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Exam 18: Accounting Periods and Methods

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Question 21

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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.

A) True
B) False

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Question 22

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In 2006,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2016,he received a salary of $190,000.During the period from October 1,2016 to December 31,2016,the corporation paid the doctor a total salary of $60,000,and paid him $240,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2017,is limited to $240,000.

A) True
B) False

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Question 23

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

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

A manufacturer must capitalize the following costs relative to inventories: I. Maintenance cost for the factory building. II. Health insurance for production workers. III. Storage cost for finished goods.

For a taxpayer who is required to use the percentage of completion method,the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 10 percent of the estimated contract costs.

Walter sold land (a capital asset) to an unrelated party for $100,000 cash and a 4% note for $150,000 due in three years.His basis in the land was $40,000.Walter and the purchaser are cash basis taxpayers.Which of the following statements is correct?

Teal,Inc. ,used the lower of cost or market to value inventory in 2016.The ending inventory at cost was $400,000 and the ending inventory at market was $385,000.In 2017,Teal changed to the LIFO method.The company's beginning LIFO inventory is $400,000.

In 2016 George used the FIFO lower of cost or market inventory method.As of December 31,2016,the inventory cost was $50,000 and its market price was $40,000.At the time of filing his 2017 income tax return,George changed to the LIFO method.The ending inventory at cost on December 31,2017,was $75,000 and the market price of the goods totaled $35,000.Which of the following statements is correct?

In the case of a taxpayer who uses the lower-of-cost-or-market inventory method:

Ted,a cash basis taxpayer,received a $150,000 bonus in 2016 when he was in the 35% marginal tax bracket.In 2017,when Ted was in the 28% marginal tax bracket,it was discovered that the bonus was incorrectly computed,and Ted was required to refund $40,000 to his employer.As a result of the refund,Ted can reduce his 2017 tax liability by $14,000 (.35 × $40,000).

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

Pedro,not a dealer,sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2014.The terms of the sale required Pat to pay $28,000 cash,assume the $56,000 mortgage,and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate) .The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2016 note as promised,what is the recognized gain to Pedro in 2016 (exclusive of interest) ?

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

The Seagull Partnership has three equal partners.Partner A's tax year ends June 30th,and Partners B and C use a calendar year.If the partnership uses the calendar year to report its income,Partner A is permitted to defer partnership income earned from July through December 2016 until he files his tax return for his year ending June 30,2017.

The taxpayer had incorrectly been using the cash method of accounting.For 2016,the company voluntarily changed to the accrual method.The adjustment due to the change in method as calculated at the beginning of 2016 was $120,000 (positive) .The adjustment as calculated as of the end of 2016 was $80,000 (positive) .As a result of the change in method,the company must:

The company has consistently used the LIFO inventory method and has deferred over $1 million of income from using that method.However,in the last two years,the prices it pays for goods has been decreasing.Therefore,the company is considering changing to the FIFO inventory method.What would be some tax consequences of the change?

In determining the cost of goods manufactured and thus the cost of the ending inventory:

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.

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 5 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?