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Exam 18: Accounting Periods and Methods

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Question 41

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The Multi Department store takes physical inventories at each of its 300 stores on various dates between August 1 and September 30th each year.The company's tax year ends on the Monday closest to January 31st.The company's reduction in inventory due to breakage and theft after the last physical inventory in September 2014:

A) Cannot be determined until the physical inventory is actually taken and therefore breakage that occurs in December 2014 will not be deductible until the year ending in January 2015.
B) Must be delayed until the inventory has been taken as a result of the all-events test.
C) Can be estimated and deducted for the year ending in January 2015.
D) Can be estimated and deducted as of the end of the tax year,but only if the taxpayer uses the lower of cost or market inventory method.
E) None of these.

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

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Question 42

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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?

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The $20,000 received in 2014 must be in...

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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:

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30,2014,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 30,2015),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 2014 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30,2015?

A C corporation is required to annualize its income:

Which of the following statements regarding a 52-53 week tax year is correct?

Laura Corporation changed its tax year-end from July 31st to December 31st in 2014.The income for the period August 1,2014 through December 31,2014 was $35,000.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 June - December 2014 income will be taxed at 34%.

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?

Andrew owns 100% of the stock of Crow's Farm Inc. ,an S corporation,that raises cattle and corn.The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.

In the case of an accrual basis taxpayer,an item of income:

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

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.

Teal,Inc. ,used the lower of cost or market to value inventory in 2014.The ending inventory at cost was $400,000 and the ending inventory at market was $385,000.In 2015,Teal changed to the LIFO method.The company's beginning LIFO inventory is $400,000.

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 7% when the applicable Federal rate was 4%.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.

If a company uses the LIFO inventory method to report the cost of inventory and cost of goods sold on its financial statements,footnote disclosure of the income as calculated by the FIFO method does not violate the tax and financial accounting conformity requirement.

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

Ramon sold land in 2014 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 2014,Ramon gave one of the $50,000 installment obligations to a close relative. b.In 2014,Ramon transferred the installment obligations ($50,000)to his 100% owned corporation. c.Ramon collected the $50,000 plus $12,000 interest on January 1,2015,and died on January 2,2015.

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

44. Karen, an accrual basis taxpayer, sold goods in December 2014 for $20,000. The customer was unable to pay cash. So the customer gave Karen a note for $20,000 that was payable in April 2015. The note bore interest at the Federal rate. The fair market value of the note at the end of 2014 was $18,000. Karen collected $20,500 from the customer in April 2014, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

In the case of a small home construction company that builds under long-term contracts,generally: