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Exam 16: Accounting Periods and Methods

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Question 21

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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.

A) If Todd uses the cash basis to report the income from his practice, he cannot use the installment method to report the gain on the sale of the land.
B) If Todd uses the accrual basis to report the income from his practice, he cannot use the installment method to report the gain from the sale of the land.
C) If Todd uses the installment method to report the gain, the contract price is $800,000.
D) If Todd does not use the installment method, his gain in the year of sale is $620,000 ($700,000 - $80,000) .
E) None of the above.

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

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Question 22

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Father sold land to Son for $150,000 in 2012.Father's basis in the land was $60,000.Son paid Father $25,000 and gave Father a note for $125,000 due in 2015.In 2013, Son sold the land for $200,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

A) Father must recognize $90,000 of income in 2012.
B) Father must recognize a $75,000 gain in 2013.
C) Father's gain is all ordinary income.
D) Son is not permitted to use the installment method to report his gain.
E) None of the above.

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

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Question 23

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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.

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.

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:

Albert is in the 35% marginal tax bracket.He sold a building in the current year for $450,000.Albert received $110,000 cash at closing, the buyer assumed Albert's mortgage for $120,000, and the buyer gave Albert a 6% note for $220,000 due in two years.The Federal rate was 6%.Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straight-line depreciation) .Assuming he did not elect out of the installment method, Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts? Section 1231 Gain Unrecaptured § 1250 Gain Taxed at 25%

The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business. The taxpayer decided to voluntarily change to the accrual method of accounting. The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories, $30,000 for accounts receivable, and $12,000 for accounts payable. The adjustment due to the change in accounting method is:

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?

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

A C corporation in the manufacturing business must use a calendar year as its tax year unless the corporation has a business reason for using a tax year that is not a calendar year.

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).

In 2012, 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 2011 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.

Juan, not a dealer in real property, sold land that he owned.His adjusted basis in the land was $500,000 and it was encumbered by a mortgage for $200,000.The terms of the sale required the buyer to pay Juan $100,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $600,000 (plus interest at the Federal rate) due in the following year.What is the gross profit percentage (gain ¸ contract price) ?

If an installment sale contract does not charge interest on the sale of a capital asset, the IRS will impute interest and thereby increase the taxpayer's capital gain and interest income.

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

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 2012, Yellow made a sale and collected a commission for $20,000. In June of 2013, 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 2012 was $70,000, and in 2013 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 2013 tax liability?

A C corporation provides lawn maintenance services to various businesses and homeowners. The corporation has average annual gross receipts of $3,500,000.The corporation may use the cash method of accounting.

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 2012, 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 2013. Also, in January 2013, claims for $8,000 were filed for deliveries made in 2012, and $6,000 was paid on these claims by March 15, 2013.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 2012:

John sold an apartment building for $600,000.His basis in the building was $360,000 and it was subject to $30,000 of depreciation recapture.John received $120,000 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 5 years.The interest on the note was payable each June 30th, beginning in the year following the year of the sale.John incurred $30,000 of selling expenses which he paid in the year of sale.Compute John's installment sales gain that should be reported in the year of sale.

Which of the following statements regarding the matching principle is correct?