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Exam 18: Accounting Periods and Methods

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Question 1

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In 2012,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 1,2012 through December 31,2012.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.

A) True
B) False

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Question 2

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Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2012,the company entered into a contract to construct a building for $960,000.Camelia estimated that the cost of constructing the building would be $720,000.In 2012,the company incurred $240,000 in costs under the contract.In 2013,the company incurred an additional $450,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

A) Camelia is not required to report any income from the contract until 2013 when the contract is completed.
B) Camelia must report $80,000 gross profit on the contract in 2012, but must pay interest in 2013 under the lookback rules.
C) Camelia does not recognize any profit from the contract in 2013 and the company will receive interest from the overpayment of tax on 2012 reported profit from the contract.
D) Camelia should amend its 2012 tax return to decrease the profit on the contract for that year.
E) None of the above.

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

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Question 3

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For purposes of determining the partnership's tax year,there may be more than one principal partner.

Ted,a cash basis taxpayer,received a $150,000 bonus in 2012 when he was in the 35% marginal tax bracket.In 2013,when Ted was in the 28% 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 2013 tax liability by $14,000 (.35 ´ $40,000).

Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2012.Gold and Silver use a calendar tax year,and Platinum's tax year ends June 30th.GSP is not a seasonal business.

Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2012,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2012 sales and $50,000 in refunds from 2011 sales.All of the refunds from 2011 sales were for claims filed in 2011 and were paid in January and February 2012.At the end of 2012,the company had $12,000 in refund claims for sales in 2012 for which payment had been approved.These claims were paid in January 2013.Also in January 2013,the company received an additional $30,000 in claims for sales in 2012.This $30,000 was paid by Gray in February 2013.With respect to the above,Gray can deduct:

In 2012,Beth sold equipment used in her business.Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation) .Beth sold the property for $400,000,with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate) due in 2013.Beth's recognized installment sale gain in 2013 is:

A manufacturer must capitalize the following costs relative to inventories:

Snow Corporation began business on May 1,2012,and elected to use the calendar year for tax purposes.Brown Corporation,a calendar year corporation,sold all of its assets and liquidated as of April 30,2012.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2012 returns.

The lower of FIFO cost or market inventory method can be used for tax purposes,but the lower of cost or market cannot be used in conjunction with the LIFO method.

In 2012,Norma sold Zinc,Inc.,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2013 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?

Under the percentage of completion method,if the actual costs are ____ the estimated costs,the taxpayer must pay interest on the underpayment of prior years' taxes.

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

A cash basis taxpayer sold investment land in 2012 for $200,000.He received $40,000 in the year of sale and $160,000 in 2013.The cost of the land was $80,000.Under the installment method,the taxpayer would report a $24,000 gain in 2012.

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

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 2012 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1,2012,the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2012,2013,2014,and 2015.

Mogo Manufacturing Company accounts for its inventories by the FIFO method.The company has consistently allocated building depreciation to production and general administration on the basis of the number of square feet occupied.According to the measurements used,manufacturing requires 90% of the square footage and general administration utilizes 10% of the total square feet.This year,2012,the accountant realized that 5 years ago an addition was made to the portion of the building used for general administration,and the depreciation allocation had not been adjusted.What are the tax accounting implications of this discovery?

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

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 2012:

Walter sold land (a capital asset) to an unrelated party for $50,000 cash and a 5% note for $150,000 due in three years.His basis in the land was $40,000.Walter and the purchaser are cash basis taxpayers.Which of the following statements is correct?