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Exam 18: Accounting Periods and Methods

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Question 31

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In 2017, 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 2016 was $300,000, $60,000 of the item was included in the ending inventory that year and $240,000 was deducted as cost of goods sold.

A) The company should amend its 2016 tax return and reduce its income by $240,000.
B) The company should change its accounting method in 2017, with a $60,000 negative § 481 adjustment which decreases its 2017 taxable income.
C) The company should change its accounting method in 2017, and increase its 2017 income by $60,000, the amount of the positive § 481 adjustment to income.
D) The company should change its accounting method in 2017 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2017-20.
E) None of the above.

F) All of the above
G) D) and E)

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Question 32

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

A) Taxpayers may not use the lower of cost or market method for tax purposes.
B) Market price means the expected selling price.
C) Taxpayers may deduct a reserve for anticipated inventory price changes.
D) Each inventory item must be valued at the lower of its cost or its market value.
E) None of the above.

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

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Question 33

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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, 2017, and $130,000 (plus interest at the Federal rate) in two years. Abby's gain to be reported in 2017 (exclusive of interest) is:

Mallard Auto Parts, Inc. has on hand 1,000 fenders for 1953 Studebakers. Mallard purchased the fenders in 1965 for $30 each and the selling price is $400 each. Only rarely does Mallard sell a Studebaker fender and it is highly unlikely that more than 100 of the remaining fenders will ever be sold. However, Mallard has ample storage space and feels an obligation to Studebaker owners. Therefore, the company will not salvage the fenders and will continue to sell them for $400 each. Scrap value of the fenders is $5 each. Under the lower of cost or market inventory method:

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

A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.

Which of the following statements is true concerning the disposition of an installment note?

In applying the lower of cost or market for tax purposes, the market price is the replacement cost of the goods, rather than their expected selling price.

Which of the following statements regarding a 52-53 week tax year is not correct?

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 2017, Yellow made a sale and collected a commission for $20,000. In June of 2018, 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 2017 was $70,000, and in 2018 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 2018 tax liability?

Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

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?

In the case of a sale reported under the installment method, gain is recognized in each year the seller collects on the installment contract.

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 2017:

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 2018.

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2017, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%. During 2017, the corporation paid $24,000 on its estimated state income tax liability for that year. The remaining $6,000 of 2017 state income tax was paid in April 2018. In June 2017, the corporation paid $9,000 on its year 2016 state income tax liability, as a result of an audit of the 2016 return that was conducted in 2017. The company has elected to use the recurring item exception to economic performance. As a result of the above, the corporation should deduct in 2017 on its Federal income tax return state income taxes of:

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

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 2017 is understated by $40,000. If Sandstone voluntarily changes accounting methods effective January 1, 2017, the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2017, 2018, 2019, and 2020.

In 2006, a medical doctor who incorporated his practice elected a fiscal year ending September 30th. During the fiscal year ended September 30, 2016, he received a salary of $190,000. During the period from October 1, 2016 to December 31, 2016, the corporation paid the doctor a total salary of $60,000, and paid him $240,000 of salary in the following 9 months. The corporation's salary deduction for the fiscal year ending September 30, 2017, is limited to $240,000.

Juan, not a dealer in real property, sold land that he owned. His adjusted basis in the land was $700,000 and it was encumbered by a mortgage for $100,000. The terms of the sale required the buyer to pay Juan $200,000 on the date of the sale. The buyer assumed Juan's mortgage and gave Juan a note for $900,000 (plus interest at the Federal rate) due in the following year. What is the gross profit percentage (gain ÷ contract price) ?