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Exam 18: Accounting Periods and Methods

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Question 51

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In 2014,Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses.The total amount of the expense for 2013 was $300,000,$60,000 of the item was included in the ending inventory that year and $240,000 was deducted as cost of goods sold.

A) The company should amend its 2013 tax return and reduce its income by $240,000.
B) The company should change its accounting method in 2014,with a $60,000 negative § 481 adjustment which decreases its 2014 taxable income.
C) The company should change its accounting method in 2014,and increase its 2014 income by $60,000,the amount of the positive § 481 adjustment to income.
D) The company should change its accounting method in 2014 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2014-17.
E) None of these.

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

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Question 52

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The buyer and seller have tentatively agreed to a contract for the sale of a building that the buyer will use in its business.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 is in the area is 7%. a.Why would the seller bargain for a 5% interest rate for the contract rather than a 7% interest rate? b.How does the interest rate affect the buyer's future taxable income?

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a.The total payments the seller will rec...

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Question 53

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The accrual basis taxpayer sold land for $100,000 on December 31,2014.He did not collect the $100,000 until January 2,2015.The land was held as an investment.

Gold Corporation,Silver Corporation,and Copper Corporation are equal partners in the GSC Partnership.The partners' tax year­ends are as follows: Gold December 31st Silver April 30th Copper September 30th

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

In 2004,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2014,he received a salary of $190,000.During the period from October 1,2014 to December 31,2014,the corporation paid the doctor a total salary of $60,000,and paid him $240,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2015,is limited to $240,000.

A C corporation provides lawn maintenance services to various businesses and homeowners.The corporation has average annual gross receipts of $3,500,000.The corporation may use the cash method of accounting.

The LIFO method is beneficial only when prices are rising and the taxpayer is increasing the quantities of inventory items on hand.

Brown Corporation had consistently reported its income by the cash method.The corporation should have used the accrual method because inventories are material to the business.In 2014,Brown timely filed a request to change to the accrual method.At the beginning of 2014,Brown had accounts receivable of $75,000.Also,Brown had merchandise on hand with a cost of $150,000 and accounts payable for merchandise of $45,000.The accounts receivable,inventory,and accounts payable balance per books were zero.Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2014.

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

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.

A calendar year,cash basis corporation began business on April 1,2014,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2014,and purchased a 24-month liability insurance policy.The accrual basis taxpayer must amortize the premiums over 24 months but the cash basis taxpayer may deduct the total premiums in 2014.

Color,Inc. ,is an accrual basis taxpayer.In December 2014,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2015.Also,in December 2014,the company received a bill of $800 for office supplies that had been purchased and used in November 2014.The bill was not paid until January 2015.In January 2015,the company received a claim for $600 for defective merchandise purchased in 2014.Color paid the customer the $600 in February 2014.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2014 as a result of the above are:

The company has consistently used the LIFO inventory method and has deferred over $1 million of income from using that method.However,in the last two years,the prices it pays for goods has been decreasing.Therefore,the company is considering changing to the FIFO inventory method.What would be some tax consequences of the change?

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

In 2014,Norma sold Zinc,Inc. ,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2015with accrued interest at the Federal rate.Norma's basis in the stock was $250,000.This was Norma's only installment sale transaction.Which of the following statements is correct?

The taxpayer has consistently,but incorrectly,used an allowance for bad debts.At the beginning of the year,the balance in the allowance account is $90,000.

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?

In regard to choosing a tax year for a business owned by individuals,which form of business provides the greater number of options in regard to the tax year?

The taxpayer is an appliance dealer and has the following items of inventory on hand at the end of the year: $\begin{array}{lrrr}&&\text { Replacement }&\text {Expected Selling }\\\text { Item }& \text { Cost }&\text { Cost }& \text { Price }\\\hline20 \text { Big Screen TV's } & \$ 12,000 & \$ 14,000 & \$ 18,000 \\200 \text { DVD Players } & 20,000 & 16,000 & 18,000 \\100 \text { Stereo Systems } & 24,000 & 21,000 & 35,000\\&\$56,000&\$51,000&\$71,000\end{array}$ Under the lower-of-cost-or-market inventory method,the ending inventory value is: