Question 1

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 statement is true. Since Partner A's tax year ends on June 30th, they are allowed to defer their portion of the partnership's income earned from July through December 2012 until they file their tax return for their year ending on June 30, 2013. This is known as a fiscal year taxpayer using the "short period rule." However, Partners B and C must report their respective shares of partnership income on their individual tax returns for the calendar year in which the income was earned.

Question 2

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

Accepted Answer

The IRS allows partnerships to choose any tax year as long as it's consistent with the accounting period used for bookkeeping purposes. If there are multiple principal partners, their combined ownership percentage is used to determine the partnership's tax year.

Question 3

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

The statement is true. Under the cash method, income is only recognized when cash is received, rather than when it is earned or billed. This can be an advantage for taxpayers who have a large amount of accounts receivable or other income that may not be collected immediately, as it allows them to defer recognition of income until it is actually received.

Question 4

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

A C corporation can choose a fiscal year as its tax year without needing a business reason, as long as it consistently applies that tax year.

Question 5

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 6

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 according to the IRS guidelines which state that a partnership's tax year should be the same as that of its majority partner or, if there is no majority partner, the tax year of the partner with the most interest. In this case, Red Corporation's tax year ends September 30th, so the R & G Partnership must use that tax year unless it has a valid business purpose for using a different tax year.

Question 7

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

A partnership must have a valid business purpose to use a tax year other than a calendar year, and being busy with tax preparation is not considered a valid business purpose.

Question 8

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 choose any tax year it prefers, regardless of the tax year of its shareholders. However, if the corporation has a substantial number of individual shareholders who own more than 50% of the stock, it may be subject to certain restrictions on its choice of tax year.

Question 9

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

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 because the annualization method assumes that the income earned during the short period is representative of the income that would have been earned if the corporation had been on a calendar year basis all along. As a result, the income is annualized and taxed as if the corporation had earned that amount of income for the entire year. Therefore, the tax on the annualized income will be greater than the tax on $25,000 for the short period.

Question 10

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 as the CPA practice can use a fiscal year ending April 30th even though it is a professional services corporation.

Question 11

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 cash basis taxpayer can only deduct the amount actually paid in 2012, which is $2,400. The accrual basis taxpayer can deduct the portion of the insurance policy that applies to 2012, which is $900 (9 months of coverage from April to December).

Question 12

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 13

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

Ted, being a cash basis taxpayer, had included the $150,000 bonus in his income in 2012, but since the refund was required to be paid in 2013, he could reduce his tax liability for that year by $14,000 in the 35% tax bracket.

Question 14

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

According to the information given in the statement, Alice, Inc. may report its sales from the retail store and rental income by the cash method, unless it previously elected the accrual method. This indicates that Alice, Inc. is eligible to use the cash method of accounting as its annual gross receipts have never exceeded $1 million.

Question 15

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 16

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 began business on May 1, 2012, and Brown Corporation liquidated as of April 30, 2012, neither corporation had income for the entire year, and thus they do not need to annualize their income for their 2012 tax returns.

Question 17

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, as per the statement in the question.

Question 18

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 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. Since the income for the period August 1, 2012 through December 31, 2012 is less than $50,000, none of the income will be taxed at 34%.

Question 19

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 IRS guidelines, a C corporation with average annual gross receipts of $3,500,000 or less may use the cash method of accounting.

Question 20

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 in accordance with the policy of most retailers and also ensures a fair and transparent process for both the retailer and the customer. Deducting a refund without receiving an actual claim from the customer can lead to disputes and legal issues.

Quiz 16: Accounting Periods and Methods