recognized until the services are performed.
C) Is not recognized if the customer can return the goods.
D) Is recognized when all the events have occurred to fix the taxpayer's right to receive the income and the amount of the income can be determined with reasonable accuracy.
E) None of these.

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

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Question 33

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The buyer and seller have tentatively agreed to a contract for the sale of a building that the buyer will use in its business. The buyer will pay the seller $100,000 (principal and interest) each year for five years. The seller's cost of the asset is $200,000, and he will report the capital gain using the installment method. The buyer and seller are now negotiating the interest rate that will be used to compute the interest included in each $100,000 payment. The relevant Federal rate is 5%, but the market rate on similar contracts is in the area is 7%. a. Why would the seller bargain for a 5% interest rate for the contract rather than a 7% interest rate? b. How does the interest rate affect the buyer's future taxable income?

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?

The tax year of a doctor's incorporated medical practice may end on the last day of any month of the year.

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.

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 straight-line depreciation). Assuming that 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 {Section1231Gain}& \text {Unrecaptured \$ 1250 GainTaxedat \( 25 \% \)}\end{array}$ A) $\begin{array}{ll}&& \$ 66,000 &&&&&&&&& \$ 0 \\\end{array}$ B) $\begin{array}{ll}&& \$ 0 &&&&&&&&&&& \$ 66,000 \\\end{array}$ C) $\begin{array}{ll}&& \$ 90,000 &&&&&&&&& \$ 90,000 \\\end{array}$ D) $\begin{array}{ll}&& \$ 90,000 &&&&&&&&& \$ 0 \\\end{array}$ E) $\begin{array}{ll}&&\$ 0 &&&&&&&&&&& \$ 110,000\end{array}$

Under both the cash and accrual methods of accounting for tax purposes, a taxpayer may elect to defer prepaid revenue.

In 2020, Brown Corporation, a service business, no longer qualifies as a small business. Thus, it must change from the cash to the accrual method starting with its 2020 tax year.. At the beginning of 2020, Brown had accounts receivable of $575,000. Also, Brown had accounts payable of $345,000. Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2020.

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 $23 million, and the farm is not considered a tax shelter.

This year, Sarah started a business selling unique kitchen items both in stores and online. She purchased $70,000 of goods during the year. Her ending inventory was $8,000, and she owed suppliers $15,000 at year end, including for all of the ending inventory. For tax purposes, Sarah adopted the cash method and the treatment of inventory as nonincidental supplies. Her deduction for inventory for the year is:

The ability of the CPA to prepare a tax return in a timely manner is justification for the partnership's use of a particular tax year.

Related-party installment sales include all of the following except the first seller's:

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

Generally, deductions for additions to reserves for estimated future costs (e.g., an allowance for estimated warranty costs) are not allowed for Federal income tax purposes because allowing the deduction would:

In 2019, Norma sold Zinc, Inc., common stock for $100,000 cash and a note receivable for $900,000. The note was due in 2020 with accrued interest at the Federal rate. Norma's basis in the stock was $250,000. This was Norma's only installment sale transaction. Which of the following statements is correct?

In 2019, Cashmere Construction Company, a small business, 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 2019, Cashmere incurred $300,000 of costs on the contract, and in 2020 the contract was completed at a total cost of $425,000. Cashmere is not required to recognize any income from the contract until 2020.

Which of the following statements regarding a 52-53 week tax year is correct?

Abby sold her unincorporated business that 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, 2019, and $130,000 (plus interest at the Federal rate) in two years. Abby's gain to be reported in 2019 (exclusive of interest) is:

Barbara operates a sporting goods store. She uses the cash method and treats inventory as nonincidental supplies. At the beginning of the year, she had inventory of $26,000. She purchased $470,000 of goods during the year. Her ending inventory was $42,000. She makes sure to pay all of her suppliers by the last day of her tax year. What is Barbara's inventory deduction for the year?