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Exam 16: Accounting Periods and Methods

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Question 51

Multiple Choice

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

A) The year-end must be the same day of the week in all years.
B) The year cannot contain more than 366 calendar days.
C) Every four years, there will be only 51 weeks.
D) The year cannot end on a Sunday.
E) None of the above.

F) A) and C)
G) B) and D)

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Question 52

Multiple Choice

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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:

A) Result in a mismatching of revenues and expenses.
B) Violate established public policy.
C) Violate the economic performance requirement.
D) Violate the tax benefit rule.
E) None of the above.

F) B) and D)
G) C) and D)

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Question 53

Multiple Choice

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In 2014, Godfrey received a $50,000 sales commission on a long-term contract. But in 2015, the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer. Under the bonus agreement, Godfrey was required to repay the employer $20,000 of the bonus. Godfrey was in the 35% marginal tax bracket in 2014 but he is in the 25% marginal tax bracket in 2015.

Karen, an accrual basis taxpayer, sold goods in December 2014 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 2015. The note bore interest at the Federal rate. The fair market value of the note at the end of 2014 was $18,000. Karen collected $20,500 from the customer in April 2014, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

When the IRS requires a taxpayer to change accounting methods:

Yard Corporation, a cash basis taxpayer, received $10,000 from a customer in 2013. In 2013, the customer filed a claim for a refund of the fee. In 2014, Yard refunded the customer $6,000. In 2013, Yard paid $5,000 in estimated state income tax. In May 2014, Yard received a state income tax refund of $2,000 for overpayment of its 2013 income tax. Yard was in the 35% marginal tax bracket in 2013 and in the 15% marginal tax bracket in 2014. What are the tax effects of the 2014 payment to the customer and the collection of the state income taxes overpaid?

Ivory Fast Delivery Company, an accrual basis taxpayer, frequently has claims for damages to property the company delivered. Often the claim is not filed until a month after the delivery. In the past, approximately 80% of the claims are paid by Ivory. In 2014, claims for $80,000 were filed. The company refused to pay $20,000 of the claims (because they were not valid) , and paid $50,000. The remaining $10,000 in claims were processed and paid in January 2015. Also, in January 2015, claims for $8,000 were filed for deliveries made in 2014, and $6,000 was paid on these claims by March 15, 2015. Ivory has not elected to use the recurring item exception to economic performance. Under the all-events and economic performance tests, Ivory can accrue as an expense for 2014: