Exam 16: Accounting Periods and Methods

Under the percentage of completion method,if the actual costs are ____ the estimated costs,the taxpayer must pay interest on the underpayment of prior years' taxes.

If interest paid is attributed to the taxpayer's building which is under construction,the taxpayer must add the interest to the cost of the building.

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?

Laura Corporation changed its tax year-end from June 30th to December 31st in 2010.The income for the period July 1,2010 through December 31,2010 was $45,000.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 July - December 2010 income will be taxed at 34%.

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

At the beginning of 2010,the taxpayer voluntarily changed from the cash to the accrual method of accounting.The relevant account balances as of January 1,2010,were as follows:

Juan,not a dealer in real property,sold land that he owned.His adjusted basis in the land was $500,000 and it was encumbered by a mortgage for $150,000.The terms of the sale required the buyer to pay Juan $100,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $550,000 (plus interest at the Federal rate)due in the following year.What is the gross profit percentage?

In the case of a sale reported under the installment method,no gain is reported until the seller has recovered the entire cost of the property sold.

A C corporation must use a calendar year as its tax year unless the corporation has a business reason for using a tax year that is not a calendar year.

Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $8,000,000 in the year of the sale and a note for $12,000,000,payable in three years with interest at the Federal rate.Gold's basis in the stock was $2,000,000.Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

Wendy sold property on the installment basis in 2009 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 2010,before she collected on the installment obligation for that year,Wendy gave to her daughter (Wilma)the installment obligation so that she could collect the four remaining installments.

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?

Charlotte sold her unincorporated business for $360,000 in 2010.The sales contract allocated $150,000 to equipment,$110,000 to land,and $100,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $60,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?

A partnership can elect to use a tax year other than a calendar year if the partnership's CPA is too busy to prepare a calendar year return.

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.

Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2010,the company entered into a contract to construct a building for $960,000.Camelia estimated that the cost of constructing the building would be $720,000.In 2010,the company incurred $240,000 in costs under the contract.In 2011,the company incurred an additional $450,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2010,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2010 sales and $50,000 in refunds from 2009 sales.All of the refunds from 2009 sales were for claims filed in 2009 and were paid in January and February 2010.At the end of 2010,the company had $12,000 in refund claims for sales in 2010 for which payment had been approved.These claims were paid in January 2011.Also in January 2011,the company received an additional $30,000 in claims for sales in 2010.This $30,000 was paid by Gray in February 2011.With respect to the above,Gray can deduct:

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 11% when the applicable Federal rate was 7%.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.

A disadvantage to using the accrual method of accounting,as compared to the cash method,is that under the accrual method the income may be recognized before it is actually collected.

In 2010,Kathy sold an apartment building to her 100 percent controlled corporation,Kathy,Inc.The apartment building cost $500,000 and the balance in the accumulated depreciation account was $400,000.Kathy,Inc.paid $100,000 in the year of sale and gave Kathy a note for $900,000 plus adequate interest due in 2012.