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Exam 18: Accounting Periods and Methods

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Question 31

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The use of the LIFO inventory method for tax purposes:

A) Will not defer income if the prices are increasing and quantities of inventories are decreasing.
B) Is required for tax purposes if the taxpayer uses the LIFO method for reporting to stockholders and creditors.
C) Will result in a recapture of deferred income if the quantities of inventories decrease.
D) Does not affect the company's financial accounting for inventories and cost of goods sold.
E) None of the above.

F) A) and E)
G) C) and D)

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Question 32

True/False

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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%.

A) True
B) False

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Question 33

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Teal,Inc.,used the lower of cost or market to value inventory in 2012.The ending inventory at cost was $400,000 and the ending inventory at market was $385,000.In 2013,Teal changed to the LIFO method.The company's beginning LIFO inventory is $400,000.

Ramon sold land in 2012 with a cost of $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 Ramon uses the installment method whenever possible):

Ivory Fast Delivery Company,an accrual basis taxpayer,frequently has claims for damages to property the company delivered.Often the claim is not filed until a month after the delivery.In the past,approximately 80% of the claims are paid by Ivory.In 2012,claims for $80,000 were filed.The company refused to pay $20,000 of the claims (because they were not valid) ,and paid $50,000.The remaining $10,000 in claims were processed and paid in January 2013.Also,in January 2013,claims for $8,000 were filed for deliveries made in 2012,and $6,000 was paid on these claims by March 15,2013.Ivory has not elected to use the recurring item exception to economic performance.Under the all-events and economic performance tests,Ivory can accrue as an expense for 2012:

Yard Corporation,a cash basis taxpayer,received $10,000 from a customer in 2011.In 2011,the customer filed a claim for a refund of the fee.In 2012,Yard refunded the customer $6,000.In 2011,Yard paid $5,000 in estimated state income tax.In May 2012,Yard received a state income tax refund of $2,000 for overpayment of its 2011 income tax.Yard was in the 35% marginal tax bracket in 2011 and in the 15% marginal tax bracket in 2012.What are the tax effects of the 2012 payment to the customer and the collection of the state income taxes overpaid?

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

A C corporation is required to annualize its income:

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

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?

Which of the following statements regarding a 52-53 week tax year is not correct?

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.

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?

Related-party installment sales include all of the following except the first seller's:

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:

Crow Corporation has used the LIFO inventory method for the past 10 years.During that time,the prices Crow pays for the inventory have increased by 50%.Its inventory value when it first adopted LIFO was $5,000,000.The company began using a just-in-time inventory system the same year it adopted LIFO,and although sales have increased,the quantities of goods on hand at year end has not changed in the past ten years.The corporation's marginal tax rate has been 35% in all of the years.As a result of the LIFO election:

A CPA practice that is incorporated earns 40% of its annual revenues in the months of March and April.Although the CPA practice is a professional services corporation (PSC),it may use a fiscal year ending April 30th.

In 2012,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 2011 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 C corporation in the manufacturing business must use a calendar year as its tax year unless the corporation has a business reason for using a tax year that is not a calendar year.

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?