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Exam 18: Accounting Periods and Methods

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Question 41

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The accrual method generally is required for the following types of businesses:

A) A real estate management company operating as an S corporation with more than $25 million of gross receipts.
B) An incorporated public accounting firm with gross receipts in excess of $25 million.
C) A partnership that has a partner that is an S corporation.
D) A grocery store with average annual gross receipts of $800,000.
E) None of these.

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

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Question 42

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In 2019, Ramon sold land that had cost $80,000 for $200,000.The sales agreement called for a $50,000 down payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years.What would be the consequences of the following (treat each part independently and assume that Ramon uses the installment method whenever possible): a.In 2019, Ramon gave one of the $50,000 installment obligations to a close relative. b.In 2019, Ramon transferred the installment obligations ($50,000) to his 100% owned corporation. c.Ramon collected the $50,000 plus $12,000 interest on January 1, 2020, and died on January 2, 2020.

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a.The gift is a taxable disposition and,...

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Question 43

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Multi Department Store takes physical inventories at each of its 300 stores on various dates between August 1 and September 30 each year.The company's tax year ends on the Monday closest to January 31.The company's reduction in inventory due to breakage and theft after the last physical inventory in September 2019:

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

A C corporation's selection of a tax year generally is independent of the tax year of its principal shareholders.

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.

Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2019.Gold and Silver use a calendar tax year, and Platinum's tax year ends June 30.GSP is not a seasonal business.

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:

This year, Yuan started a business selling computer parts both in store and online.He purchased $60,000 of goods during the year via credit card.His ending inventory was $9,000.For tax purposes, Yuan adopted the cash method and the treatment of inventory as deductible when purchased per his books.His deduction for inventory for the year is:

Red Corporation and Green Corporation are equal partners in the R & G Partnership.Red's tax year ends September 30th, and Green is a calendar year taxpayer.The greatest aggregate deferral of income would occur if the partnership used a calendar year for tax purposes.

In 2019, T Corporation changed its tax year from ending each April 30 to ending each December 31.The corporation earned $60,000 during the period May 1, 2019 through December 31, 2019.The annualized income for the short year is $90,000.

Robin Construction Company began a long-term contract in 2019.The contract price was $800,000.The estimated cost of the contract at the time it was begun was $500,000.The actual cost incurred in 2019 was $350,000.The contract was completed in 2020 and the cost incurred that year was $125,000.Under the percentage of completion method:

In 2019, Beth sold equipment used in her business.Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation) .Beth sold the property for $400,000, with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate) due in 2020.Beth's recognized gain from the installment sale in 2019 is:

In 2020, Brown Corporation, a service business, no longer qualifies as a small business.Thus, it must change from the cash to the accrual method starting with its 2020 tax year..At the beginning of 2020, Brown had accounts receivable of $575,000.Also, Brown had accounts payable of $345,000.Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2020.

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?

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30.For the fiscal year ending September 30, 2019, 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, 2020), 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 2019 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2020?

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 2019 until filing the tax return for the year ending June 30, 2020.

The taxpayer had incorrectly been using the cash method of accounting.For 2019, the company voluntarily changed to the accrual method.The adjustment due to the change in method as calculated at the beginning of 2019 was $120,000 (positive) .The adjustment as calculated as of the end of 2019 was $80,000 (positive) .As a result of the change in method, the company must:

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.

Which of the following statements is true concerning the disposition of an installment note?