Exam 18: Accounting Periods and Methods

Yard Corporation, a cash basis taxpayer, received $10,000 from a customer in 2016. In 2016, the customer filed a claim for a refund of the fee. In 2017, Yard refunded the customer $6,000. In 2016, Yard paid $5,000 in estimated state income tax. In May 2017, Yard received a state income tax refund of $2,000 for overpayment of its 2016 income tax. Yard was in the 35% marginal tax bracket in 2016 and in the 15% marginal tax bracket in 2017. What are the tax effects of the 2017 payment to the customer and the collection of the state income taxes overpaid?

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.

Blue Mart operates a large chain of retail stores. The company has four warehouses that are located in various parts of the country. The cost of operating the warehouses can be expensed immediately because it is a cost that is incurred even though the goods were not sold during the year.

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

Albert is in the 35% marginal tax bracket. He sold a building in the current year for $450,000. Albert received $110,000 cash at closing, the buyer assumed Albert's mortgage for $120,000, and the buyer gave Albert a 6% note for $220,000 due in two years. The Federal rate was 6%. Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straight-line depreciation). Assuming he did not elect out of the installment method, Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts? ​ Section 1231 Gain Unrecaptured § 1250 Gain Taxed at 25%

A C corporation provides lawn maintenance services to various businesses and homeowners. The corporation has average annual gross receipts of $3,500,000. The corporation may use the cash method of accounting.

In determining the cost of goods manufactured and thus the cost of the ending inventory:

Snow Corporation began business on May 1, 2017, and elected to use the calendar year for tax purposes. Brown Corporation, a calendar year corporation, sold all of its assets and liquidated as of April 30, 2017. Neither Snow Corporation nor Brown Corporation must annualize their income for their 2017 returns.

In 2017 George used the FIFO lower of cost or market inventory method. As of December 31, 2017, the inventory cost was $50,000 and its market price was $40,000. At the time of filing his 2018 income tax return, George changed to the LIFO method. The ending inventory at cost on December 31, 2018, was $75,000 and the market price of the goods totaled $35,000. Which of the following statements is correct?

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

If a company uses the LIFO inventory method to report the cost of inventory and cost of goods sold on its financial statements, footnote disclosure of the income as calculated by the FIFO method does not violate the tax and financial accounting conformity requirement.

In the case of a small home construction company that builds under long-term contracts, generally:

The taxpayer does need the IRS's permission to change from the FIFO inventory method to the LIFO method.

Dr. Stone incorporated her medical practice and elected to use a fiscal year ending September 30th. For the fiscal year ending September 30, 2017, 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, 2018), 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 2017 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2018?

The taxpayer is an appliance dealer and has the following items of inventory on hand at the end of the year: ​ Under the lower-of-cost-or-market inventory method, the ending inventory value is:

When the IRS requires a taxpayer to change accounting methods:

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.

Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2017, the company entered into a contract to construct a building for $900,000. Camelia estimated that the cost of constructing the building would be $600,000. In 2017, the company incurred $150,000 in costs under the contract. In 2018, the company incurred an additional $500,000 in costs to complete the contract. The company's marginal tax rate in all years was 35%.

Color, Inc., is an accrual basis taxpayer. In December 2017, the company received from a customer a $500 claim for defective merchandise. Color paid the customer in January 2018. Also, in December 2017, the company received a bill of $800 for office supplies that had been purchased and used in November 2017. The bill was not paid until January 2018. In January 2018, the company received a claim for $600 for defective merchandise purchased in 2017. Color paid the customer the $600 in February 2017. Assuming Color uses the recurring item exception to economic performance, the company's deductions for 2017 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.