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Exam 16: Accounting Periods and Methods

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Question 1

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Ivory Fast Delivery Company,an accrual basis taxpayer,frequently has claims for damages to property the company delivered.Often the claim is not filed until a month after the delivery.In the past,approximately 80% of the claims are paid by Ivory.At the end of 2010,$19,000 in claims had been filed.The company refused to pay $4,000 of the claims,and paid the other $15,000 of claims in January 2011.Also,in January 2011,claims for $13,000 were filed for deliveries made in 2010,and $10,000 was paid on these claims by March 2011.Ivory has elected to use the recurring item exception to economic performance.Under the all-events test,Ivory can accrue as an expense for 2010:

A) $32,000.
B) $28,000.
C) $25,000.
D) $15,000.
E) None of the above.

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Question 2

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In 2010,Helen sold property and reported her gain by the installment method.Her basis in the property was $250,000 ($400,000 cost less $150,000 of depreciation) .Helen sold the property for $700,000,with $140,000 due on the date of the sale and $560,000 (plus interest at the Federal rate) due in 2011.Helen's recognized installment sale gain in 2010 is:

A) $0.
B) $60,000.
C) $150,000.
D) $210,000.
E) None of the above.

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Question 3

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

Which of the following statements regarding the matching principle is correct?

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 30,2010,the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1,2010 through December 31,2010.

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 $3,000,000 and the farm is not considered a tax shelter.

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

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2011,the corporation's income subject to state income tax was $400,000 and the state corporate tax rate was 6%.During 2011,the corporation paid $18,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2011 state income tax was paid in April 2012.In June 2011,the corporation paid $9,000 on its year 2010 state income tax liability,as a result of an audit of the 2010 return that was conducted in 2011.As a result of the above:

The DEF Partnership had three equal partners when it was formed.Partners D and E were calendar year taxpayers and Partner F's tax year ended on June 30th before he joined the partnership.Partner F was required to change his tax year to end on December 31st upon joining the partnership.

Abby sold her unincorporated business which consisted of equipment and goodwill.The equipment had an original cost of $150,000 and Abby had claimed $90,000 in depreciation (adjusted basis = $60,000) .Abby had no basis in the goodwill.The sales price for the business was $280,000,with $120,000 for the equipment and $160,000 for the goodwill.The buyer agreed to pay $70,000 on June 30,2010,and $210,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2010 (exclusive of interest) is:

In 2010,Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses.The total amount of the expense for 2009 was $200,000,but $50,000 of the item was included in the ending inventory that year.

In 2010,T Corporation changed its tax year from ending each September 30th to ending each December 31st.The corporation earned $25,000 during the period October 1,2010 through December 31,2010.The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.

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.

Sandstone,Inc. ,has consistently included some factory overhead as a current expense,rather than as a cost of producing goods.As a result,the beginning inventory for 2010 is understated by $30,000.If Sandstone voluntarily changes accounting methods effective January 1,2010,the adjustment to the inventory is a § 481 adjustment and $7,500 must be added to taxable income for each year 2010,2011,2012,and 2013.

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30,2010,the corporation earned $20,000 profits each month,before Dr.Stone's salary and income tax.Dr.Stone received a salary that averaged $15,000 per month.Next year (fiscal year ending September 30,2011),Dr.Stone expects the average monthly profits before salary and taxes to be $24,000.What is the minimum salary Dr.Stone can receive for the last three months of calendar year 2010 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30,2011?

Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2010.Gold and Silver uses a calendar tax year,and Platinum's tax year ends September 30.GSP is not a seasonal business.

Snow Corporation was a calendar year corporation that sold all of its assets and liquidated as of April 30,2010.The corporation is not required to annualize its income for its final year of operations.

In 2010,Norma sold Zinc,Inc. ,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2011 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 taxpayer voluntarily changed from the cash to the accrual method of accounting,because inventories were material to the taxpayer's business.The change resulted in a positive $60,000 adjustment to income.

A cash basis taxpayer sold investment land in 2010.He received $35,000 in the year of sale and $105,000 in 2011.The cost of the land was $100,000.Under the installment method,the taxpayer would report a $10,000 gain in 2010.