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Exam 16: Accounting Periods and Methods

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Question 21

True/False

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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.R & G Partnership must use September 30th as its tax year,unless it has a business purpose for using a different tax year.

A) True
B) False

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Question 22

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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:

A) Violate the of claim of right doctrine.
B) Violate the economic performance requirement.
C) Result in a mismatching of revenues and expenses.
D) Result in deducting future costs that cannot be accurately estimated.
E) None of the above.

F) B) and E)
G) C) and D)

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Question 23

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

An S corporation's tax year,generally,is determined by the tax year of its principal shareholders.

For 2009,Godfrey had $5,000 in itemized deductions for state income taxes paid.In 2011,Godfrey's 2009 state income tax return was audited and he was required to pay an additional $4,000 of state income taxes.Godfrey was in the 35% tax bracket in 2009,but his marginal tax bracket in 2011 is 15%.He will itemize his deductions on his 2011 return.

Todd,a CPA,sold land for $200,000 plus a note for $400,000.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $360,000.Todd's basis in the land was $75,000.

In 2010,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 2010,Cashmere incurred $300,000 of costs on the contract,and in 2011 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2011.

In the case of a partnership whose partners all use a calendar year,a reason that is acceptable to the IRS for using a tax year ending June 30th would be:

A CPA practice that is incorporated earns two-thirds 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.

Robin Construction Company began a long-term contract in 2010.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 2010 was $300,000.The contract was completed in 2011 and the cost incurred that year was $180,000.Under the percentage of completion method:

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?

The accrual method generally must be used to report income:

The Seagull Partnership has three equal partners.Partner A's tax year ends June 30th,and Partners B and C use a calendar year.If the partnership uses the calendar year to report its income,when Partner A files his tax return for his tax year ending June 30,2011,he will include his share of partnership income for the period July 1,2010 through June 30,2011.

A calendar year,cash basis corporation began business on October 1,2010 and paid $2,400 for a 12-month liability insurance policy.The corporation can deduct $2,400 as insurance expense for its first tax year ending on December 31,2010.

The installment method applies to which of the following sales with payments being made in the year following the year of sale?

Color,Inc. ,is an accrual basis taxpayer.In December 2011,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2012.Also,in December 2011,the company received a bill of $800 for office supplies that had been purchased and used in November 2011.The bill was not paid until January 2012.In January 2012,the company received a claim for $600 for defective merchandise purchased in 2011.Color paid the customer the $600 in February 2012.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2011 as a result of the above are:

Pedro,not a dealer,sold real property that he owned with an adjusted basis of $60,000 and encumbered by a mortgage for $28,000 to Pat in 2009.The terms of the sale required Pat to pay $14,000 cash,assume the $28,000 mortgage,and give Pedro eleven notes for $6,000 each (plus interest at the Federal rate) .The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2012 note as promised,what is the recognized gain to Pedro in 2011 (exclusive of interest) ?

A C corporation provides office janitorial services to various businesses.The corporation has average annual gross receipts of $2,500,000.The corporation can use the cash method of accounting.

The buyer and seller have tentatively agreed that the buyer will pay the seller $100,000 (principal and interest)each year for 5 years.The seller's cost of the asset is $200,000,and he will report the capital gain using the installment method.The buyer and seller are now negotiating the interest rate that will be used to compute the interest included in each $100,000 payment.The relevant Federal rate is 5%,but the market rate on similar contracts in the area is 7%.Why would the seller bargain for a 5% interest rate for the contract rather than a 7% interest rate?

A C corporation is required to annualize its income: