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Exam 16: Accounting Periods and Methods

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Question 41

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The accrual method generally is required to report income for which of the following types of businesses:

A) From long-term construction contracts.
B) Earned by an incorporated public accounting firm with gross receipts in excess of $5 million.
C) Earned by a partnership that has a partner that is an S corporation.
D) A grocery store with average annual gross receipts of $800,000.
E) None of the above.

F) B) and C)
G) A) and D)

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Question 42

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Brown Corporation had consistently reported its income by the cash method. The corporation should have used the accrual method because inventories are material to the business. In 2014, Brown timely filed a request to change to the accrual method. At the beginning of 2014, Brown had accounts receivable of $75,000. Also, Brown had merchandise on hand with a cost of $150,000 and accounts payable for merchandise of $45,000. The accounts receivable, inventory, and accounts payable balance per books were zero. Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2014.

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Adjustment due to the change:
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Question 43

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The taxpayer had consistently used the cash method of accounting even though inventories were a material income- producing factor to its business. The taxpayer decided to voluntarily change to the accrual method of accounting. The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories, $30,000 for accounts receivable, and $12,000 for accounts payable. The adjustment due to the change in accounting method is:

Robin Construction Company began a long-term contract in 2014. The contract price was $800,000. The estimated cost of the contract at the time it was begun was $500,000. The actual cost incurred in 2014 was $350,000. The contract was completed in 2015 and the cost incurred that year was $125,000. Under the percentage of completion method:

A C corporation is required to annualize its income:

The Yellow Equipment Company, an accrual basis C corporation, is a manufacturer's representative and works on a commission basis (15% of sales that it places) and does not carry inventory. In November 2014, Yellow made a sale and collected a commission for $20,000. In June of 2015, the customer had not received the equipment from the manufacturer and canceled the order. As a result, Yellow was required to refund the $20,000 commission to the manufacturer. Yellow's taxable income in 2014 was $70,000, and in 2015 Yellow's taxable income was $25,000 after deducting the refund. The applicable tax rate schedule is 15% on the first $50,000 of income and 25% on income in excess of $50,000. What is the effect of the refund on Yellow's 2015 tax liability?

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.

A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.

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 2014 is understated by $40,000. If Sandstone voluntarily changes accounting methods effective January 1, 2014, the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2014, 2015, 2016, and 2017.

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.

Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2014. Gold and Silver use a calendar tax year, and Platinum's tax year ends June 30th. GSP is not a seasonal business.

Father sold land to Son for $500,000 in 2014. Father's basis in the land was $100,000. Son paid Father $50,000 and gave Father a note for $450,000 due in 2017. In 2015, Son sold the land for $600,000 cash. The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

The installment method applies where a payment will be received after the tax year of the sale:

Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2014, the company entered into a contract to construct a building for $900,000. Camelia estimated that the cost of constructing the building would be $600,000. In 2014, the company incurred $150,000 in costs under the contract. In 2015, the company incurred an additional $500,000 in costs to complete the contract. The company's marginal tax rate in all years was 35%.

The taxpayer had incorrectly been using the cash method of accounting. For 2014, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2014 was $120,000 (positive) . The adjustment as calculated as of the end of 2014 was $80,000 (positive) . As a result of the change in method, the company must:

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 2016.

Walter sold land (a capital asset) to an unrelated party for $100,000 cash and a 4% note for $150,000 due in three years. His basis in the land was $40,000. Walter and the purchaser are cash basis taxpayers. Which of the following statements is correct?

In 2014, T Corporation changed its tax year from ending each April 30th to ending each December 31st. The corporation earned $60,000 during the period May 1, 2014 through December 31, 2014. The annualized income for the short year is $90,000.

The accrual basis taxpayer sold land for $100,000 on December 31, 2014. He did not collect the $100,000 until January 2, 2015. The land was held as an investment.

In 2004, a medical doctor who incorporated his practice elected a fiscal year ending September 30th. During the fiscal year ended September 30, 2014, he received a salary of $190,000. During the period from October 1, 2014 to December 31, 2014, 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, 2015, is limited to $240,000.