Exam 16: Accounting Periods and Methods

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

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30, 2012, 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, 2013), 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 2012 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2013?

In 2012, Godfrey received a $50,000 sales commission on a long-term contract. But in 2013, 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 2012 but he is in the 25% marginal tax bracket in 2013.

Laura Corporation changed its tax year-end from July 31st to December 31st in 2012.The income for the period August 1, 2012 through December 31, 2012 was $35,000. The corporate tax rate is 15% on the first $50,000 of income, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000. A portion of Laura's June - December 2012 income will be taxed at 34%.

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 2012, Brown timely filed a request to change to the accrual method.At the beginning of 2012, Brown had accounts receivable of $90,000.Also, Brown had merchandise on hand with a cost of $120,000 and accounts payable for merchandise of $37,500.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 2012.

Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2012.Gold and Silver use a calendar tax year, and Platinum's tax year ends June 30th.GSP is not a seasonal business.

In 2012, Father sold land to Son for $150,000 cash and an installment note for $450,000 due in 2016.Father's basis was $240,000.In 2013, after paying $27,000 interest but nothing on the principal, Son sold the land for $600,000 cash.As a result of the second disposition, what gain must Father recognize in 2013?

Terry, Inc., makes gasoline storage tanks.All production is done under contract.The company makes three basic models, but each model must be adapted to customer specifications for the location of outlets, insulation, and paint.It takes from three to six months to complete a tank.How should Terry account for the income for the business?

Computer Consultants Inc., began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is, the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year, the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?

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)?

What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?

Andrew owns 100% of the stock of Crow's Farm Inc., an S corporation, that raises cattle and corn.The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.

Ramon sold land in 2012 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):

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.

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.

In regard to choosing a tax year for a business owned by individuals, which form of business provides the greater number of options in regard to the tax year?

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.

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

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

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.