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Exam 16: Accounting Periods and Methods

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Question 41

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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?

A) If the Federal rate is 3%, interest will be imputed at that rate.
B) If the Federal rate is 5%, interest will be imputed at that rate and the capital gain will be reduced.
C) If the Federal rate is 4.5%, interest will be imputed at that rate and the capital gain will be increased.
D) All of the above.
E) None of the above.

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

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Question 42

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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.

A) True
B) False

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Question 43

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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 2018 until he files his tax return for his year ending June 30, 2019.

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

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

A positive § 481 adjustment from a change in method of accounting initiated by the taxpayer is spread equally over the year of change and the three following years.

This year, Sarah started a business selling unique kitchen items both in-store 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:

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

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

Alice, Inc., is an S corporation that has been in business for 18 years. Its annual gross receipts have never exceeded $25 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.

A C corporation is required to annualize certain tax factors:

Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years. The note bore interest of 7% when the applicable Federal rate was 4%. Hal's cost of the land was $40,000. Because of the buyer's good credit record and the high interest rate on the note, Hal thought the fair market value of the note was at least $74,000.

In 2008, a medical doctor who incorporated her practice elected a fiscal year ending September 30th. During the fiscal year ended September 30, 2018, she received a salary of $190,000. During the period from October 1, 2018 to December 31, 2018, the corporation paid the doctor a total salary of $60,000, and paid her $240,000 of salary in the following 9 months. The corporation's salary deduction for the fiscal year ending September 30, 2019, is limited to $240,000.

When a taxpayer with average annual gross receipts in excess of $25 million finances the construction of its building by borrowing, the interest is added to the cost of the building.

In 2018, 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 2018, Cashmere incurred $300,000 of costs on the contract, and in 2019 the contract was completed at a total cost of $425,000. Cashmere is not required to recognize any income from the contract until 2019.

Gold Corporation, Silver Corporation, and Copper Corporation are equal partners in the GSC Partnership. The partners' tax year-ends are as follows: Gold December 31 Silver April 30 Copper September 30

Barbara operates a sporting goods store. She uses the cash method and treats inventory as non-incidental 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?

Juan, not a dealer in real property, sold land that he owned. His adjusted basis in the land was $700,000 and it was encumbered by a mortgage for $100,000. The terms of the sale required the buyer to pay Juan $200,000 on the date of the sale. The buyer assumed Juan's mortgage and gave Juan a note for $900,000 (plus interest at the Federal rate) due in the following year. What is the gross profit percentage (gain ÷ contract price) ?

In 2018, T Corporation changed its tax year from ending each April 30th to ending each December 31st. The corporation earned $60,000 during the period May 1, 2018 through December 31, 2018. The annualized income for the short year is $90,000.

A calendar year, cash basis corporation began business on April 1, 2018, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2018, and purchased a 24- month liability insurance policy. The accrual basis taxpayer must amortize the premiums over 24 months but the cash basis taxpayer may deduct the total premiums in 2018.