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Exam 16: Accounting Periods and Methods

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Question 41

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Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years.The note bore interest of 11% when the applicable Federal rate was 7%.Hal's cost of the land was $40,000.Because of the buyer's good credit record and the high interest rate on the note, Hal thought the fair market value of the note was at least $74,000.

A) Hal can elect to treat the $36,000 as a recovery of capital.
B) Hal must recognize $60,000 gain in the year of sale.
C) Hal must recognize $36,000 gain in the year of sale.
D) Unless Hal elects not to use the installment method, Hal must recognize $21,600 gain in the year of sale.
E) None of the above.

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

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Question 42

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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%

A) $66,000 $0
B) $0 $66,000
C) $90,000 $90,000
D) $90,000 $0
E) $0 $110,000

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

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Question 43

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

In 2012, 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 2012, Cashmere incurred $300,000 of costs on the contract, and in 2013 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2013.

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?

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.

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

Andrew owns 100% of the stock of Crow's Farm Inc., an S corporation, that raises cattle and corn.The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.

Charlotte sold her unincorporated business for $600,000 in 2012.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?

Yard Corporation, a cash basis taxpayer, received $10,000 from a customer in 2011.In 2011, the customer filed a claim for a refund of the fee.In 2012, Yard refunded the customer $6,000.In 2011, Yard paid $5,000 in estimated state income tax.In May 2012, Yard received a state income tax refund of $2,000 for overpayment of its 2011 income tax.Yard was in the 35% marginal tax bracket in 2011 and in the 15% marginal tax bracket in 2012.What are the tax effects of the 2012 payment to the customer and the collection of the state income taxes overpaid?

The taxpayer has consistently, but incorrectly, used an allowance for bad debts.At the beginning of the year, the balance in the allowance account is $90,000.

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:

The accrual method generally is required to report income for which of the following types of businesses:

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?

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

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30, 2012, 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, 2013), 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 2012 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2013?

Related-party installment sales include all of the following except the first seller's:

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?

Kathy was a shareholder in Matrix, Inc., when she sold the corporation a commercial building.The building cost $500,000 and the balance in the accumulated depreciation account was $400,000. Matrix, Inc., paid $100,000 in the year of sale and gave Kathy a note for $400,000 plus adequate interest due in 2014.

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.