Exam 18: Accounting Periods and Methods

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,approximately 80% of the claims are paid by Ivory.In 2016,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 2017.Also,in January 2017,claims for $8,000 were filed for deliveries made in 2016,and $6,000 was paid on these claims by March 15,2017.Ivory has not elected to use the recurring item exception to economic performance.Under the all-events and economic performance tests,Ivory can accrue as an expense for 2016:

The use of the LIFO inventory method for tax purposes:

A cash basis taxpayer sold investment land in 2016 for $200,000.He received $40,000 in the year of sale and $160,000 in 2017.The cost of the land was $80,000.Under the installment method,the taxpayer would report a $24,000 gain in 2016.

Color,Inc. ,is an accrual basis taxpayer.In December 2016,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2017.Also,in December 2016,the company received a bill of $800 for office supplies that had been purchased and used in November 2016.The bill was not paid until January 2017.In January 2017,the company received a claim for $600 for defective merchandise purchased in 2016.Color paid the customer the $600 in February 2016.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2016 as a result of the above are:

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.

Ramon sold land in 2016 with a cost of $80,000 for $200,000.The sales agreement called for a $50,000 down payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years.What would be the consequences of the following (treat each part independently and assume Ramon uses the installment method whenever possible): a.In 2016,Ramon gave one of the $50,000 installment obligations to a close relative. b.In 2016,Ramon transferred the installment obligations ($50,000)to his 100% owned corporation. c.Ramon collected the $50,000 plus $12,000 interest on January 1,2017,and died on January 2,2017.

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 2016 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1,2016,the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2016,2017,2018,and 2019.

If an installment sale contract does not charge interest on the sale of a capital asset,only capital gain will be recognized over the life of the contract.

Generally,deductions for additions to reserves for estimated future costs (e.g. ,an allowance for estimated warranty costs)are not allowed for Federal income tax purposes because allowing the deduction would:

Mallard Auto Parts,Inc.has on hand 1,000 fenders for 1953 Studebakers.Mallard purchased the fenders in 1965 for $30 each and the selling price is $400 each.Only rarely does Mallard sell a Studebaker fender and it is highly unlikely that more than 100 of the remaining fenders will ever be sold.However,Mallard has ample storage space and feels an obligation to Studebaker owners.Therefore,the company will not salvage the fenders and will continue to sell them for $400 each.Scrap value of the fenders is $5 each.Under the lower of cost or market inventory method:

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 2018.

Brown Corporation had consistently reported its income by the cash method.The corporation should have used the accrual method because inventories are material to the business.In 2016,Brown timely filed a request to change to the accrual method.At the beginning of 2016,Brown had accounts receivable of $75,000.Also,Brown had merchandise on hand with a cost of $150,000 and accounts payable for merchandise of $45,000.The accounts receivable,inventory,and accounts payable balance per books were zero.Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2016.

Todd,a CPA,sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.

A CPA practice that is incorporated earns 40% of its annual revenues in the months of March and April.Although the CPA practice is a professional services corporation (PSC),it may use a fiscal year ending April 30th.

A C corporation's selection of a tax year,generally,is independent of the tax year of its principal shareholders.

Abby sold her unincorporated business which consisted of equipment and goodwill.The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000).Abby had no basis in the goodwill.The sales price for the business was $250,000,with $150,000 for the equipment and $100,000 for the goodwill.The buyer agreed to pay $120,000 on June 30,2016,and $130,000 (plus interest at the Federal rate)in two years.Abby's gain to be reported in 2016 (exclusive of interest)is:

In 2016,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 2017.Beth's recognized gain from the installment sale in 2016 is:

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30,2016,the corporation earned $40,000 profits each month,before Dr.Stone's salary and income tax.Dr.Stone received a salary that averaged $30,000 per month.Next year (fiscal year ending September 30,2017),Dr.Stone expects the average monthly profits before salary and taxes to be $48,000.What is the minimum salary Dr.Stone can receive for the last three months of calendar year 2016 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30,2017?

Red Corporation and Green Corporation are equal partners in the R & G Partnership.Red Corporation's tax year ends September 30th,and Green Corporation is a calendar year taxpayer.The greatest aggregate deferral of income would occur if the partnership used a calendar year for tax purposes.

The Multi Department store takes physical inventories at each of its 300 stores on various dates between August 1 and September 30th each year.The company's tax year ends on the Monday closest to January 31st.The company's reduction in inventory due to breakage and theft after the last physical inventory in September 2016: