Question 1

A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.

Accepted Answer

A retailer cannot deduct a refund from a customer until they have received a claim for refund from the customer. Simply anticipating a refund does not give the retailer the right to make a deduction.

Question 2

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.

Accepted Answer

Under the cash method of accounting, income is only recognized when it is actually received. This means that income is not taxed until it is collected, which can be an advantage for taxpayers who may have fluctuations in their income or who have significant amounts of unpaid invoices. In contrast, under the accrual method of accounting, income is recognized when it is earned, regardless of whether it has been collected or not. This can result in taxpayers having to pay taxes on income that they have not yet received, which can create cash flow problems.

Question 3

A doctor's incorporated medical practice may end the last day of any month of the year.

Accepted Answer

False

Question 4

Red Corporation and Green Corporation are equal partners in the R & G Partnership.Red Corporation's tax year ends September 30th,and Green Corporation is a calendar year taxpayer.The greatest aggregate deferral of income would occur if the partnership used a calendar year for tax purposes.

Accepted Answer

If the partnership uses a calendar year tax year, both Red and Green Corporations will have the same tax year, allowing them to defer income to the following year if necessary. If they use Red Corporation's tax year, any income earned after September 30th by Red Corporation would be taxed immediately, while Green Corporation would have to wait until their following calendar year to be taxed on their share of the income. This would result in a less efficient deferral of income.

Question 5

The DEF Partnership had three equal partners when it was formed.Partners D and E were calendar year taxpayers and Partner F's tax year ended on June 30th before he joined the partnership.The partnership may use a calendar year and partner F may continue to use the tax year ending June 30th.

Accepted Answer

The partnership may use a calendar year and partner F may continue to use the tax year ending June 30th, which means that the statement is true.

Question 6

Ted,a cash basis taxpayer,received a $150,000 bonus in 2015 when he was in the 35% marginal tax bracket.In 2016,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 2016 tax liability by $14,000 (.35 × $40,000).

Accepted Answer

Since Ted is a cash basis taxpayer, the refund amount of $40,000 will be treated as a deductible expense in the year it was paid (2016). This will reduce Ted's taxable income by $40,000, and since he was in the 28% marginal tax bracket in 2016, his tax liability will be reduced by $14,000 (0.28 x $40,000).

Question 7

Laura Corporation changed its tax year-end from July 31st to December 31st in 2015.The income for the period August 1,2015 through December 31,2015 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 2015 income will be taxed at 34%.

Accepted Answer

The income for the period August 1, 2015, through December 31, 2015, 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. Therefore, a portion of Laura's June - December 2015 income will be taxed at 34%.

Question 8

In 2015,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 1,2015 through December 31,2015.The annualized income for the short year is $90,000.

Accepted Answer

To annualize the income for the short year, we need to multiply the actual income ($60,000) by 12/8, since the short year is 8 months instead of 12 months.

$60,000 * 12/8 = $90,000

Therefore, the annualized income for the short year is $90,000, making option A true.

Question 9

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

Accepted Answer

A C corporation without a natural business year can choose a fiscal year as its tax year instead of a calendar year, as long as it satisfies IRS requirements.

Question 10

In 2005,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2015,he received a salary of $190,000.During the period from October 1,2015 to December 31,2015,the corporation paid the doctor a total salary of $60,000,and paid him $240,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2016,is limited to $240,000.

Accepted Answer

The corporation's salary deduction for the fiscal year ending September 30, 2016, is limited to $240,000 because the doctor's salary for the period from October 1, 2015, to December 31, 2015, is considered part of the fiscal year ending September 30, 2016.

Question 11

The ability of the CPA to timely prepare a tax return is a justification for the partnership's use of a particular tax year.

Accepted Answer

The answer of The ability of the CPA to timely...

Question 12

A C corporation's selection of a tax year,generally,is independent of the tax year of its principal shareholders.

Accepted Answer

A C corporation can select any tax year, regardless of the tax year of its principal shareholders.

Question 13

Snow Corporation began business on May 1,2015,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 30,2015.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2015 returns.

Accepted Answer

Since Snow Corporation began business on May 1, 2015 and Brown Corporation liquidated as of April 30, 2015, neither corporation has a short taxable year and therefore does not need to annualize their income for their 2015 returns.

Question 14

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.

Accepted Answer

According to the IRS, corporations with average annual gross receipts of $26,000,000 or less for the preceding three years may use the cash method of accounting. Since this corporation has average annual gross receipts of $3,500,000, it is eligible to use the cash method of accounting.

Question 15

The Seagull Partnership has three equal partners.Partner A's tax year ends June 30th,and Partners B and C use a calendar year.If the partnership uses the calendar year to report its income,Partner A is permitted to defer partnership income earned from July through December 2015 until he files his tax return for his year ending June 30,2016.

Accepted Answer

This is true because Partner A's tax year ends in June, which is within the second half of the calendar year. Therefore, they are allowed to defer income earned from July to December until they file their tax return for their year ending in June.

Question 16

Franklin Company began business in 2011 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2011 through 2015.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2016.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2016 and the three following years.

Accepted Answer

The answer of Franklin Company began business in 2011 and...

Question 17

A calendar year,cash basis corporation began business on April 1,2015,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2015,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 2015.

Accepted Answer

A cash basis taxpayer can only deduct expenses in the year they are paid if they apply to that year. Since the insurance policy covers 24 months, the cash basis taxpayer must allocate the expense over the period it covers, not deduct it all in 2015.

Question 18

A CPA practice that is incorporated earns 40% of its annual revenues in the months of March and April.Although the CPA practice is a professional services corporation (PSC),it may use a fiscal year ending April 30th.

Accepted Answer

The statement is true. The fact that the CPA practice is a PSC does not prevent it from using a fiscal year ending on April 30th, and it is possible for a CPA practice to earn a significant portion of its annual revenues in the months of March and April due to the tax season.

Question 19

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

Accepted Answer

The tax year of a partnership is generally determined by the tax year of the majority of the partners. However, if one of the principal partners (owning at least a 5% interest in the partnership) has a different tax year, then the partnership's tax year may be required to match that partner's tax year.

Question 20

Alice,Inc. ,is an S corporation that has been in business for five years.Its annual gross receipts have never exceeded $1 million.The corporation operates a retail store and also owns rental property.The sales from the retail store and the rental income may be reported by the cash method,unless Alice previously elected the accrual method.

Accepted Answer

S corporations with annual gross receipts under $1 million are allowed to use the cash method of accounting for sales and rental income, unless they have previously elected the accrual method.

Quiz 16: Accounting Periods and Methods