Question 1

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 2

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

Accepted Answer

According to the IRS, if there is more than one principal partner, the partnership must use the tax year of the partner with the largest interest in the partnership's income and loss.

Question 3

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

Due to the change in tax year, the corporation will have a short tax period for 2012 which will be annualized to calculate the tax liability. This will result in a higher tax rate since the income earned in the short period will be annualized to represent a full year's income. Therefore, 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.

Question 4

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 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 choose to use a calendar year as it is the most common tax year for partnerships. Partner F may continue to use their tax year ending June 30th as long as they notify the IRS and other partners of their intention to do so and properly allocate income and expenses between the two tax years.

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 because if one of the partners has a tax year that ends on a date other than December 31, the partnership must use that partner's tax year as its own tax year. In this case, Red Corporation's tax year ends on September 30th, so the partnership must use that as its tax year, unless there is a valid business purpose for choosing a different tax year.

Question 7

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 assume that a customer will request a refund and deduct that amount from their sales without actually receiving a claim for refund from the customer. This is a common practice to ensure fairness and accuracy in accounting.

Question 8

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 9

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 a calendar year unless they meet specific criteria to use a fiscal year. The convenience of the CPA does not qualify as a valid reason to use a fiscal year.

Question 10

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 in cash. This means that income is not taxed until it is collected, which can provide a timing advantage for the taxpayer. In contrast, the accrual method of accounting recognizes income when it is earned, even if it has not yet been received. This can result in a higher tax liability in the current period, even if the taxpayer has not yet collected the income.

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

Question 12

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

Partner A's tax year end is different from Partners B and C, thus allowing Partner A to defer their share of partnership income earned from July through December 2012 until their tax return for their year ending June 30, 2013.

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

Since Ted is a cash basis taxpayer, the refund of $40,000 is deductible in the year it is paid. Therefore, in 2013 when Ted is in the 28% marginal tax bracket, he can reduce his tax liability by $14,000 (0.35 x $40,000).

Question 14

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 15

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 $1 million or less for the three preceding tax years are generally allowed to use the cash method of accounting for both income and expenses. This includes income from both retail sales and rental income, unless the corporation has previously elected to use the accrual method.

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 both Snow Corporation and Brown Corporation used the calendar year for tax purposes and Brown Corporation sold all its assets and liquidated before the start of Snow Corporation's business on May 1, 2012, there is no need to annualize their income for the 2012 tax returns.

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

The information provided does not prohibit the use of a fiscal year ending April 30th for the PSC. Therefore, it is possible for the PSC to use this fiscal year.

Question 18

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 its own tax year, regardless of the tax year of its shareholders.

Question 19

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 Corporation changed its tax year-end, the June-July 2012 income will be taxed separately under the old tax year, and the August-December 2012 income will be taxed under the new tax year. As the income from August-December 2012 was $35,000, which falls in the $0 to $50,000 bracket, it will be taxed at 15%. However, the question mentions that "a portion" of June-December 2012 income will be taxed at 34%, which implies that some portion of the income from June-July 2012 may have fallen in the $75,001 to $100,000 bracket and will be taxed at 34%. Therefore, the statement is true.

Question 20

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 $25 million or less for the past three taxable years is eligible to 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.

Quiz 18: Accounting Periods and Methods