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Exam 16: Accounting Periods and Methods

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Question 31

True/False

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If an installment sale contract does not charge interest on the sale of a capital asset,the IRS will impute interest and thereby increase the taxpayer's capital gain and interest income.

A) True
B) False

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Question 32

Multiple Choice

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In regard to choosing a tax year for a business owned by individuals,which form of business provides the greater number of options in regard to the tax year?

A) A C corporation formed by medical doctors to conduct their practice.
B) A C corporation that is in the retail grocery business.
C) A real estate partnership.
D) An S corporation engaged in manufacturing.
E) All of the above have the same options.

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

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Question 33

Multiple Choice

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

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 30,2011,the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1,2011 through December 31,2011.

A partnership cannot elect to use a tax year other than a calendar year merely because the partnership's CPA is too busy to prepare a calendar year return.

In 2011,Norma sold Zinc,Inc.,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2012 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?

The accrual basis taxpayer sold land for $100,000 on December 31,2011.He did not collect the $100,000 until January 2,2012.The land was held as an investment.

Yard Corporation,a cash basis taxpayer,received $10,000 from a customer in 2010.In 2010,the customer filed a claim for a refund of the fee.In 2011,Yard refunded the customer $6,000.In 2010,Yard paid $5,000 in estimated state income tax.In May 2011,Yard received a state income tax refund of $2,000 for overpayment of its 2010 income tax.Yard was in the 35% marginal tax bracket in 2010 and in the 15% marginal tax bracket in 2011.What are the tax effects of the 2011 payment to the customer and the collection of the state income taxes overpaid?

In 2011,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 2011,Cashmere incurred $300,000 of costs on the contract,and in 2012 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2012.

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

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 2011,Yellow made a sale and collected a commission for $20,000.In June of 2012,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 2011 was $70,000,and in 2012 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 2012 tax liability?

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:

In 2003,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2011,he received a salary of $180,000.During the period from October 1,2011 to December 31,2011,the corporation paid the doctor a total salary of $50,000,and paid him $200,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2012,is limited to $200,000.

A CPA practice that is incorporated earns 60% of its annual revenues in the months of February,March,and April.Because the CPA practice is a professional services corporation (PSC),it must use a calendar year to report its income.

Alice,Inc.,is an S corporation that has been in business for five years.Its annual gross receipts have never exceeded $1 million.The corporation operates a retail store and also owns rental property.The sales from the retail store and the rental income may be reported by the cash method,unless Alice previously elected the accrual method.

Which of the following must use the accrual method of accounting?

Which of the following is (are) a taxable disposition of an installment obligation?

Juan,not a dealer in real property,sold land that he owned.His adjusted basis in the land was $500,000 and it was encumbered by a mortgage for $200,000.The terms of the sale required the buyer to pay Juan $100,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $600,000 (plus interest at the Federal rate) due in the following year.What is the gross profit percentage (gain ¸ contract price) ?

Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2011.Gold and Silver uses a calendar tax year,and Platinum's tax year ends September 30.GSP is not a seasonal business.

Walter sold land (a capital asset) to an unrelated party for $50,000 cash and a 5% 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?