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Exam 18: Accounting Periods and Methods

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Question 41

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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) Increase its income for 2012 by $120,000.
B) Increase its income for 2012 by $80,000.
C) Increase its income for 2012 by $30,000.
D) Increase its income for 2012 by $40,000.
E) None of the above.

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

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Question 42

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Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2012,the company entered into a contract to construct a building for $960,000.Camelia estimated that the cost of constructing the building would be $720,000.In 2012,the company incurred $240,000 in costs under the contract.In 2013,the company incurred an additional $450,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

A) Camelia is not required to report any income from the contract until 2013 when the contract is completed.
B) Camelia must report $80,000 gross profit on the contract in 2012, but must pay interest in 2013 under the lookback rules.
C) Camelia does not recognize any profit from the contract in 2013 and the company will receive interest from the overpayment of tax on 2012 reported profit from the contract.
D) Camelia should amend its 2012 tax return to decrease the profit on the contract for that year.
E) None of the above.

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

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Question 43

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Red Corporation and Green Corporation are equal partners in the R & G Partnership.Red Corporation's tax year ends September 30th,and Green Corporation is a calendar year taxpayer.R & G Partnership must use September 30th as its tax year,unless it has a business purpose for using a different tax year.

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

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

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:

What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?

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?

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%

When the IRS requires a taxpayer to change accounting methods:

Laura Corporation changed its tax year-end from July 31st to December 31st in 2012.The income for the period August 1,2012 through December 31,2012 was $35,000.The corporate tax rate is 15% on the first $50,000 of income,25% on income from $50,001 to $75,000,and 34% on income from $75,001 to $100,000.A portion of Laura's June - December 2012 income will be taxed at 34%.

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.

Pedro,not a dealer,sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2010.The terms of the sale required Pat to pay $28,000 cash,assume the $56,000 mortgage,and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate) .The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2012 note as promised,what is the recognized gain to Pedro in 2012 (exclusive of interest) ?

Franklin Company began business in 2008 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2008 through 2012.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2013.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2013 and the three following years.

Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2012,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2012 sales and $50,000 in refunds from 2011 sales.All of the refunds from 2011 sales were for claims filed in 2011 and were paid in January and February 2012.At the end of 2012,the company had $12,000 in refund claims for sales in 2012 for which payment had been approved.These claims were paid in January 2013.Also in January 2013,the company received an additional $30,000 in claims for sales in 2012.This $30,000 was paid by Gray in February 2013.With respect to the above,Gray can deduct:

Aspen stores is a large retail chain.The company has four warehouses that are located in various parts of the country.The goods are stored at the warehouses and then moved to the retail stores for sale.

The lower of FIFO cost or market inventory method can be used for tax purposes,but the lower of cost or market cannot be used in conjunction with the LIFO method.

Computer Consultants Inc.,began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is,the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year,the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?

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.

In 2012,T Corporation changed its tax year from ending each September 30th to ending each December 31st.The corporation earned $25,000 during the period October 1,2012 through December 31,2012.The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.