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Exam 18: Accounting Periods and Methods

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Question 1

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Computer Consultants Inc. ,began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is,the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year,the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?

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Inventories are an income-producing fact...

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Question 2

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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 Juan 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 the above.

F) None of the above
G) D) and E)

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Question 3

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Terry,Inc. ,makes gasoline storage tanks.All production is done under contract.The company makes three basic models,but each model must be adapted to customer specifications for the location of outlets,insulation,and paint.It takes from three to six months to complete a tank.How should Terry account for the income for the business?

The taxpayer is an appliance dealer and has the following items of inventory on hand at the end of the year: Item Cost Replacement Cost Expected Selling Price 20 Big Screen TV's $12,000 $14,000 $18,000 200 DVD Players 20,000 16,000 18,000 100 Stereo Systems 24,000 21,000 35,000 $56,000 $51,000 $71,000 ​ Under the lower-of-cost-or-market inventory method,the ending inventory value is:

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

In 2016,Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2020.Father's basis was $100,000.In 2017,after paying $8,000 interest but nothing on the principal,Son sold the land for $300,000 cash.What gain,if any,must Father recognize in 2017?

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%

In 2016,T Corporation changed its tax year from ending each April 30th to ending each December 31st.The corporation earned $60,000 during the period May 1,2016 through December 31,2016.The annualized income for the short year is $90,000.

A calendar year,cash basis corporation began business on April 1,2016,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2016,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 2016.

Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2016,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 2016,the company incurred $150,000 in costs under the contract.In 2017,the company incurred an additional $500,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

In 2016,Cashmere Construction Company enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000.Cashmere estimates the total cost to complete the cottage to be $400,000.In 2016,Cashmere incurred $300,000 of costs on the contract,and in 2017 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2017.

A C corporation is required to annualize its income:

Blue Mart operates a large chain of retail stores.The company has four warehouses that are located in various parts of the country.The cost of operating the warehouses can be expensed immediately because it is a cost that is incurred even though the goods were not sold during the year.

The accrual basis taxpayer sold land for $100,000 on December 31,2016.He did not collect the $100,000 until January 2,2017.The land was held as an investment.

Charlotte sold her unincorporated business for $600,000 in 2016.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?

When an accrual basis taxpayer finances the construction of its building by borrowing,the interest is added to the cost of the building.

Laura Corporation changed its tax year-end from July 31st to December 31st in 2016.The income for the period August 1,2016 through December 31,2016 was $35,000.The corporate tax rate is 15% on the first $50,000 of income,25% on income from $50,001 to $75,000,and 34% on income from $75,001 to $100,000.A portion of Laura's June - December 2016 income will be taxed at 34%.

Snow Corporation began business on May 1,2016,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 30,2016.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2016 returns.

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,2016,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?

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