Exam 16: Accounting Periods and Methods

Alice, Inc., is an S corporation that has been in business for 18 years. Its annual gross receipts have never exceeded $25 million. The corporation operates a retail store and also owns rental property. The sales from the retail store and the rental income may be reported by the cash method.

The taxpayer had incorrectly been using the cash method of accounting. For 2019, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2019 was $120,000 (positive). The adjustment as calculated as of the end of 2019 was $80,000 (positive). As a result of the change in method, the company must:

A C corporation that does not have a natural business year must use a calendar year as its tax year.

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

A calendar year, cash basis corporation began business on April 1, 2019, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2019, 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 2019.

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?

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

Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years. The note bore interest of 7% when the applicable Federal rate was 4%. Hal's cost of the land was $40,000. Because of the buyer's good credit record and the high interest rate on the note, Hal thought the fair market value of the note was at least $74,000.

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

In 2019, T Corporation changed its tax year from ending each April 30 to ending each December 31. The corporation earned $60,000 during the period May 1, 2019 through December 31, 2019. The annualized income for the short year is $90,000.

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

In 2019, Godfrey received a $50,000 sales commission on a long-term contract. But in 2020, the customer filed for bankruptcy and his 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 2019 but he is in the 24% marginal tax bracket in 2020.

A C corporation provides lawn maintenance services to various businesses and homeowners. The corporation has average annual gross receipts of $7 million. The corporation may use the cash method of accounting.

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?

Using your knowledge of GAAP and financial reporting, list and explain one good reason that GAAP should not be used for tax purposes and one good reason that it should be used.

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

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:

Wendy sold property on the installment basis in 2017 for more than her basis in the property. She was to receive installment payments at the end of each year for the next five years. In 2019, Wendy was killed in a car accident and the note was transferred to her estate.

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, Ivory has paid approximately 80% of the claims. In 2019, 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 2020. Also, in January 2020, claims for $8,000 were filed for deliveries made in 2019, and $6,000 was paid on these claims by March 15, 2020. Ivory has not elected to use the recurring item exception to economic performance. Under the all-events and economic performance tests, Ivory can accrue which of the following as an expense for 2019:

The tax year of one of the principal partners may determine the partnership's tax year.