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Exam 16: Accounting Periods and Methods

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Question 21

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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 him 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) ?

A) $700/$1,100 = 63.64%.
B) $500/$1,200 = 41.67%.
C) $700/$1,200 = 58.33%.
D) $500/$1,100 = 45.45%.
E) None of these.

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

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Question 22

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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.

A) True
B) False

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Question 23

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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.

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.

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.

Red Corporation and Green Corporation are equal partners in the R & G Partnership. Red's tax year ends September 30th, and Green is a calendar year taxpayer. The greatest aggregate deferral of income would occur if the partnership used a calendar year for tax purposes.

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.

Generally, an advantage to using the cash method of accounting, as compared to the accrual method, is that under the cash method, income is not recognized until it is collected rather than being taxed as soon as the taxpayer has the right to collect the income.

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

If an installment sale contract does not charge interest on the sale of a capital asset, only capital gain will be recognized over the life of the contract.

Dr. Stone incorporated her medical practice and elected to use a fiscal year ending September 30. For the fiscal year ending September 30, 2019, the corporation earned $40,000 profits each month, before Dr. Stone's salary and income tax. Dr. Stone received a salary that averaged $30,000 per month. Next year (fiscal year ending September 30, 2020), Dr. Stone expects the average monthly profits before salary and taxes to be $48,000. What is the minimum salary Dr. Stone can receive for the last three months of calendar year 2019 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2020?

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

In 2019, Ramon sold land that had cost $80,000 for $200,000. The sales agreement called for a $50,000 down payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years. What would be the consequences of the following (treat each part independently and assume that Ramon uses the installment method whenever possible): a. In 2019, Ramon gave one of the $50,000 installment obligations to a close relative. b. In 2019, Ramon transferred the installment obligations ($50,000) to his 100% owned corporation. c. Ramon collected the $50,000 plus $12,000 interest on January 1, 2020, and died on January 2, 2020.

Color, Inc., is an accrual basis taxpayer. In December 2019, the company received from a customer a $500 claim for defective merchandise. Color paid the customer in January 2020. Also, in December 2019, the company received a bill of $800 for office supplies that had been purchased and used in November 2019. The bill was not paid until January 2020. In January 2020, the company received a claim for $600 for defective merchandise purchased in 2019. Color paid the customer the $600 in February 2020. Assuming that Color uses the recurring item exception to economic performance, the company's deductions for 2019 as a result of these facts are:

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

Charlotte sold her unincorporated business for $600,000 in 2019. 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?

Robin Construction Company began a long-term contract in 2019. 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 2019 was $350,000. The contract was completed in 2020 and the cost incurred that year was $125,000. Under the percentage of completion method:

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, Partner A is permitted to defer partnership income earned from July through December 2019 until filing the tax return for the year ending June 30, 2020.

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.

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.