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Exam 18: Accounting Periods and Methods

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Question 31

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

A) (1) only.
B) (1) and (2) .
C) (2) and (3) .
D) (1) and (3) .
E) None of the above.

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

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Question 32

True/False

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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).

A) True
B) False

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Question 33

Multiple Choice

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Robin Construction Company began a long-term contract in 2012.The contract price was $600,000.The estimated cost of the contract at the time it was begun was $450,000.The actual cost incurred in 2012 was $300,000.The contract was completed in 2013 and the cost incurred that year was $180,000.Under the percentage of completion method:

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

A partnership cannot elect to use a tax year other than a calendar year merely because the partnership's CPA is too busy to prepare a calendar year return.

Father sold land to Son for $150,000 in 2012.Father's basis in the land was $60,000.Son paid Father $25,000 and gave Father a note for $125,000 due in 2015.In 2013,Son sold the land for $200,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

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

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

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

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.

Mallard Auto Parts,Inc.has on hand 1,000 fenders for 1953 Studebakers.Mallard purchased the fenders in 1965 for $30 each and the selling price is $400 each.Only rarely does Mallard sell a Studebaker fender and it is highly unlikely that more than 100 of the remaining fenders will ever be sold.However,Mallard has ample storage space and feels an obligation to Studebaker owners.Therefore,the company will not salvage the fenders and will continue to sell them for $400 each.Scrap value of the fenders is $5 each.Under the lower of cost or market inventory method:

Crow Corporation has used the LIFO inventory method for the past 10 years.During that time,the prices Crow pays for the inventory have increased by 50%.Its inventory value when it first adopted LIFO was $5,000,000.The company began using a just-in-time inventory system the same year it adopted LIFO,and although sales have increased,the quantities of goods on hand at year end has not changed in the past ten years.The corporation's marginal tax rate has been 35% in all of the years.As a result of the LIFO election:

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?

In the case of an accrual basis taxpayer,an item of income:

A C corporation in the manufacturing business must use a calendar year as its tax year unless the corporation has a business reason for using a tax year that is not a calendar year.

In 2012,George used the FIFO lower of cost or market inventory method.As of December 31,2011,the inventory cost was $50,000 and its market price was $40,000.At the time of filing his 2012 income tax return,George changed to the LIFO method.The ending inventory at cost on December 31,2012,was $75,000 and the market price of the goods totaled $35,000.Which of the following statements is correct?

Which of the following statements regarding a 52-53 week tax year is not correct?

Sandstone,Inc.,has consistently included some factory overhead as a current expense,rather than as a cost of producing goods.As a result,the beginning inventory for 2012 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1,2012,the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2012,2013,2014,and 2015.

Todd,a CPA,sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.

Related-party installment sales include all of the following except the first seller's: