Exam 16: Accounting Periods and Methods

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

A calendar year, cash basis corporation began business on April 1, 2012, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2012, and purchased a 24-month liability insurance policy. Both the cash basis and accrual basis taxpayers' deduction for insurance expense on the policy for 2012 is $900 (9/12 ´ $1,200).

Gold Corporation, Silver Corporation, and Copper Corporation are equal partners in the GSC Partnership.The partners' tax year-ends are as follows:

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:

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 2012 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1, 2012, the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2012, 2013, 2014, and 2015.

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

In 2012, T Corporation changed its tax year from ending each September 30th to ending each December 31st. The corporation earned $25,000 during the period October 1, 2012 through December 31, 2012. The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.