Exam 16: Accounting Periods and Methods

Wendy sold property on the installment basis in 2011 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 2012, before she collected on the installment obligation for that year, Wendy gave to her daughter (Wilma) the installment obligation so that she could collect the four remaining installments.

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.

A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.

The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business. The taxpayer decided to voluntarily change to the accrual method of accounting. The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories, $30,000 for accounts receivable, and $12,000 for accounts payable. The adjustment due to the change in accounting method is:

Father sold land to Son for $150,000 in 2012.Father's basis in the land was $60,000.Son paid Father $25,000 and gave Father a note for $125,000 due in 2015.In 2013, Son sold the land for $200,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

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.

Juan, not a dealer in real property, sold land that he owned.His adjusted basis in the land was $500,000 and it was encumbered by a mortgage for $200,000.The terms of the sale required the buyer to pay Juan $100,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $600,000 (plus interest at the Federal rate) due in the following year.What is the gross profit percentage (gain ¸ contract price)?

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.R & G Partnership must use September 30th as its tax year, unless it has a business purpose for using a different tax year.

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2012, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2012, the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2012 state income tax was paid in April 2013.In June 2012, the corporation paid $9,000 on its year 2011 state income tax liability, as a result of an audit of the 2011 return that was conducted in 2012. The company has elected to use the recurring item exception to economic performance. As a result of the above, the corporation should deduct in 2012 on its Federal income tax return state income taxes of:

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 2012, 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 2013. Also, in January 2013, claims for $8,000 were filed for deliveries made in 2012, and $6,000 was paid on these claims by March 15, 2013.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 2012:

Which of the following statements regarding the matching principle is correct?

A partnership cannot elect to use a tax year other than a calendar year merely because the partnership's CPA is too busy to prepare a calendar year return.

Pedro, not a dealer, sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2010.The terms of the sale required Pat to pay $28,000 cash, assume the $56,000 mortgage, and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate).The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2012 note as promised, what is the recognized gain to Pedro in 2012 (exclusive of interest)?

Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2012, the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2012 sales and $50,000 in refunds from 2011 sales.All of the refunds from 2011 sales were for claims filed in 2011 and were paid in January and February 2012.At the end of 2012, the company had $12,000 in refund claims for sales in 2012 for which payment had been approved.These claims were paid in January 2013.Also in January 2013, the company received an additional $30,000 in claims for sales in 2012.This $30,000 was paid by Gray in February 2013.With respect to the above, Gray can deduct:

Ted, a cash basis taxpayer, received a $150,000 bonus in 2012 when he was in the 35% marginal tax bracket.In 2013, when Ted was in the 28% marginal tax bracket, it was discovered that the bonus was incorrectly computed, and Ted was required to refund $40,000 to his employer.As a result of the refund, Ted can reduce his 2013 tax liability by $14,000 (.35 ´ $40,000).

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

For a taxpayer who is required to use the percentage of completion method, the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 25 percent of the estimated contract costs.

Snow Corporation began business on May 1, 2012, 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, 2012. Neither Snow Corporation nor Brown Corporation must annualize their income for their 2012 returns.

Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

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, 2012, the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1, 2012 through December 31, 2012.