Exam 18: Accounting Periods and Methods

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 Corporation will report the gain by the installment method where the method is permitted.

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 Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2016.Gold and Silver use a calendar tax year,and Platinum's tax year ends June 30th.GSP is not a seasonal business.

Which of the following must use the accrual method of accounting? I. A property management company,operating as a C corporation,with average annual gross receipts of $50 million. II. An incorporated law firm with average annual gross receipts of $6 million. III. An unincorporated grocery store with average annual gross receipts of $1,200,000.

Generally,an advantage to using the cash method of accounting,as compared to the accrual method,is that under the cash method income is not recognized until it is collected,rather than being taxed as soon as the taxpayer has the right to collect the income.

The DEF Partnership had three equal partners when it was formed.Partners D and E were calendar year taxpayers and Partner F's tax year ended on June 30th before he joined the partnership.The partnership may use a calendar year and partner F may continue to use the tax year ending June 30th.

Brown Corporation elected dollar-value LIFO in 2011.Its ending inventory at base year cost and its LIFO indexes are as follows: (1) (2) (3)= (1)/(2) Ending Inventory Ending Inventory@ At End of the Year Prices LIFO Index Base Year Prices 2011 $1,000,000 1.00 $1,000,000 2012 1,100,000 1.06 1,037,736 2013 1,200,000 1.10 1,090,909 2014 1,300,000 1.11 1,171,171 2015 1,250,000 1.20 1,041,667 2016 1,550,000 1.23 1,260,163 ​ Compute the LIFO inventory at the end of 2016.

Wendy sold property on the installment basis in 2014 for more than her basis in the property.Wendy was to receive installment payments at the end of each year for the next five years.In 2016,Wendy was killed in a car accident and the note was transferred to her estate.

Purple Corporation,a personal service corporation (PSC),adopted a fiscal year ending September 30th.The sole shareholder of the corporation is a calendar year taxpayer.During the fiscal year ending September 30,2016,the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1,2016 through December 31,2016.

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

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

In 2016,Godfrey received a $50,000 sales commission on a long-term contract.But in 2017,the customer filed bankruptcy and Godfrey's 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 2016 but he is in the 25% marginal tax bracket in 2017.

Aspen stores is a large retail chain.The company has four warehouses that are located in various parts of the country.The goods are stored at the warehouses and then moved to the retail stores for sale.

In the case of a change from the lower-of-cost-or-market FIFO to the LIFO inventory method:

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.

Related-party installment sales include all of the following except the first seller's:

The LIFO method is beneficial only when prices are rising and the taxpayer is increasing the quantities of inventory items on hand.

In the case of an accrual basis taxpayer,an item of income:

Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2016,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2016 sales and $50,000 in refunds from 2015 sales.All of the refunds from 2015 sales were for claims filed in 2015 and were paid in January and February 2016.At the end of 2016,the company had $12,000 in refund claims for sales in 2016 for which payment had been approved.These claims were paid in January 2016.Also in January 2016,the company received an additional $30,000 in claims for sales in 2016.This $30,000 was paid by Gray in February 2017.With respect to the above,Gray can deduct:

The lower of cost or market can be used in conjunction with both the FIFO and LIFO method.