Exam 16: Accounting Periods and Methods

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?

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 2019.

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:

Related-party installment sales include all of the following except the first seller's:

​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.

In 2007,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2017,he received a salary of $190,000.During the period from October 1,2017 to December 31,2017,the corporation paid the doctor a total salary of $60,000,and paid him $240,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2018,is limited to $240,000.

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 2015.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 2017 note as promised,what is the recognized gain to Pedro in 2017 (exclusive of interest)?

Laura Corporation changed its tax year-end from July 31st to December 31st in 2017.The income for the period August 1,2017 through December 31,2017 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 2017 income will be taxed at 34%.

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.

Mogo Manufacturing Company accounts for its inventories by the FIFO method.The company has consistently allocated building depreciation to production and general administration on the basis of the number of square feet occupied.According to the measurements used,manufacturing requires 90% of the square footage and general administration utilizes 10% of the total square feet.This year,2017,the accountant realized that 5 years ago an addition was made to the portion of the building used for general administration,and the depreciation allocation had not been adjusted.What are the tax accounting implications of this discovery?

Alice,Inc.,is an S corporation that has been in business for five years.Its annual gross receipts have never exceeded $1 million.The corporation operates a retail store and also owns rental property.The sales from the retail store and the rental income may be reported by the cash method,unless Alice previously elected the accrual method.

The accrual basis taxpayer sold land for $100,000 on December 31,2017.He did not collect the $100,000 until January 2,2018.The land was held as an investment.

Duck Company has valued its inventories at FIFO cost for the past 10 years.The Company would like to change to the LIFO method,effective in 2018.

The installment method can be used for which of the following sales with payments being made in the year following the year of sale?

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 30,2017,and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2017 (exclusive of interest) is:

A C corporation that does not have a natural business year must use a calendar year as its tax year.

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 company has consistently used the LIFO inventory method and has deferred over $1 million of income from using that method.However,in the last two years,the prices it pays for goods has been decreasing.Therefore,the company is considering changing to the FIFO inventory method.What would be some tax consequences of the change?

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.

Wendy sold property on the installment basis in 2015 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 2017,Wendy was killed in a car accident and the note was transferred to her estate.