Exam 27: Accounting Periods and Methods

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 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

One criterion which will permit a deduction for an expenditure by the 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.

Arnie is negotiating the sale of land to Phil.Arnie's basis in the land is $3,000,000,and it currently has a fair market value of $5,000,000.Phil wants to pay the purchase price over three years.Arnie suggests that Phil pays $2,000,000 at closing,then pay $1,200,000 each of the next three years.Arnie would not require that Phil pay any interest under these terms.Discuss the tax issues that Arnie should consider.

Malea sold a machine for $140,000.The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable.The buyer assumed an existing loan of $40,000,paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest.Selling expenses are $10,000.The contract price is

Advance approval and the filing of Form 970 is required whenever a taxpayer adopts LIFO.

In 2016 Anika Co.adopted the simplified dollar-value LIFO method.Inventory under FIFO in 2016 and 2017 is $400,000 and $600,000,respectively.The Consumer Price Index for 2016 is 115 and the Consumer Price Index in 2017 is 125 percent.How much is Anika's inventory at the end of year 2017 under simplified LIFO?

Generally,economic performance must occur before an expense may be deducted.In some cases,this requirement of economic performance may be waived.Discuss the conditions under which economic performance may be waived and an earlier deduction may be allowed.

Lloyd Corporation,a calendar-year,accrual-basis taxpayer,pays its insurance premium each year on June 1,the anniversary of the policy.The premium paid this year is $9,600 while last year's was $9,000.How much is Lloyd's deduction for insurance this year?

Sela sold a machine for $140,000.The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable.The buyer assumed an existing loan of $40,000,paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest.Selling expenses are $10,000.The total gross profit for installment sale recognition purposes is

C corporations and partnerships with a corporate partner may use the cash method of accounting if average annual gross receipts for the three preceding tax years do not exceed $10 million.

When a new business is formed,it must request approval from the IRS regarding the adoption of its various accounting methods.

A new business is established.It is not a seasonal business.All of the following are acceptable accounting tax years with the exception of

On June 11,two years ago,Gia sold land with a cost of $15,000 for $45,000.Gia collected $20,000 initially and is scheduled to receive $5,000 each year for five years starting last year plus an acceptable rate of interest.This year,Gia decided to sell one installment note to a bank that agreed to pay $4,100.As a result of the sale of the note,Gia must report

CPA Associates,a cash-basis partnership with a calendar tax year,signs a contract for a 20-month subscription to an online tax research service,effective as of April 1.The firm pays the full $10,000 subscription bill on the April 1,2017 subscription start date.For 2017 the firm can deduct

If the majority of the partners do not have the same tax year,the partnership must use the tax year of its principal partners.

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

On June 11,of last year,Derrick sold land with a cost of $15,000 for $45,000.Derrick collected $20,000 last year and is scheduled to receive $5,000 each year for five years starting this year plus an acceptable rate of interest.Derrick receives the $5,000 installment required this year.Derrick's recognized gain this year is

Interest is not imputed on a gift loan between two individuals totaling $100,000 except when the borrowed funds are used to purchase income-producing property.

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

Nick sells land with a $7,000 adjusted basis for $10,000.Nick receives a $2,000 down payment with the balance of $8,000 due the following year.Nick is unable to collect the remaining $8,000 and,after incurring legal fees of $500,he repossesses the land when it has a fair market value of $9,000. a.What is the amount of gain that Nick must report in the first year? b.What is the amount of gain that Nick must report in the second year? c.What is the basis in the repossessed stock?