Question 1

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 can choose to adopt a calendar year and Partner F can use a tax year ending on June 30th, as long as the partnership agreement allows for it.

Question 2

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 of less than $1 million are generally allowed to use the cash method of accounting, and Alice's rental income and retail sales are both eligible to be reported using the cash method unless Alice has previously elected to use the accrual method.

Question 3

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

Accepted Answer

The tax year for a C corporation can be chosen independently of the tax year of its shareholders. However, if the corporation has a majority shareholder who owns more than 50% of the shares, the IRS may require the corporation to use the same tax year as the majority shareholder.

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.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 regulations. When partners have different tax years, the partnership must use the tax year of the partner with the earliest year-end, unless a valid business purpose exists for using a different tax year.

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, and the doctor received a total salary of $250,000 during that fiscal year. Therefore, the deduction is limited to $200,000, and the remaining $50,000 is not deductible.

Question 6

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 because a deduction for a refund cannot be made until the retailer has verified the customer's claim and approved the refund.

Question 7

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 business...

Question 8

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

Partnerships are required to use the calendar year unless they meet certain exceptions, such as having a business purpose for a fiscal year or having a majority of partners that use a fiscal year. The CPA's workload is not a valid reason to use a different tax year.

Question 9

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 both corporations are using the calendar year for tax purposes and Brown Corporation sold and liquidated before May 1, 2012 (the start of Snow Corporation's business), neither corporation needs to annualize their income for their 2012 returns.

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 fact that the practice earns 40% of its annual revenues in March and April does not affect its ability to use a fiscal year ending on April 30th, regardless of whether it is a PSC or not.

Question 11

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 because Partner A's tax year ends on June 30th, which means he can defer the partnership income earned from July through December until he files his tax return for his year ending June 30, 2013. Partners B and C will report their share of the partnership income on their individual tax returns using the calendar year.

Question 12

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 13

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 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, a C corporation with average annual gross receipts of $3,500,000 or less for the past three years may use the cash method of accounting. Therefore, this corporation may use the cash method of accounting.

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

Since Ted is a cash basis taxpayer, he only reports income in the year it was received (2012), and only deducts expenses in the year they were paid. Therefore, the refund received in 2013 can be applied as a deduction against the income earned in 2012, reducing his tax liability for that year (when he was in the higher tax bracket). The calculation of the reduction in his 2013 tax liability is also correct.

Question 16

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

Since Laura's income for the period August 1,2012 through December 31,2012 was $35,000 and the corporate tax rate is 15% on the first $50,000 of income, all of the income falls in the 15% tax bracket. Therefore, the statement that a portion of Laura's June - December 2012 income will be taxed at 34% is false.

Question 17

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, which means it is not taxed until the taxpayer has the actual funds in their possession. This is different from the accrual method, where income is recognized as soon as it is earned or the right to receive it is obtained, even if payment has not been received yet.

Question 18

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

When tax rates are progressive, the tax on a smaller amount of income earned over a shorter period will be greater than the tax on the same amount of income earned over a longer period. Therefore, the tax on the annualized income for the short period (October 1, 2012 through December 31, 2012) will be greater than the tax on $25,000 when the tax rates are progressive.

Question 19

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

Accepted Answer

The Internal Revenue Service (IRS) rules state that each partner who owns at least 5% of the partnership is considered a principal partner, and their tax year must be taken into consideration when determining the partnership's tax year. Therefore, there may be more than one principal partner.

Question 20

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...

Quiz 18: Accounting Periods and Methods