Question 1

A calendar year,cash basis corporation began business on April 1,2014,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2014,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 2014.

Accepted Answer

The "one­year rule" does not apply because the life of the policy extends beyond the end of 2015,the tax year following the year the policy begins.Therefore,both the cash and accrual basis taxpayers must capitalize and amortize the policy over its 24-month life.

Question 2

Ted,a cash basis taxpayer,received a $150,000 bonus in 2014 when he was in the 35% marginal tax bracket.In 2015,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 2015 tax liability by $14,000 (.35 × $40,000).

Accepted Answer

Ted recognized income in a high tax rate year (35%),but was required to refund the income in a lower tax rate year.Under § 1341,Ted is permitted to reduce the 2015 tax liability by the amount of the tax paid in 2014 on an amount that was subsequently determined to not be his income.

Question 3

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

Accepted Answer

Generally,a C corporation,unlike an S corporation,can adopt a tax year independent of the tax year of its shareholders.

Question 4

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

Accepted Answer

According to IRS rules, if a partnership does not have a specific tax year, the tax year of the partnership is determined by the tax year of the principal partner with the highest ownership percentage.

Question 5

Snow Corporation began business on May 1,2014,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 30,2014.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2014 returns.

Accepted Answer

The purpose of annualizing income is to prevent the taxpayer from taking undue advantage of the progressive tax rate schedule.Annualization is not required in the corporation's first tax year,nor for its final tax year.

Question 6

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

The C corporation is providing services,and inventories are not an income producing factor.Furthermore,the corporation's average annual gross receipts are less than $5 million.Therefore,the corporation can use the cash method.

Question 7

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

Although inventories are an income­producing factor for the business,the fact that the corporation's average annual gross receipts are less than $1 million results in the corporation being permitted to use the cash method.

Question 8

In 2004,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2014,he received a salary of $190,000.During the period from October 1,2014 to December 31,2014,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 30,2015,is limited to $240,000.

Accepted Answer

The personal service corporation's deduction is limited to $240,000 [$60,000 + $60,000(12 - 3)/3].

Question 9

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

Generally,the partnership must conform its tax year to agree with that of the majority interest partners;that is,partners with a greater than 50% interest in the partnership who have the same tax year-end.For the DEF partnership,Partners D and E are the majority interest partners.However,the partner without the majority interest (Partner F)is not required to change his tax year.

Question 10

Franklin Company began business in 2010 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2010 through 2014.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2015.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2015 and the three following years.

Accepted Answer

The net positive adjustment from a change initiated by the IRS must be included in the income for the year of the change.

Question 11

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

Accepted Answer

Such an accrual would violate both the all-events and economic performance requirements unless a claim for refund has been received.

Question 12

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

With a year ending September 30th,the aggregate deferral months will be 1.5 (3 × .50).That is,Green Corporation will defer for three months its share of partnership income.With a calendar year,the aggregate deferral months will be 4.5 (9 × .50).Red Corporation will defer for 9 months its share of partnership income.

Question 13

Laura Corporation changed its tax year-end from July 31st to December 31st in 2014.The income for the period August 1,2014 through December 31,2014 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 2014 income will be taxed at 34%.

Accepted Answer

The income for the period August 1, 2014 through December 31, 2014 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, 2014 through December 31, 2014 is less than $50,000, none of the income will be taxed at 34%.

Question 14

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

Accepted Answer

The corporation in this case is a "personal service corporation" and must use a calendar year ending unless the corporation has a business purpose for using a different year ending.

Question 15

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 accrual method,income must be recognized when the taxpayer has the right to receive the income,whether or not the income has actually been received.

Question 16

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 IRS acknowledges only the need to conform the tax year to the natural business year.The CPA's work schedule is not considered relevant.

Question 17

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

Although a PSC usually is required to use a calendar year to report its income,an exception applies to seasonal businesses,such as in this case.This exception permits the corporation to adopt a natural business year.Here the natural business year appears to end in April.

Question 18

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 2014 until he files his tax return for his year ending June 30,2015.

Accepted Answer

The partner reports his income for the partnership tax year that ends with or within his tax year ending June 30,2015.Thus,when Partner A files his tax return for his year ending June 30,2015,he must report his share of the partnership income for the calendar year 2014.

Question 19

In 2014,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 1,2014 through December 31,2014.The annualized income for the short year is $90,000.

Accepted Answer

The annualized income will be $90,000 [(12 months/8 months)× $60,000].

Question 20

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 can have either a fiscal year or a calendar year as its tax year.

Quiz 18: Accounting Periods and Methods