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Exam 18: Accounting Periods and Methods

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Question 21

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The accrual basis taxpayer sold land for $100,000 on December 31, 2019.He did not collect the $100,000 until January 2, 2020.The land was held as an investment.

A) If the accrual basis taxpayer's basis in the land was $110,000, the loss would be recognized in 2020.
B) If the accrual basis taxpayer's basis in the land was $60,000, the gain must be reported in 2019.
C) If the accrual basis taxpayer's basis in the land was $60,000, the gain must be reported in 2020, unless the taxpayer elects to not use the installment method.
D) The accrual basis taxpayer must recognize the gain or loss in the year of sale.
E) None of these.

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

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Question 22

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Laura Corporation changed its tax year-end from July 31 to December 31 in 2019.The income for the period August 1, 2019 through December 31, 2019 was $35,000.The corporate tax rate in the state where the corporation performs all of its business is 5% on the first $50,000 of income and 7% on income above $50,000.Laura's state tax for the short period is $2,033.

A) True
B) False

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Question 23

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A calendar year, cash basis corporation began business on April 1, 2019, and paid $2,400 for a 24-month liability insurance policy.An accrual basis, calendar year taxpayer also began business on April 1, 2019, and purchased a 24- month liability insurance policy.The accrual basis taxpayer must amortize the premiums over 24 months but the cash basis taxpayer may deduct the total premiums in 2019.

When a taxpayer with average annual gross receipts in excess of $25 million finances the construction of its building by borrowing, the interest is added to the cost of the building.

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

A C corporation provides lawn maintenance services to various businesses and homeowners.The corporation has average annual gross receipts of $7 million.The corporation may use the cash method of accounting.

Camelia Company is a large commercial real estate contractor that reports its income by using the percentage of completion method.In 2019, the company entered into a contract to construct a building for $900,000.Camelia estimated that the cost of constructing the building would be $600,000.In 2019, the company incurred $150,000 in costs under the contract.In 2020, the company incurred an additional $500,000 in costs to complete the contract.

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

A positive § 481 adjustment from a change in method of accounting initiated by the taxpayer is spread equally over the year of change and the three following years.

Kathy was a shareholder in Matrix, Inc., when she sold the corporation a commercial building.The building cost $500,000 and the balance in the accumulated depreciation account was $400,000.Matrix, Inc., paid $100,000 in the year of sale and gave Kathy a note for $400,000 plus adequate interest due in 2020.

John sold an apartment building for $600,000.His basis in the building was $360,000 subject to $30,000 of depreciation recapture.John received $150,000 in the year of sale, the buyer assumed John's mortgage payable of $240,000, and the buyer gave John an 8% (the current Federal rate) note of $210,000 due in five years.The interest on the note was payable each June 30 beginning in the year following the year of the sale.John incurred $30,000 of selling expenses which he paid for in the year of sale.Compute John's installment sales gain that should be reported in the year of sale.

A cash basis taxpayer sold investment land in 2019 for $200,000.He received $40,000 in the year of sale and $160,000 in 2020.The cost of the land was $80,000.Under the installment method, the taxpayer would report a $24,000 gain in 2019.

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, 2019, the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1, 2019 through December 31, 2019.

Todd, a CPA, sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.

In 2019, 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 2018 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.

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, Ivory has paid approximately 80% of the claims.In 2019, 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 2020.Also, in January 2020, claims for $8,000 were filed for deliveries made in 2019, and $6,000 was paid on these claims by March 15, 2020.Ivory has not elected to use the recurring item exception to economic performance.Under the all-events and economic performance tests, Ivory can accrue which of the following as an expense for 2019:

The taxpayer has consistently but incorrectly used an allowance for bad debts.At the beginning of the year, the balance in the allowance account is $90,000.

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.The partnership may use a calendar year and partner F may continue to use the tax year ending June 30th.

In 2019, Norma sold Zinc, Inc., common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2020 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?

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