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Exam 16: Accounting Periods and Methods

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Question 1

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Laura Corporation changed its tax year-end from July 31st to December 31st in 2018. The income for the period August 1, 2018 through December 31, 2018 was $35,000. The corporate tax rate in the state where the corporation performs all of its business is 5% on the first $50,000 of income and 7% on income above $50,000. Laura's state tax for the short period is $2,033.

A) True
B) False

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Question 2

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Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2018. Gold and Silver use a calendar tax year, and Platinum's tax year ends June 30. GSP is not a seasonal business.

A) GSP must use a tax year ending December 31, and Platinum can retain its tax year ending June 30.
B) GSP must use a tax year ending June 30, and the partners must change their tax years to end on June 30.
C) GSP must use a tax year ending December 31 and Platinum must change its tax year to December 31.
D) GSP may elect its tax year without regard to the partners' tax years.
E) None of the above.

F) A) and E)
G) B) and E)

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Question 3

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

Albert is in the 35% marginal tax bracket. He sold a building in the current year for $450,000. Albert received $110,000 cash at closing, the buyer assumed Albert's mortgage for $120,000, and the buyer gave Albert a 6% note for $220,000 due in two years. The Federal rate was 6%. Albert's basis in the building was $180,000 ($500,000 cost -$320,000 accumulated straight-line depreciation). Assuming he did not elect out of the installment method, Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts?

In 2018, Norma sold Zinc, Inc., common stock for $100,000 cash and a note receivable for $900,000. The note was due in 2019 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?

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.

Ramon sold land in 2018 with a cost of $80,000 for $200,000. The sales agreement called for a $50,000 down payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years. What would be the consequences of the following (treat each part independently and assume Ramon uses the installment method whenever possible): a. In 2018, Ramon gave one of the $50,000 installment obligations to a close relative. b. In 2018, Ramon transferred the installment obligations ($50,000) to his 100% owned corporation. c. Ramon collected the $50,000 plus $12,000 interest on January 1, 2019, and died on January 2,2019.

Gold Corporation sold its 40% of the Ruby Corporation common stock. Gold received $10 million in the year of the sale and a note for $15 million, payable in three years with interest at the Federal rate. Gold's basis in the stock was $5 million. Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

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 30, 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.

A C corporation provides lawn maintenance services to various businesses and homeowners. The corporation has average annual gross receipts of $7 million. The corporation may use the cash method of accounting.

This year, Yuan started a business selling computer parts both in-store and online. He purchased via credit card, $60,000 of goods during the year. His ending inventory was $9,000. For tax purposes, Yuan adopted the cash method and the treatment of inventory as deductible when purchased per his books. His deduction for inventory for the year is:

In 2018, Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2022. Father's basis was $100,000. In 2019, after paying $8,000 interest but nothing on the principal, Son sold the land for $300,000 cash. What gain, if any, must Father recognize in 2019?

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?

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:

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

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 2019.

Father sold land to Son for $500,000 in 2018. Father's basis in the land was $100,000. Son paid Father $50,000 and gave Father a note for $450,000 due in 2021. In 2019, 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.

Dr. Stone incorporated her medical practice and elected to use a fiscal year ending September 30. For the fiscal year ending September 30, 2018, the corporation earned $40,000 profits each month, before Dr. Stone's salary and income tax. Dr. Stone received a salary that averaged $30,000 per month. Next year (fiscal year ending September 30, 2019), Dr. Stone expects the average monthly profits before salary and taxes to be $48,000. What is the minimum salary Dr. Stone can receive for the last three months of calendar year 2018 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2019?

The taxpayer had consistently used the cash method of accounting even though inventories were a material income- producing factor to its business and average annual gross receipts in the prior-3 year period exceeded $25 million. 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: $600,000 for inventories, $300,000 for accounts receivable, and $120,000 for accounts payable. The adjustment due to the change in accounting method is:

Red Corporation and Green Corporation are equal partners in the R & G Partnership. Red Corporation's tax year ends September 30th, and Green Corporation is a calendar year taxpayer. The greatest aggregate deferral of income would occur if the partnership used a calendar year for tax purposes.