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Exam 16: Accounting Periods and Methods

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Question 1

True/False

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For a taxpayer who is required to use the percentage of completion method,the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 25 percent of the estimated contract costs.

A) True
B) False

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Question 2

Multiple Choice

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In 2011,Helen sold equipment used in her business and reported her gain by the installment method.Her basis in the property was $250,000 ($400,000 cost less $150,000 of depreciation) .Helen sold the property for $500,000,with $200,000 due on the date of the sale and $300,000 (plus interest at the Federal rate) due in 2012.Helen's recognized installment sale gain in 2011 is:

A) $0.
B) $60,000.
C) $190,000.
D) $210,000.
E) None of the above.

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

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C

Question 3

Multiple Choice

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The taxpayer voluntarily changed from the cash to the accrual method of accounting,because inventories were material to the taxpayer's business.The change resulted in a positive $60,000 adjustment to income.

Father sold land to Son for $150,000 in 2011.Father's basis in the land was $60,000.Son paid Father $25,000 and gave Father a note for $125,000 due in 2014.In 2012,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.

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.

A C corporation is required to annualize its income:

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

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?

Snow Corporation was a calendar year corporation that sold all of its assets and liquidated as of April 30,2012.Brown Corporation began business on May 1,2012 and elected to use a calendar year.Both Snow Corporation and Brown Corporation must annualize their income for their 2012 returns.

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) ?

In 2011,Father sold land to Son for $150,000 cash and an installment note for $450,000 due in 2015.Father's basis was $240,000.In 2012,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 2012?

Laura Corporation changed its tax year-end from June 30th to December 31st in 2011.The income for the period July 1,2011 through December 31,2011 was $45,000.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 July - December 2011 income will be taxed at 34%.

Karen,an accrual basis taxpayer,sold goods in October 2011 for $10,000.The customer was unable to pay cash.So the customer gave Karen a note for $10,000 that was payable in April 2012.The note bore interest at the Federal rate.The fair market value of the note at the end of 2011 was $9,000.Karen collected $10,000 from the customer in April 2012.Under the accrual method:

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 2011.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2012.The net adjustment due to the change is a positive adjustment to income.

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

Charlotte sold her unincorporated business for $500,000 in 2011.The sales contract allocated $150,000 to equipment,$300,000 to land,and $50,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $140,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?

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

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

Ted,a cash basis taxpayer,received a $150,000 bonus in 2011 when he was in the 35% marginal tax bracket.In 2012,when Ted was in the 28% marginal tax bracket,it was discovered that the bonus was incorrectly computed,and Ted was required to refund $40,000 to his employer.As a result of the refund,Ted can reduce his 2012 tax liability by $14,000 (.35 ´ $40,000).

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.