Exam 18: Accounting Periods and Methods

Yard Corporation, a cash basis taxpayer, received $10,000 from a customer in 2017.In that year, the customer filed a claim for a refund of the fee.In 2018, Yard refunded the customer $6,000.In 2017, Yard paid $5,000 in estimated state income tax.In May 2018, Yard received a state income tax refund of $2,000 for overpayment of its 2017 income tax.Yard was in the 35% marginal tax bracket in 2017 and in the 15% marginal tax bracket in 2018.What are the tax effects of the 2018 payment to the customer and the collection of the state income taxes overpaid?

Mogo Manufacturing Company accounts for its inventories using the FIFO method.The company has consistently allocated building depreciation to production and general administration on the basis of the number of square feet occupied.According to the measurements used, manufacturing requires 90% of the square footage and general administration utilizes 10% of the total square feet.This year, the accountant realized that five years ago an addition was made to the portion of the building used for general administration, and the depreciation allocation had not been adjusted.What are the tax accounting implications of this discovery?

The company has consistently used the LIFO inventory method and has deferred over $1 million of income from using that method.However, in the last two years, the prices it pays for goods has been decreasing.Therefore, the company is considering changing to the FIFO inventory method.What would be some tax consequences of the change?

This year, Sarah started a business selling unique kitchen items both in stores and online.She purchased $70,000 of goods during the year.Her ending inventory was $8,000, and she owed suppliers $15,000 at year end, including for all of the ending inventory.For tax purposes, Sarah adopted the cash method and the treatment of inventory as nonincidental supplies.Her deduction for inventory for the year is:

Karen, an accrual basis taxpayer, sold goods in December 2019 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 2020.The note bore interest at the Federal rate.The fair market value of the note at the end of 2019 was $18,000.Karen collected $20,500 from the customer in April 2020, $20,000 principal plus $500 interest.Under the accrual method, Karen must recognize income of:

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?

Charlotte sold her unincorporated business for $600,000 in 2019.The sales contract allocated $120,000 to equipment, $300,000 to land, and $180,000 to goodwill.Charlotte had a $0 basis in the goodwill, the land cost $150,000, and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?

The tax year of a doctor's incorporated medical practice may end on the last day of any month of the year.

In 2019, Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2023.Father's basis was $100,000.In 2020, after paying $8,000 interest but nothing on the principal, Son sold the land for $300,000 cash.What gain, if any, must Father recognize in 2020?

A retailer sells widgets with a 90-day warranty and uses the accrual method.The retailer may estimate its warranty expense and deduct it.

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

Color, Inc., is an accrual basis taxpayer.In December 2019, the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2020.Also, in December 2019, the company received a bill of $800 for office supplies that had been purchased and used in November 2019.The bill was not paid until January 2020.In January 2020, the company received a claim for $600 for defective merchandise purchased in 2019.Color paid the customer the $600 in February 2020.Assuming that Color uses the recurring item exception to economic performance, the company's deductions for 2019 as a result of these facts are:

Juan, not a dealer in real property, sold land that he owned.His adjusted basis in the land was $700,000 and it was encumbered by a mortgage for $100,000.The terms of the sale required the buyer to pay Juan $200,000 on the date of the sale.The buyer assumed Juan's mortgage and gave him a note for $900,000 (plus interest at the Federal rate) due in the following year.What is the gross profit percentage (gain ÷ contract price)?

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

Under both the cash and accrual methods of accounting for tax purposes, a taxpayer may elect to defer prepaid revenue.

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

The installment method can be used for which of the following sales with payments being made in the year following the year of sale?

Which of the following taxpayers is required to use the accrual method of accounting?

Sandstone, Inc., has consistently included some factory overhead as a current expense rather than as a cost of producing goods.As a result, the beginning inventory for 2019 is understated by $10,000.If Sandstone voluntarily changes accounting methods effective January 1, 2019, the positive adjustment to the inventory is a § 481 adjustment, and $2,500 must be added to taxable income for each year 2019, 2020, 2021, and 2022.

Mallard Auto Parts, Inc.has on hand 1,000 fenders for 1953 Studebakers.Mallard purchased the fenders in 1966 for $30 each and the selling price is $400 each.Only rarely does Mallard sell a Studebaker fender and it is highly unlikely that more than 100 of the remaining fenders will ever be sold.However, Mallard has ample storage space and feels An obligation to Studebaker owners.Therefore, the company will not salvage the fenders and will continue to sell them for $400 each.Scrap value of the fenders is $5 each.Under the lower of cost or market inventory method,