Exam 16: Accounting Periods and Methods

Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years.The note bore interest of 7% when the applicable Federal rate was 4%.Hal's cost of the land was $40,000.Because of the buyer's good credit record and the high interest rate on the note,Hal thought the fair market value of the note was at least $74,000.

The taxpayer had incorrectly been using the cash method of accounting.For 2017,the company voluntarily changed to the accrual method.The adjustment due to the change in method as calculated at the beginning of 2017 was $120,000 (positive).The adjustment as calculated as of the end of 2017 was $80,000 (positive).As a result of the change in method,the company must:

Which of the following must use the accrual method of accounting? I. A property management company,operating as a C corporation,with average annual gross receipts of $50 million. II. An incorporated law firm with average annual gross receipts of $6 million. III. An unincorporated grocery store with average annual gross receipts of $1,200,000.

Yard Corporation,a cash basis taxpayer,received $10,000 from a customer in 2016.In 2016,the customer filed a claim for a refund of the fee.In 2017,Yard refunded the customer $6,000.In 2016,Yard paid $5,000 in estimated state income tax.In May 2017,Yard received a state income tax refund of $2,000 for overpayment of its 2016 income tax.Yard was in the 35% marginal tax bracket in 2016 and in the 15% marginal tax bracket in 2017.What are the tax effects of the 2017 payment to the customer and the collection of the state income taxes overpaid?

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 2017 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1,2017,the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2017,2018,2019,and 2020.

The taxpayer does need the IRS's permission to change from the FIFO inventory method to the LIFO method.

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

Which of the following taxpayers is required to use the accrual method of accounting?

The tax year of one of the principal partners may determine the partnership's tax year.

Todd,a CPA,sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.

The taxpayer has consistently,but incorrectly,used an allowance for bad debts.At the beginning of the year,the balance in the allowance account is $90,000.