Exam 16: Accounting Periods and Methods

In 2017,Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses.The total amount of the expense for 2016 was $300,000,$60,000 of the item was included in the ending inventory that year and $240,000 was deducted as cost of goods sold.

A CPA practice that is incorporated earns 40% of its annual revenues in the months of March and April.Although the CPA practice is a professional services corporation (PSC),it may use a fiscal year ending April 30th.

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:

Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $10 million in the year of the sale and a note for $15 million,payable in three years with interest at the Federal rate.Gold's basis in the stock was $5 million.Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

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

A doctor's incorporated medical practice may end the last day of any month of the year.

Ramon sold land in 2017 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): a.In 2017, Ramon gave one of the $50,000 installment obligations to a close relative. b.In 2017, Ramon transferred the installment obligations ($50,000) to his 100% owned corporation. c.Ramon collected the $50,000 plus $12,000 interest on January 1, 2018, and died on January 2, 2018.

Juan,not a dealer in real property,sold land that he owned.His adjusted basis in the land was $700,000 and it was encumbered by a mortgage for $100,000.The terms of the sale required the buyer to pay Juan $200,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $900,000 (plus interest at the Federal rate) due in the following year.What is the gross profit percentage (gain ÷ contract price)?

Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2017.Gold and Silver use a calendar tax year,and Platinum's tax year ends June 30th.GSP is not a seasonal business.

When an accrual basis taxpayer finances the construction of its building by borrowing,the interest is added to the cost of the building.

In applying the lower of cost or market for tax purposes,the market price is the replacement cost of the goods,rather than their expected selling price.

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?

In the case of a sale reported under the installment method,gain is recognized in each year the seller collects on the installment contract.

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.

Franklin Company began business in 2013 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2013 through 2017.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2018.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2018 and the three following years.

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%

In 2017,Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2021.Father's basis was $100,000.In 2018,after paying $8,000 interest but nothing on the principal,Son sold the land for $300,000 cash.What gain,if any,must Father recognize in 2018?

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?

Charlotte sold her unincorporated business for $600,000 in 2017.The sales contract allocated $120,000 to equipment,$300,000 to land,and $180,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $150,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2017,the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2017,the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2017 state income tax was paid in April 2018.In June 2017,the corporation paid $9,000 on its year 2016 state income tax liability,as a result of an audit of the 2016 return that was conducted in 2017.The company has elected to use the recurring item exception to economic performance.As a result of the above,the corporation should deduct in 2017 on its Federal income tax return state income taxes of: