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Exam 16: Accounting Periods and Methods

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Question 21

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Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2017,the company entered into a contract to construct a building for $900,000.Camelia estimated that the cost of constructing the building would be $600,000.In 2017,the company incurred $150,000 in costs under the contract.In 2018,the company incurred an additional $500,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

A) Camelia must report $300,000 of income in 2017.
B) Camelia is not required to report any income from the contract until 2018 when the contract is completed.
C) Camelia must recognize $75,000 of income in 2017.
D) Camelia should amend its 2017 tax return to decrease the profit on the contract for that year.
E) None of the above.

F) B) and C)
G) A) and B)

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Question 22

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Father sold land to Son for $500,000 in 2017.Father's basis in the land was $100,000.Son paid Father $50,000 and gave Father a note for $450,000 due in 2020.In 2018,Son sold the land for $600,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

A) Father must recognize $400,000 of income in 2018.
B) The installment method is not permitted because this is a related-party transaction.
C) Father's gain is all ordinary income.
D) Father must recognize a $360,000 gain in 2018.
E) None of the above.

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

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Question 23

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In 2017,Norma sold Zinc,Inc.,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2018 with 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?

Karen,an accrual basis taxpayer,sold goods in December 2017 for $20,000.The customer was unable to pay cash.So the customer gave Karen a note for $20,000 that was payable in April 2018.The note bore interest at the Federal rate.The fair market value of the note at the end of 2017 was $18,000.Karen collected $20,500 from the customer in April 2018,$20,000 principal plus $500 interest.Under the accrual method,Karen must recognize income of:

In 2017,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 2018.Beth's recognized gain from the installment sale in 2017 is:

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 2017 until he files his tax return for his year ending June 30,2018.

The ability of the CPA to timely prepare a tax return is a justification for the partnership's use of a particular tax year.

Robin Construction Company began a long-term contract in 2017.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 2017 was $350,000.The contract was completed in 2018 and the cost incurred that year was $125,000.Under the percentage of completion method:

In 2017,Godfrey received a $50,000 sales commission on a long-term contract.But in 2018,the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer.Under the bonus agreement,Godfrey was required to repay the employer $20,000 of the bonus.Godfrey was in the 35% marginal tax bracket in 2017 but he is in the 25% marginal tax bracket in 2018.

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

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

The installment method applies where a payment will be received after the tax year of the sale:

Ted,a cash basis taxpayer,received a $150,000 bonus in 2017 when he was in the 35% marginal tax bracket.In 2018,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 2018 tax liability by $14,000 (.35 × $40,000).

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 2017,Brown timely filed a request to change to the accrual method.At the beginning of 2017,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 2017.

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

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.

Terry,Inc.,makes gasoline storage tanks.All production is done under contract.The company makes three basic models,but each model must be adapted to customer specifications for the location of outlets,insulation,and paint.It takes from three to six months to complete a tank.How should Terry account for the income for the business?

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

Snow Corporation began business on May 1,2017,and elected to use the calendar year for tax purposes.Brown Corporation,a calendar year corporation,sold all of its assets and liquidated as of April 30,2017.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2017 returns.

A C corporation is required to annualize its income: