Exam 27: Accounting Periods and Methods

A taxpayer uses the accrual method in determining the taxable income from his sole proprietorship included in his tax return.He must also use the accrual method for reporting investment income and itemized deductions included in his tax return.

On May 18 of last year,Carter sells unlisted stock with a cost of $24,000 for $60,000.Carter collects $20,000 initially and is scheduled to receive $10,000 each year for four years starting this year plus an acceptable rate of interest.After receiving the first $10,000 scheduled installment payment,Carter is unable to collect any further payments.After incurring legal fees of $1,000,Carter recovers a portion of the stock valued at $26,000.As a result of the repossession,Carter must report

Alvin,a practicing attorney who also owns an office supplies store,may use the cash basis for his legal practice and the accrual basis for his office supplies store.

A cash-basis taxpayer pays a bill with a credit card.The underlying expenditure is not deductible until the credit card bill is paid.

A taxpayer sells a parcel of land on the installment sale basis and will recognize the gain over the five-year installment schedule.Form 6252 must be included with his tax return only in the year of sale.

In Year 1,a contractor agrees to build a building for $2,500,000 by the end of year 2.The builder's cost is estimated to be $1,800,000.The actual costs in Year 1 are $900,000 and Year 2's actual costs are $1,300,000.Under the completed contract method,the gross profit for Year 1 is

All of the following statements are true except

Emma,a single taxpayer,obtains permission to change from a calendar year to a fiscal year ending June 30,2019.During the six months ending June 30,2019,she earns $40,000 and has $8,000 of itemized deductions.What is the amount of her annualized income?

On May 18 of last year,Yuji sold non-publicly traded stock with a cost of $12,000 for $30,000.Yuji collected $10,000 initially and is scheduled to receive $5,000 each year for four years starting this year plus an acceptable rate of interest.After receiving the first scheduled $5,000 payment,Yuji was unable to collect any further payments.After incurring legal fees of $500,Yuji recovered a portion of the stock valued at $13,000.Yuji's basis in the recovered stock is

Generally,if inventories are an income-producing factor to a small business,the accrual method must be used for sales and cost of goods sold.

A business uses the same inventory method for both financial reporting and tax reporting.Because of the UNICAP requirement,ending inventory is likely to be

A taxpayer's tax year must coincide with the year used to keep the taxpayer's books and records.

One criterion which will permit a deduction for an expenditure by an accrual-basis taxpayer prior to economic performance is that either the amount is not material or the earlier accrual of the item results in a better matching of income and expense.

A business which provides a warranty on goods sold will deduct a reserve for warranty expense consistent with the reporting on its financial statements.

Inventory may be valued on the tax return at the lower of cost or market unless

Generally,an income tax return covers an accounting period of 12 months.

A subsidiary corporation filing a consolidated return with its parent corporation must change its accounting period to conform with its parent's tax year.

Bergeron is a local manufacturer of off-shore drilling platforms.This year,Bergeron entered into a contract to construct a drilling platform,which will be placed in the North Atlantic Ocean.The total contract price is $5,000,000,and Bergeron estimates the total construction cost at $2,000,000.Actual costs incurred this year are $600,000.If Bergeron uses the completed contract method,the gross profit for this year is

Partnerships,S corporations,and personal service corporations may elect a taxable year which results in a tax deferral of four months or less.

In general,a change in accounting method must be approved by the IRS.