Exam 16: Accounting Periods and Methods

Purple Corporation, a personal service corporation (PSC), adopted a fiscal year ending September 30. The sole shareholder of the corporation is a calendar year taxpayer. During the fiscal year ending September 30, 2019, the shareholder-employee received $120,000 salary. The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1, 2019 through December 31, 2019.

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

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?

The taxpayer had consistently used the cash method of accounting even though inventories were a material income- producing factor to its business and average annual gross receipts in the prior three-year period exceeded $25 million. 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: $600,000 for inventories, $300,000 for accounts receivable, and $120,000 for accounts payable. The adjustment due to the change in accounting method is:

In 2019, 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 2020. Beth's recognized gain from the installment sale in 2019 is:

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

Gold Corporation, Silver Corporation, and Copper Corporation are equal partners in the GSC Partnership. The partners' tax year-ends are as follows: Gold December 31 Silver April 30 Copper September 30

Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2019. Gold and Silver use a calendar tax year, and Platinum's tax year ends June 30. GSP is not a seasonal business.

Gold Corporation sold its 40% of the Ruby Corporation common stock. Gold received $10 million in the year of the sale and a note for $15 million payable in three years with interest at the Federal rate. Gold's basis in the stock was $5 million. Assume that Gold will report the gain by the installment method where the method is permitted.

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2019, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%. During 2019, the corporation paid $24,000 on its estimated state income tax liability for that year. The remaining $6,000 of 2019 state income tax was paid in April 2020. In June 2019, the corporation paid $9,000 on its year 2018 state income tax liability as a result of an audit of the 2018 return that was conducted in 2019. The company has elected to use the recurring item exception to economic performance. As a result of these facts, The corporation should deduct in 2019 on its Federal income tax return state income taxes of:

In 2019, 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 2018 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.

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.

Ted, a cash basis taxpayer, received a $150,000 bonus in 2019 when he was in the 35% marginal tax bracket. In 2020, when Ted was in the 24% 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 2020 tax liability by $14,000 (.35 × $40,000).

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?

Pedro, not a dealer, sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2017. The terms of the sale required Pat to pay $28,000 cash, assume the $56,000 mortgage, and give Pedro 11 notes for $12,000 each (plus interest at the Federal rate). The first note was payable two years from the date of sale, and each succeeding note became due at two-year intervals. Pedro did not elect out of the installment method for reporting the transaction. If Pat pays the 2019 note as promised, what is the recognized gain to Pedro in 2019 (exclusive of interest)?

The taxpayer has consistently but incorrectly used an allowance for bad debts. At the beginning of the year, the balance in the allowance account is $90,000.

In 2009, a medical doctor who incorporated her practice elected a fiscal year ending September 30th. During the fiscal year ended September 30, 2019, she received a salary of $190,000. During the period from October 1, 2019 to December 31, 2019, the corporation paid the doctor a total salary of $60,000, and paid her $240,000 of salary in the following nine months. The corporation's salary deduction for the fiscal year ending September 30, 2020, is limited to $240,000.

A taxpayer who is required to use the percentage of completion method 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% of the estimated contract costs.

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

Kathy was a shareholder in Matrix, Inc., when she sold the corporation a commercial building. The building cost $500,000 and the balance in the accumulated depreciation account was $400,000. Matrix, Inc., paid $100,000 in the year of sale and gave Kathy a note for $400,000 plus adequate interest due in 2020.