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Exam 18: Accounting Periods and Methods

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Question 21

Multiple Choice

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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:

A) A positive adjustment for $102,000.
B) A positive adjustment for $90,000.
C) A positive adjustment for $78,000.
D) A positive adjustment for $60,000.
E) None of the above.

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

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Question 22

Multiple Choice

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A manufacturer must capitalize the following costs relative to inventories:

A) Only I.
B) Only I and II.
C) Only II and III.
D) I, II, and III.
E) None of the above.

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

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Question 23

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Ted,a cash basis taxpayer,received a $150,000 bonus in 2012 when he was in the 35% marginal tax bracket.In 2013,when Ted was in the 28% marginal tax bracket,it was discovered that the bonus was incorrectly computed,and Ted was required to refund $40,000 to his employer.As a result of the refund,Ted can reduce his 2013 tax liability by $14,000 (.35 ´ $40,000).

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.

Abby sold her unincorporated business which consisted of equipment and goodwill.The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000) .Abby had no basis in the goodwill.The sales price for the business was $250,000,with $150,000 for the equipment and $100,000 for the goodwill.The buyer agreed to pay $120,000 on June 30,2012,and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2012 (exclusive of interest) is:

Blue Mart operates a large chain of retail stores.The company has four warehouses that are located in various parts of the country.The cost of operating the warehouses must be capitalized and becomes a cost of inventory that is not deducted until the goods are sold.

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 11% when the applicable Federal rate was 7%.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.

Snow Corporation began business on May 1,2012,and elected to use the calendar year for tax purposes.Brown Corporation,a calendar year corporation,sold all of its assets and liquidated as of April 30,2012.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2012 returns.

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 2012,Yellow made a sale and collected a commission for $20,000.In June of 2013,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 2012 was $70,000,and in 2013 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 2013 tax liability?

Teal,Inc.,used the lower of cost or market to value inventory in 2012.The ending inventory at cost was $400,000 and the ending inventory at market was $385,000.In 2013,Teal changed to the LIFO method.The company's beginning LIFO inventory is $400,000.

In determining the cost of goods manufactured and thus the cost of the ending inventory:

Yard Corporation,a cash basis taxpayer,received $10,000 from a customer in 2011.In 2011,the customer filed a claim for a refund of the fee.In 2012,Yard refunded the customer $6,000.In 2011,Yard paid $5,000 in estimated state income tax.In May 2012,Yard received a state income tax refund of $2,000 for overpayment of its 2011 income tax.Yard was in the 35% marginal tax bracket in 2011 and in the 15% marginal tax bracket in 2012.What are the tax effects of the 2012 payment to the customer and the collection of the state income taxes overpaid?

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.

In the case of a taxpayer who uses the lower-of-cost-or-market inventory method:

The installment method can be used for which of the following sales with payments being made in the year following the year of sale?

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?

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.

Duck Company has valued its inventories at FIFO cost for the past 10 years.The company would like to change to the LIFO method,effective in 2013.

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

Generally,an advantage to using the cash method of accounting,as compared to the accrual method,is that under the cash method income is not recognized until it is collected,rather than being taxed as soon as the taxpayer has the right to collect the income.