Question 1

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's tax year is chosen by the corporation itself and is not tied to the tax year of its shareholders.

Question 2

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

According to the tax law, a partnership may adopt any tax year unless it has a tax-exempt partner or its principal business activity is seasonal. In this case, the DEF Partnership may choose to use a calendar year, and Partner F may continue to use the tax year ending June 30th. Therefore, the statement is true.

Question 3

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

Accepted Answer

This is true. A retailer cannot deduct a refund from a customer's account until they have actually received a claim for the refund. Deducting refunds without proper notification or claim from the customer can result in legal issues for the retailer.

Question 4

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.

Accepted Answer

Since Snow Corporation started business on May 1, 2012, it only operated for part of the year and does not need to annualize its income for its 2012 return. Brown Corporation liquidated as of April 30, 2012, which is still within the calendar year, so it also does not need to annualize its income for its 2012 return.

Question 5

In 2004, a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30, 2012, he received a salary of $180,000.During the period from October 1, 2012 to December 31, 2012, the corporation paid the doctor a total salary of $50,000, and paid him $200,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30, 2013, is limited to $200,000.

Accepted Answer

The corporation's salary deduction for the fiscal year ending September 30, 2013, is limited to $200,000, which is the total amount paid to the doctor from October 1, 2012 to June 30, 2013. The salary received during the fiscal year ended September 30, 2012, is not relevant to the deduction limit for the following fiscal year. Therefore, the statement is true.

Question 6

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 received, while under the accrual method, income is recognized when it is earned, even if it has not yet been received. This means that taxpayers using the cash method may be able to delay recognizing income and paying taxes on it until they actually receive the cash.

Question 7

In 2012, T Corporation changed its tax year from ending each September 30th to ending each December 31st. The corporation earned $25,000 during the period October 1, 2012 through December 31, 2012. The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.

Accepted Answer

Since the tax year was changed from ending on September 30th to ending on December 31st, the corporation had a short period for the tax year of 2012. To calculate the tax for this period, the corporation must annualize its income. This means that the $25,000 earned during the short period is projected to what it would be for a full year, and then tax is calculated on this amount. Since the tax rates are progressive (meaning that the tax rate increases as income increases), the annualized income may fall into a higher tax bracket than $25,000. Therefore, the tax on the annualized income for the short period may be greater than the tax on $25,000 when the tax rates are progressive.

Question 8

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 fact that a CPA practice is a professional services corporation (PSC) does not affect its ability to use a fiscal year ending April 30th. Therefore, it is possible for the practice to use this fiscal year end even though it earns 40% of its annual revenues in March and April.

Question 9

A calendar year, cash basis corporation began business on April 1, 2012, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2012, and purchased a 24-month liability insurance policy. Both the cash basis and accrual basis taxpayers' deduction for insurance expense on the policy for 2012 is $900 (9/12 ´ $1,200).

Accepted Answer

The answer of A calendar year, cash basis corporation began...

Question 10

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

Accepted Answer

The tax year of a partnership is determined based on the tax year of its principal partners. There can be more than one principal partner, so the statement is true.

Question 11

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

Accepted Answer

The answer of A doctor's incorporated medical practice may end...

Question 12

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

The statement is true. According to the tax rules for S corporations, a corporation with gross receipts of less than $1 million per year may use the cash method of accounting. However, if Alice previously elected to use the accrual method, she must continue to use it unless she obtains permission from the IRS to change.

Question 13

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 rules, a C corporation whose annual gross receipts are less than $26 million is eligible to use the cash method of accounting. As the corporation's annual gross receipts are $3.5 million, it falls under this threshold and can use the cash method of accounting.

Question 14

Laura Corporation changed its tax year-end from July 31st to December 31st in 2012.The income for the period August 1, 2012 through December 31, 2012 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 2012 income will be taxed at 34%.

Accepted Answer

The answer of Laura Corporation changed its tax year-end from...

Question 15

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).

Accepted Answer

This is correct. Ted can reduce his 2013 tax liability by $14,000 (.35 ´ $40,000) as he is allowed to deduct the amount of refund in the year it was paid back.

Question 16

Franklin Company began business in 2008 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2008 through 2012.As a result of an audit by the IRS, Franklin was required to change to the accrual method of accounting beginning with 2013. The net adjustment due to the change is a positive adjustment to income. The adjustment may be spread equally over 2013 and the three following years.

Accepted Answer

The answer of Franklin Company began business in 2008 and...

Question 17

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.

Accepted Answer

The answer of A C corporation in the manufacturing business...

Question 18

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.R & G Partnership must use September 30th as its tax year, unless it has a business purpose for using a different tax year.

Accepted Answer

This is true as per the tax laws. When partners in a partnership have different tax years, the partnership must use the tax year of the partner with the earliest tax year end. In this case, Red Corporation's tax year ends on September 30th, which is earlier than Green Corporation's tax year end of December 31st. Therefore, R & G Partnership must use September 30th as its tax year unless it has a valid business purpose for using a different tax year.

Question 19

A partnership cannot elect to use a tax year other than a calendar year merely because the partnership's CPA is too busy to prepare a calendar year return.

Accepted Answer

The tax year of a partnership must conform to the tax year of the majority of its partners or to a calendar year unless IRS approval is received for a different tax year. It cannot be changed simply due to the availability of the CPA.

Question 20

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 2012 until he files his tax return for his year ending June 30, 2013.

Accepted Answer

This is true according to the tax law, which allows partners with different tax year ends to defer their share of partnership income until their respective tax years end. Since Partner A's tax year ends on June 30th, he can defer his share of partnership income earned from July through December until he files his tax return for his year ending June 30, 2013. Partners B and C, who use a calendar year, will report their share of partnership income on their tax returns for the year ending December 31, 2012.

Quiz 16: Accounting Periods and Methods