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Exam 18: Accounting Periods and Methods

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Question 1

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Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $10 million in the year of the sale and a note for $15 million payable in three years with interest at the Federal rate.Gold's basis in the stock was $5 million.Assume that Gold will report the gain by the installment method where the method is permitted.

A) The installment method is never permitted on the sale of stock.
B) If Ruby stock is traded on an established securities market, Gold must recognize a $20 million gain in the year of sale.
C) If the Ruby Corporation stock is not traded on a national exchange, Gold must recognize a $20 million gain.
D) All of these are true.
E) None of these is true.

F) A) and B)
G) A) and C)

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Question 2

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A C corporation is required to annualize certain tax factors:

A) The first year the corporation is in existence, if the first tax return includes less than 12 months.
B) The last year the corporation is in existence.
C) The year the corporation changes its tax year.
D) When there has been a greater than 50% change in the ownership of the stock.
E) All of these.

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

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Question 3

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A C corporation that does not have a natural business year must use a calendar year as its tax year.

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.

The tax year of one of the principal partners may determine the partnership's tax year.

In 2009, a medical doctor who incorporated her practice elected a fiscal year ending September 30th.During the fiscal year ended September 30, 2019, she received a salary of $190,000.During the period from October 1, 2019 to December 31, 2019, the corporation paid the doctor a total salary of $60,000, and paid her $240,000 of salary in the following nine months.The corporation's salary deduction for the fiscal year ending September 30, 2020, is limited to $240,000.

Barbara operates a sporting goods store.She uses the cash method and treats inventory as nonincidental supplies.At the beginning of the year, she had inventory of $26,000.She purchased $470,000 of goods during the year.Her ending inventory was $42,000.She makes sure to pay all of her suppliers by the last day of her tax year.What is Barbara's inventory deduction for the year?

Pedro, not a dealer, sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2017.The terms of the sale required Pat to pay $28,000 cash, assume the $56,000 mortgage, and give Pedro 11 notes for $12,000 each (plus interest at the Federal rate) .The first note was payable two years from the date of sale, and each succeeding note became due at two-year intervals.Pedro did not elect out of the installment method for reporting the transaction.If Pat pays the 2019 note as promised, what is the recognized gain to Pedro in 2019 (exclusive of interest) ?

Abby sold her unincorporated business that consisted of equipment and goodwill.The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000) .Abby had no basis in the goodwill.The sales price for the business was $250,000 with $150,000 for the equipment and $100,000 for the goodwill.The buyer agreed to pay $120,000 on June 30, 2019, and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2019 (exclusive of interest) is:

In the case of a sale reported under the installment method, gain is recognized in each year the seller collects on the installment contract.

What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?

Wendy sold property on the installment basis in 2017 for more than her basis in the property.She was to receive installment payments at the end of each year for the next five years.In 2019, Wendy was killed in a car accident and the note was transferred to her estate.

Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2019, the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2019 sales and $50,000 in refunds from 2018 sales.All of the refunds from 2018 sales were for claims filed in 2018 and were paid in January and February 2019.At the end of 2019, the company had $12,000 in refund claims for sales in 2019 for which payment had been approved.These claims were paid in January 2019.Also in January 2020, the company received an additional $30,000 in claims for sales in 2019.This $30,000 was paid by Gray in February 2020.With respect to the above, Gray can deduct:

Gold Corporation, Silver Corporation, and Copper Corporation are equal partners in the GSC Partnership.The partners' tax year-ends are as follows: $\begin{array} { l l } \text { Gold } & \text { December } 31 \\\text { Silver } & \text { April } 30 \\\text { Copper } & \text { September 30 }\end{array}$

Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

A taxpayer who is required to use the percentage of completion method can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 10% of the estimated contract costs.

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

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.

Brown Corporation elected dollar-value LIFO in 2014.Its ending inventory at base year cost and its LIFO indexes are as follows: Compute the LIFO inventory at the end of 2019.

Using your knowledge of GAAP and financial reporting, list and explain one good reason that GAAP should not be used for tax purposes and one good reason that it should be used.