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Exam 16: Accounting Periods and Methods

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Question 1

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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 2012 until he files his tax return for his year ending June 30, 2013.

A) True
B) False

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Question 2

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Wendy sold property on the installment basis in 2011 for more than her basis in the property. Wendy was to receive installment payments at the end of each year for the next five years. In 2012, before she collected on the installment obligation for that year, Wendy gave to her daughter (Wilma) the installment obligation so that she could collect the four remaining installments.

A) Wilma must recognize the gain from all the amounts collected on the installment obligation in 2012 and subsequent years.
B) Wendy must recognize the gain each year when Wilma collects on the installment obligation.
C) Wilma must recognize the remaining installment sale gain in 2012.
D) Wendy must recognize the remaining installment sale gain in 2012 and Wilma will not recognize gain from collecting on the installment obligation.
E) None of the above.

F) D) and E)
G) None of the above

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Question 3

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

Generally, an advantage to using the cash method of accounting, as compared to the accrual method, is that under the cash method income is not recognized until it is collected, rather than being taxed as soon as the taxpayer has the right to collect the income.

In the case of a sale reported under the installment method, no gain is reported until the seller has recovered the entire cost of the property sold.

A C corporation is required to annualize its income:

Yard Corporation, a cash basis taxpayer, received $10,000 from a customer in 2011.In 2011, the customer filed a claim for a refund of the fee.In 2012, Yard refunded the customer $6,000.In 2011, Yard paid $5,000 in estimated state income tax.In May 2012, Yard received a state income tax refund of $2,000 for overpayment of its 2011 income tax.Yard was in the 35% marginal tax bracket in 2011 and in the 15% marginal tax bracket in 2012.What are the tax effects of the 2012 payment to the customer and the collection of the state income taxes overpaid?

In 2004, a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30, 2012, he received a salary of $180,000.During the period from October 1, 2012 to December 31, 2012, the corporation paid the doctor a total salary of $50,000, and paid him $200,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30, 2013, is limited to $200,000.

Which of the following is (are) a taxable disposition of an installment obligation?

A CPA practice that is incorporated earns 40% of its annual revenues in the months of March and April. Although the CPA practice is a professional services corporation (PSC), it may use a fiscal year ending April 30th.

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 11% when the applicable Federal rate was 7%.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.

Kathy was a shareholder in Matrix, Inc., when she sold the corporation a commercial building.The building cost $500,000 and the balance in the accumulated depreciation account was $400,000. Matrix, Inc., paid $100,000 in the year of sale and gave Kathy a note for $400,000 plus adequate interest due in 2014.

The buyer and seller have tentatively agreed that 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 in the area is 7%.Why would the seller bargain for a 5% interest rate for the contract rather than a 7% interest rate?

Abby sold her unincorporated business which 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, 2012, and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2012 (exclusive of interest) is:

The taxpayer had incorrectly been using the cash method of accounting. For 2012, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2012 was $120,000 (positive) . The adjustment as calculated as of the end of 2012 was $80,000 (positive) .As a result of the change in method, the company must:

A calendar year, cash basis corporation began business on April 1, 2012, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2012, and purchased a 24-month liability insurance policy. Both the cash basis and accrual basis taxpayers' deduction for insurance expense on the policy for 2012 is $900 (9/12 ´ $1,200).

For purposes of determining the partnership's tax year, there may be more than one principal partner.

The accrual method generally is required to report income for which of the following types of businesses:

When an accrual basis taxpayer finances the construction of its building by borrowing, the interest is added to the cost of the building.

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2012, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2012, the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2012 state income tax was paid in April 2013.In June 2012, the corporation paid $9,000 on its year 2011 state income tax liability, as a result of an audit of the 2011 return that was conducted in 2012. The company has elected to use the recurring item exception to economic performance. As a result of the above, the corporation should deduct in 2012 on its Federal income tax return state income taxes of: