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Exam 16: Accounting Periods and Methods

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Question 31

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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.

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.

F) All of the above
G) A) and B)

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Question 32

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Franklin Company began business in 2008 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2008 through 2012.As a result of an audit by the IRS, Franklin was required to change to the accrual method of accounting beginning with 2013. The net adjustment due to the change is a positive adjustment to income. The adjustment may be spread equally over 2013 and the three following years.

A) True
B) False

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Question 33

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

A cash basis taxpayer sold investment land in 2012 for $200,000.He received $40,000 in the year of sale and $160,000 in 2013.The cost of the land was $80,000.Under the installment method, the taxpayer would report a $24,000 gain in 2012.

In 2012, Cashmere Construction Company enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000.Cashmere estimates the total cost to complete the cottage to be $400,000.In 2012, Cashmere incurred $300,000 of costs on the contract, and in 2013 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2013.

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

Related-party installment sales include all of the following except the first seller's:

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

Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2012, 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 2012, the company incurred $240,000 in costs under the contract.In 2013, the company incurred an additional $450,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

Purple Corporation, a personal service corporation (PSC) , adopted a fiscal year ending September 30th.The sole shareholder of the corporation is a calendar year taxpayer.During the fiscal year ending September 30, 2012, the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1, 2012 through December 31, 2012.

Color, Inc., is an accrual basis taxpayer.In December 2013, the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2014. Also, in December 2013, the company received a bill of $800 for office supplies that had been purchased and used in November 2013.The bill was not paid until January 2014. In January 2014, the company received a claim for $600 for defective merchandise purchased in 2013.Color paid the customer the $600 in February 2014.Assuming Color uses the recurring item exception to economic performance, the company's deductions for 2013 as a result of the above are:

In 2012, T Corporation changed its tax year from ending each September 30th to ending each December 31st. The corporation earned $25,000 during the period October 1, 2012 through December 31, 2012. The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.

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

Generally, deductions for additions to reserves for estimated future costs (e.g., an allowance for estimated warranty costs) are not allowed for Federal income tax purposes because allowing the deduction would:

Robin Construction Company began a long-term contract in 2012.The contract price was $600,000.The estimated cost of the contract at the time it was begun was $450,000.The actual cost incurred in 2012 was $300,000.The contract was completed in 2013 and the cost incurred that year was $180,000.Under the percentage of completion method:

The accrual basis taxpayer sold land for $100,000 on December 31, 2012.He did not collect the $100,000 until January 2, 2013.The land was held as an investment.

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 2012 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1, 2012, the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2012, 2013, 2014, and 2015.

Charlotte sold her unincorporated business for $600,000 in 2012.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?

Which of the following statements regarding a 52-53 week tax year is not correct?

In 2012, Norma sold Zinc, Inc., common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2013 with accrued interest at the Federal rate.Norma's basis in the stock was $250,000.This was Norma's only installment sale transaction.Which of the following statements is correct?