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Exam 18: Accounting Periods and Methods

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Question 31

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

A) True
B) False

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Question 32

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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.

A) True
B) False

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Question 33

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A doctor's incorporated medical practice may end the last day of any month of the year.

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?

Which of the following statements is true concerning the disposition of an installment note?

The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business.The taxpayer decided to voluntarily change to the accrual method of accounting.The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories,$30,000 for accounts receivable,and $12,000 for accounts payable.The adjustment due to the change in accounting method is:

In 2016,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 2015 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.

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2016,the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2016,the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2016 state income tax was paid in April 2017.In June 2016,the corporation paid $9,000 on its year 2015 state income tax liability,as a result of an audit of the 2015 return that was conducted in 2016.The company has elected to use the recurring item exception to economic performance.As a result of the above,the corporation should deduct in 2016 on its Federal income tax return state income taxes of:

Robin Construction Company began a long-term contract in 2016.The contract price was $800,000.The estimated cost of the contract at the time it was begun was $500,000.The actual cost incurred in 2016 was $350,000.The contract was completed in 2017 and the cost incurred that year was $125,000.Under the percentage of completion method:

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

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.

Franklin Company began business in 2012 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2012 through 2016.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2017.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2017 and the three following years.

Father sold land to Son for $500,000 in 2016.Father's basis in the land was $100,000.Son paid Father $50,000 and gave Father a note for $450,000 due in 2019.In 2017,Son sold the land for $600,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

​Using your knowledge of GAAP and financial reporting,list and explain one good reason why GAAP should not be used for tax purposes and one good reason why it should be used.

If a company uses the LIFO inventory method to report the cost of inventory and cost of goods sold on its financial statements,footnote disclosure of the income as calculated by the FIFO method does not violate the tax and financial accounting conformity requirement.

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

The accrual method generally is required for the following types of businesses:

Duck Company has valued its inventories at FIFO cost for the past 10 years.The Company would like to change to the LIFO method,effective in 2017.

In the case of a sale reported under the installment method,gain is recognized in each year the seller collects on the installment contract.

Karen,an accrual basis taxpayer,sold goods in December 2016 for $20,000.The customer was unable to pay cash.So the customer gave Karen a note for $20,000 that was payable in April 2017.The note bore interest at the Federal rate.The fair market value of the note at the end of 2016 was $18,000.Karen collected $20,500 from the customer in April 2017,$20,000 principal plus $500 interest.Under the accrual method,Karen must recognize income of: