Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

In 2018, Godfrey received a $50,000 sales commission on a long-term contract. But in 2019, 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 2018 but he is in the 24% marginal tax bracket in 2019.

Accepted Answer

A)  Godfrey can amend his 2018 tax return and reduce his taxable income by $20,000. 
B)  Godfrey should deduct the $20,000 paid in 2019 and thus his tax savings will be $4,800. 
C)  Godfrey can reduce his 2019 tax liability by 35% × $20,000 = $7,000. 
D)  Godfrey should not have reported the income in 2018 because of the contingencies. 
E)  None of the above. 
A)  Godfrey can amend his 2018 tax return and reduce his taxable income by $20,000. 
B)  Godfrey should deduct the $20,000 paid in 2019 and thus his tax savings will be $4,800. 
C)  Godfrey can reduce his 2019 tax liability by 35% × $20,000 = $7,000. 
D)  Godfrey should not have reported the income in 2018 because of the contingencies. 
E)  None of the above.

Question 3

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 2018 is understated by $10,000. If Sandstone voluntarily changes accounting methods effective January 1, 2018, the positive adjustment to the inventory is a § 481 adjustment and $2,500 must be added to taxable income for each year 2018, 2019, 2020, and 2021.

Accepted Answer

A) True 
 B)False

Question 4

Color, Inc., is an accrual basis taxpayer. In December 2018, the company received from a customer a $500 claim for defective merchandise. Color paid the customer in January 2019. Also, in December 2018, the company received a bill of $800 for office supplies that had been purchased and used in November 2018. The bill was not paid until January 2019. In January 2019, the company received a claim for $600 for defective merchandise purchased in 2018. Color paid the customer the $600 in February 2018. Assuming Color uses the recurring item exception to economic performance, the company's deductions for 2018 as a result of the above are:

Accepted Answer

A)  $500. 
B)  $600. 
C)  $800. 
D)  $1,300. 
E)  $1,900. 
A)  $500. 
B)  $600. 
C)  $800. 
D)  $1,300. 
E)  $1,900.

Question 5

The buyer and seller have tentatively agreed to a contract for the sale of a building that the buyer will use in its business. The buyer will pay the seller $100,000 (principal and interest) each year for 5 years. The seller's cost of the asset is $200,000, and he will report the capital gain using the installment method. The buyer and seller are now negotiating the interest rate that will be used to compute the interest included in each $100,000 payment. The relevant Federal rate is 5%, but the market rate on similar contracts is in the area is 7%.
a. Why would the seller bargain for a 5% interest rate for the contract rather than a 7%interest rate?
b. How does the interest rate affect the buyer's future taxable income?

Accepted Answer

a. The total payments the seller will re

Question 6

Generally, an advantage to using the cash method of accounting, as compared to the accrual method, is that under the cash method income is not recognized until it is collected, rather than being taxed as soon as the taxpayer has the right to collect the income.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A)  If the IRS examines the taxpayer's return and requires the taxpayer to change accounting methods, the taxpayer will be required to recognize an additional $90,000 of income (one-half in the current year and one- half in the following year) as the adjustment due to the change in accounting methods. 
B)  If the taxpayer voluntarily changes methods, the $90,000 adjustment can be spread over the current and three following years. 
C)  If the taxpayer voluntarily changes methods, the $90,000 reserve can be used to absorb bad debts until the account balance is zero. 
D)  If the IRS examines the taxpayer's return, no adjustment to the reserve account will be required if the balance is consistent with prior bad debt experience. 
E)  None of the above. 
A)  If the IRS examines the taxpayer's return and requires the taxpayer to change accounting methods, the taxpayer will be required to recognize an additional $90,000 of income (one-half in the current year and one- half in the following year) as the adjustment due to the change in accounting methods. 
B)  If the taxpayer voluntarily changes methods, the $90,000 adjustment can be spread over the current and three following years. 
C)  If the taxpayer voluntarily changes methods, the $90,000 reserve can be used to absorb bad debts until the account balance is zero. 
D)  If the IRS examines the taxpayer's return, no adjustment to the reserve account will be required if the balance is consistent with prior bad debt experience. 
E)  None of the above.

Question 8

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.

Accepted Answer

A)  greater than 
B)  less than 
C)  equal to or greater than 
D)  equal to 
E)  None of the above 
A)  greater than 
B)  less than 
C)  equal to or greater than 
D)  equal to 
E)  None of the above

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

Generally, an advantage to using the cash method of accounting, as compared to the accrual method, is that under the cash method income is not recognized until it is collected, rather than being taxed as soon as the taxpayer has the right to collect the income.

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.

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.

An Introduction to Taxation and Understanding the Federal Tax Law

Working with the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: In General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

Taxing Business Income

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Partnerships

S Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Income Taxation of Trusts and Estates

Filters

Exam 16: Accounting Periods and Methods

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

Generally, an advantage to using the cash method of accounting, as compared to the accrual method, is that under the cash method income is not recognized until it is collected, rather than being taxed as soon as the taxpayer has the right to collect the income.

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.

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.

An Introduction to Taxation and Understanding the Federal Tax Law

Working with the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: In General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Property Transactions: Capital Gains and Losses, Section 1231, and Recapture Provisions

Taxing Business Income

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Partnerships

S Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Income Taxation of Trusts and Estates

Filters