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Exam 16: Accounting Periods and Methods

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Question 21

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Which of the following statements regarding a 52-53 week tax year is correct?

A) The year-end must be the same day of the week in all years.
B) The year cannot contain more than 366 calendar days.
C) Every four years, there will be only 51 weeks.
D) The year cannot end on a Sunday.
E) None of the above.

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

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Question 22

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The accrual method generally is required for the following types of businesses:

A) A real estate management company, operating as an S corporation, with over $25 million of gross receipts.
B) An incorporated public accounting firm with gross receipts in excess of $25 million.
C) A partnership that has a partner that is an S corporation.
D) A grocery store with average annual gross receipts of $800,000.
E) None of the above.

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

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Question 23

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The ability of the CPA to timely prepare a tax return is a justification for the partnership's use of a particular tax year.

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

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2018, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%. During 2018, the corporation paid $24,000 on its estimated state income tax liability for that year. The remaining $6,000 of 2018 state income tax was paid in April 2019. In June 2018, the corporation paid $9,000 on its year 2017 state income tax liability, as a result of an audit of the 2017 return that was conducted in 2018. The company has elected to use the recurring item exception to economic performance. As a result of the above, the corporation should deduct in 2018 on its Federal income tax return state income taxes of:

A retailer sells widgets with a 90-day warranty and uses the accrual method. The retailer may estimate its warranty expense and deduct it.

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. In 2018, claims for $80,000 were filed. The company refused to pay $20,000 of the claims (because they were not valid) , and paid $50,000. The remaining $10,000 in claims were processed and paid in January 2019. Also, in January 2019, claims for $8,000 were filed for deliveries made in 2018, and $6,000 was paid on these claims by March 15, 2019. Ivory has not elected to use the recurring item exception to economic performance. Under the all- events and economic performance tests, Ivory can accrue as an expense for 2018:

The taxpayer had incorrectly been using the cash method of accounting. For 2018, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2018 was $120,000 (positive) . The adjustment as calculated as of the end of 2018 was $80,000 (positive) . As a result of the change in method, the company must:

Purple Corporation, a personal service corporation (PSC) , adopted a fiscal year ending September 30. The sole shareholder of the corporation is a calendar year taxpayer. During the fiscal year ending September 30, 2018, the shareholder-employee received $120,000 salary. The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1, 2018 through December 31, 2018.

An S corporation may select any tax year as long as it ends on the last day of a month.

Charlotte sold her unincorporated business for $600,000 in 2018. The sales contract allocated $120,000 to equipment, $300,000 to land, and $180,000 to goodwill. Charlotte had a $0 basis in the goodwill, the land cost $150,000, and the equipment originally cost $250,000 but it was fully depreciated. What is the amount of the gain eligible for installment sales treatment?

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

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

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 $23 million and the farm is not considered a tax shelter.

Karen, an accrual basis taxpayer, sold goods in December 2018 for $20,000. The customer was unable to pay cash. So the customer gave Karen a note for $20,000 that was payable in April 2019. The note bore interest at the Federal rate. The fair market value of the note at the end of 2018 was $18,000. Karen collected $20,500 from the customer in April 2019, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

Which of the following taxpayers is required to use the accrual method of accounting?

Ted, a cash basis taxpayer, received a $150,000 bonus in 2018 when he was in the 35% marginal tax bracket. In 2019, when Ted was in the 24% 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 2019 tax liability by $14,000 (.35 × $40,000).

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

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, 2018, and $130,000 (plus interest at the Federal rate) in two years. Abby's gain to be reported in 2018 (exclusive of interest) is:

Robin Construction Company began a long-term contract in 2018. The contract price was $800,000. The estimated cost of the contract at the time it was begun was $500,000. The actual cost incurred in 2018 was $350,000. The contract was completed in 2019 and the cost incurred that year was $125,000. Under the percentage of completion method: