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Exam 18: Accounting Periods and Methods

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Question 41

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Alice,Inc.,is an S corporation that has been in business for five years.Its annual gross receipts have never exceeded $1 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,unless Alice previously elected the accrual method.

A) True
B) False

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Question 42

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In the case of a taxpayer who uses the lower-of-cost-or-market inventory method:

A) Either FIFO or LIFO can be used.
B) Excess inventories can be written-off in the year the company decides the goods are overstocked.
C) "Market" means the replacement cost of the goods.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

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

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Question 43

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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.

Albert is in the 35% marginal tax bracket.He sold a building in the current year for $450,000.Albert received $110,000 cash at closing,the buyer assumed Albert's mortgage for $120,000,and the buyer gave Albert a 6% note for $220,000 due in two years.The Federal rate was 6%.Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straight-line depreciation) .Assuming he did not elect out of the installment method,Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts? Section 1231 Gain Unrecaptured § 1250 Gain Taxed at 25%

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.

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

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 the case of a small home construction company that builds under long-term contracts,generally:

Blue Mart operates a large chain of retail stores.The company has four warehouses that are located in various parts of the country.The cost of operating the warehouses must be capitalized and becomes a cost of inventory that is not deducted until the goods are sold.

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30,2012,the corporation earned $40,000 profits each month,before Dr.Stone's salary and income tax.Dr.Stone received a salary that averaged $30,000 per month.Next year (fiscal year ending September 30,2013),Dr.Stone expects the average monthly profits before salary and taxes to be $48,000.What is the minimum salary Dr.Stone can receive for the last three months of calendar year 2012 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30,2013?

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.

The Yellow Equipment Company,an accrual basis C corporation,is a manufacturer's representative and works on a commission basis (15% of sales that it places)and does not carry inventory.In November 2012,Yellow made a sale and collected a commission for $20,000.In June of 2013,the customer had not received the equipment from the manufacturer and canceled the order.As a result,Yellow was required to refund the $20,000 commission to the manufacturer.Yellow's taxable income in 2012 was $70,000,and in 2013 Yellow's taxable income was $25,000 after deducting the refund.The applicable tax rate schedule is 15% on the first $50,000 of income and 25% on income in excess of $50,000.What is the effect of the refund on Yellow's 2013 tax liability?

In 2012,Father sold land to Son for $150,000 cash and an installment note for $450,000 due in 2016.Father's basis was $240,000.In 2013,after paying $27,000 interest but nothing on the principal,Son sold the land for $600,000 cash.As a result of the second disposition,what gain must Father recognize in 2013?

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.

A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.

The installment method can be used for which of the following sales with payments being made in the year following the year of sale?

Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

The taxpayer is an appliance dealer and has the following items of inventory on hand at the end of the year: Under the lower-of-cost-or-market inventory method,the ending inventory value is:

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.

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