Exam 16: Accounting Periods and Methods

The buyer and seller have tentatively agreed to a contract for the sale of a building that the buyer will use in its business.The buyer will pay the seller $100,000 (principal and interest) each year for 5 years.The seller's cost of the asset is $200,000,and he will report the capital gain using the installment method.The buyer and seller are now negotiating the interest rate that will be used to compute the interest included in each $100,000 payment.The relevant Federal rate is 5%,but the market rate on similar contracts is in the area is 7%. a.Why would the seller bargain for a 5% interest rate for the contract rather than a 7% interest rate? b.How does the interest rate affect the buyer's future taxable income?

Computer Consultants Inc. ,began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is,the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year,the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?

John sold an apartment building for $600,000.His basis in the building was $360,000 and it was subject to $30,000 of depreciation recapture.John received $150,000 in the year of sale,the buyer assumed John's mortgage payable of $240,000,and the buyer gave John an 8% (the current Federal rate) note of $210,000 due in 5 years.The interest on the note was payable each June 30th,beginning in the year following the year of the sale.John incurred $30,000 of selling expenses which he paid in the year of sale.Compute John's installment sales gain that should be reported in the year of sale.

What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?

Terry,Inc. ,makes gasoline storage tanks.All production is done under contract.The company makes three basic models,but each model must be adapted to customer specifications for the location of outlets,insulation,and paint.It takes from three to six months to complete a tank.How should Terry account for the income for the business?

Yard Corporation,a cash basis taxpayer,received $10,000 from a customer in 2014.In 2014,the customer filed a claim for a refund of the fee.In 2015,Yard refunded the customer $6,000.In 2014,Yard paid $5,000 in estimated state income tax.In May 2015,Yard received a state income tax refund of $2,000 for overpayment of its 2014 income tax.Yard was in the 35% marginal tax bracket in 2014 and in the 15% marginal tax bracket in 2015.What are the tax effects of the 2015 payment to the customer and the collection of the state income taxes overpaid?