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Exam 16: Accounting Periods and Methods

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Question 31

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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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Question 32

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

A) Deferred gain is not recognized by the transferor if the installment note is a non-taxable transfer to a controlled corporation.
B) Deferred gain must only be recognized if the installment note was transferred as a gift to a related party.
C) Transfer of an installment obligation to another party will not trigger immediate recognition of deferred gain.
D) Deferred gain must be recognized if the note is transferred to the owner's estate at his death.
E) None of the above.

F) A) and C)
G) All of the above

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Question 33

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Generally,an advantage to using the cash method of accounting,as compared to the accrual method,is that under the cash method income is not recognized until it is collected,rather than being taxed as soon as the taxpayer has the right to collect the income.

In 2017,Cashmere Construction Company enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000.Cashmere estimates the total cost to complete the cottage to be $400,000.In 2017,Cashmere incurred $300,000 of costs on the contract,and in 2018 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2018.

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30,2017,the corporation earned $40,000 profits each month,before Dr.Stone's salary and income tax.Dr.Stone received a salary that averaged $30,000 per month.Next year (fiscal year ending September 30,2018),Dr.Stone expects the average monthly profits before salary and taxes to be $48,000.What is the minimum salary Dr.Stone can receive for the last three months of calendar year 2017 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30,2018?

If an installment sale contract does not charge interest on the sale of a capital asset,only capital gain will be recognized over the life of the contract.

A cash basis taxpayer sold investment land in 2017 for $200,000.He received $40,000 in the year of sale and $160,000 in 2018.The cost of the land was $80,000.Under the installment method,the taxpayer would report a $24,000 gain in 2017.

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

Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2017,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2017 sales and $50,000 in refunds from 2016 sales.All of the refunds from 2016 sales were for claims filed in 2016 and were paid in January and February 2017.At the end of 2017,the company had $12,000 in refund claims for sales in 2017 for which payment had been approved.These claims were paid in January 2017.Also in January 2017,the company received an additional $30,000 in claims for sales in 2017.This $30,000 was paid by Gray in February 2018.With respect to the above,Gray can deduct:

In the case of an accrual basis taxpayer,an item of income:

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 10 percent of the estimated contract costs.

The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business.The taxpayer decided to voluntarily change to the accrual method of accounting.The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories,$30,000 for accounts receivable,and $12,000 for accounts payable.The adjustment due to the change in accounting method is:

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

Walter sold land (a capital asset) to an unrelated party for $100,000 cash and a 4% note for $150,000 due in three years.His basis in the land was $40,000.Walter and the purchaser are cash basis taxpayers.Which of the following statements is correct?

Under the percentage of completion method,if the actual costs are ____ the estimated costs,the taxpayer must pay interest on the underpayment of prior years' taxes.

A calendar year,cash basis corporation began business on April 1,2017,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2017,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 2017.

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 2017,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 2018.Also,in January 2018,claims for $8,000 were filed for deliveries made in 2017,and $6,000 was paid on these claims by March 15,2018.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 2017:

Purple Corporation,a personal service corporation (PSC) ,adopted a fiscal year ending September 30th.The sole shareholder of the corporation is a calendar year taxpayer.During the fiscal year ending September 30,2017,the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1,2017 through December 31,2017.

A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.

In 2017,T Corporation changed its tax year from ending each April 30th to ending each December 31st.The corporation earned $60,000 during the period May 1,2017 through December 31,2017.The annualized income for the short year is $90,000.