Question 1

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

Accepted Answer

According to IRS rules, if one of the principal partners has a different tax year than the partnership, the partnership may be required to use the tax year of that partner. This is to ensure that the partner's share of the partnership's income is reported consistently with their personal tax return. However, there are certain limitations and requirements that must be met before the partnership can use the partner's tax year.

Question 2

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

False

Question 3

A calendar year,cash basis corporation began business on April 1,2017,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2017,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 2017.

Accepted Answer

A cash basis taxpayer can only deduct expenses in the year they are paid if they apply to that year. Since the insurance policy covers 24 months, the cash basis taxpayer must allocate the expense over the period it covers, not deduct it all in 2017.

Question 4

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

With the cash method of accounting, income is only recognized when received, which can result in lower tax liabilities for the taxpayer. In contrast, with the accrual method, income is recognized when earned, regardless of whether it has been collected yet, which can result in higher tax liabilities.

Question 5

Ted,a cash basis taxpayer,received a $150,000 bonus in 2017 when he was in the 35% marginal tax bracket.In 2018,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 2018 tax liability by $14,000 (.35 × $40,000).

Accepted Answer

This is because Ted is able to receive a tax benefit from the refund of $14,000, given that he was in a higher tax bracket in the year that he received the bonus. This is an example of tax planning and taking advantage of tax laws to minimize tax liability.

Question 6

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, and partner F may continue to use their tax year ending on June 30th, as long as the partnership and partner F consistently use the same tax year. This is allowed under the tax code regulations.

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

An S corporation with annual gross receipts of less than $1 million may report its retail store sales and rental income using the cash method, unless they previously elected the accrual method.

Question 8

Snow Corporation began business on May 1,2017,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 30,2017.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2017 returns.

Accepted Answer

Snow Corporation began business after Brown Corporation liquidated, so there is no need for either corporation to annualize their income for their 2017 returns.

Question 9

Laura Corporation changed its tax year-end from July 31st to December 31st in 2017.The income for the period August 1,2017 through December 31,2017 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 2017 income will be taxed at 34%.

Accepted Answer

Since Laura Corporation changed its tax year-end from July 31st to December 31st in 2017, the income for the period August 1, 2017, through December 31, 2017, will be taxed according to the new tax rates. As per the given information, the income for this period was $35,000, which falls under the income range of $75,001 to $100,000, and therefore, a portion of it will be taxed at 34%.

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 CPA practice is a PSC does not affect its ability to use a fiscal year ending April 30th. Additionally, the information provided suggests that the business earns a significant portion of its revenues in March and April, which may be relevant to its tax planning and financial management.

Question 11

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

C corporations with average annual gross receipts of $25 million or less for the preceding three tax years are allowed to use the cash method of accounting. As the given corporation's annual gross receipts are $3,500,000, it is eligible to use the cash method of accounting.

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 2017 until he files his tax return for his year ending June 30,2018.

Accepted Answer

This statement is true. A partner with a tax year ending other than December 31st may defer their share of partnership income earned in the last six months of the partnership's tax year until their own tax return deadline for the year ending within the partnership's tax year. In this case, Partner A's tax year ends on June 30th, so they would be allowed to defer their share of income earned from July through December 2017 until they file their tax return for the year ending June 30, 2018.

Question 13

In 2017,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 1,2017 through December 31,2017.The annualized income for the short year is $90,000.

Accepted Answer

This is true because the annualized income is calculated by taking the actual income earned during the short tax year and multiplying by 12/8 (the number of months in a full year divided by the number of months in the short year). Therefore, the annualized income is $90,000 ($60,000 x 12/8).

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

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 without a natural business year can choose a fiscal year as its tax year instead of a calendar year, as long as it satisfies IRS requirements.

Question 16

Franklin Company began business in 2013 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2013 through 2017.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2018.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2018 and the three following years.

Accepted Answer

The answer of Franklin Company began business in 2013 and...

Question 17

In 2007,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2017,he received a salary of $190,000.During the period from October 1,2017 to December 31,2017,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 30,2018,is limited to $240,000.

Accepted Answer

The deduction for the corporation's salary is limited to $240,000 for the fiscal year ending September 30,2018, which includes the salary paid to the doctor from October 1,2017 to September 30,2018. Therefore, the corporation can deduct the $240,000 paid to the doctor during the 9 months following October 1, 2017, but cannot deduct the $60,000 paid during the period from October 1, 2017 to December 31, 2017, as it falls outside the scope of the fiscal year ending September 30, 2018. The doctor's salary received during the fiscal year ending September 30,2017 is not relevant for determining the corporation's deduction for the following 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

The tax year of a C corporation is generally independent of the tax year of its principal shareholders. Each C corporation must adopt a tax year and report its income and expenses on that tax year's return. Shareholders report their share of the corporation's income on their own tax returns using the information provided by the corporation's return.

Question 19

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 under the principle of "matching" in accounting, which requires that a deduction for a refund be made only in the same period that the sale was made and the revenue was recognized. Therefore, a claim for refund must actually be received by the retailer before the deduction can be made.

Question 20

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

If the partnership uses a calendar year tax year, both Red and Green Corporations will have the same tax year, allowing them to defer income to the following year if necessary. If they use Red Corporation's tax year, any income earned after September 30th by Red Corporation would be taxed immediately, while Green Corporation would have to wait until their following calendar year to be taxed on their share of the income. This would result in a less efficient deferral of income.

Quiz 16: Accounting Periods and Methods