Deck 18: Accounting Periods and Methods

Question 1

A C corporation that does not have a natural business year must use a calendar year as its tax year.

Answer 1

False

Question 2

Ted,a cash basis taxpayer,received a $150,000 bonus in 2016 when he was in the 35% marginal tax bracket.In 2017,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 2017 tax liability by $14,000 (.35 × $40,000).

Answer 2

True

Question 3

Snow Corporation began business on May 1,2016,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 30,2016.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2016 returns.

Answer 3

True

Question 4

In 2016,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 1,2016 through December 31,2016.The annualized income for the short year is $90,000.

Question 5

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.

Question 6

Franklin Company began business in 2012 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2012 through 2016.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2017.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2017 and the three following years.

Question 7

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.

Question 8

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.

Question 9

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

Question 10

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

Question 11

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.

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 2016 until he files his tax return for his year ending June 30,2017.

Question 13

In 2006,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2016,he received a salary of $190,000.During the period from October 1,2016 to December 31,2016,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 30,2017,is limited to $240,000.

Question 14

A calendar year,cash basis corporation began business on April 1,2016,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2016,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 2016.

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.

Question 16

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.

Question 17

The ability of the CPA to timely prepare a tax return is a justification for the partnership's use of a particular tax year.

Question 18

Laura Corporation changed its tax year-end from July 31st to December 31st in 2016.The income for the period August 1,2016 through December 31,2016 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 2016 income will be taxed at 34%.

Question 19

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

Question 20

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

Question 21

Blue Mart operates a large chain of retail stores.The company has four warehouses that are located in various parts of the country.The cost of operating the warehouses can be expensed immediately because it is a cost that is incurred even though the goods were not sold during the year.

Question 22

When an accrual basis taxpayer finances the construction of its building by borrowing,the interest is added to the cost of the building.

Question 23

If a company uses the LIFO inventory method to report the cost of inventory and cost of goods sold on its financial statements,footnote disclosure of the income as calculated by the FIFO method does not violate the tax and financial accounting conformity requirement.

Question 24

Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2016.Gold and Silver use a calendar tax year,and Platinum's tax year ends June 30th.GSP is not a seasonal business.

A)GSP must use a tax year ending December 31st,and Platinum can retain its tax year ending June 30th.
B)GSP must use a tax year ending June 30th,and the partners must change their tax years to end on June 30th.
C)GSP must use a tax year ending December 31st and Platinum must change its tax year to December 31st.
D)GSP may elect its tax year without regard to the partners' tax years.
E)None of the above.

Question 25

If an installment sale contract does not charge interest on the sale of a capital asset,only capital gain will be recognized over the life of the contract.

Question 26

The LIFO method is beneficial only when prices are rising and the taxpayer is increasing the quantities of inventory items on hand.

Question 27

A C corporation is required to annualize its income:

A)The first year the corporation is in existence,if the first tax return includes less than 12 months.
B)The last year the corporation is in existence.
C)The year the corporation changes its tax year.
D)When there has been a greater than 50% change in the ownership of the stock.
E)All of the above.

Question 28

Which of the following statements regarding a 52-53 week tax year is correct?

A)The year-end must be the same day of the week in all years.
B)The year cannot contain more than 366 calendar days.
C)Every four years,there will be only 51 weeks.
D)The year cannot end on a Sunday.
E)None of the above.

Question 29

Teal,Inc. ,used the lower of cost or market to value inventory in 2016.The ending inventory at cost was $400,000 and the ending inventory at market was $385,000.In 2017,Teal changed to the LIFO method.The company's beginning LIFO inventory is $400,000.

Question 30

In the case of a sale reported under the installment method,gain is recognized in each year the seller collects on the installment contract.

Question 31

Sandstone,Inc. ,has consistently included some factory overhead as a current expense,rather than as a cost of producing goods.As a result,the beginning inventory for 2016 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1,2016,the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2016,2017,2018,and 2019.

Question 32

In regard to choosing a tax year for a business owned by individuals,which form of business provides the greater number of options in regard to the tax year?

A)A C corporation formed by medical doctors to conduct their practice.
B)A C corporation that is in the retail grocery business.
C)A real estate partnership.
D)An S corporation engaged in manufacturing.
E)All of the above have the same options.

Question 33

A cash basis taxpayer sold investment land in 2016 for $200,000.He received $40,000 in the year of sale and $160,000 in 2017.The cost of the land was $80,000.Under the installment method,the taxpayer would report a $24,000 gain in 2016.

Question 34

The lower of cost or market can be used in conjunction with both the FIFO and LIFO method.

Question 35

Which of the following statements regarding a 52-53 week tax year is not correct?

A)Some tax years will include more than 366 calendar days.
B)Whether the particular tax year includes 52 weeks or 53 weeks is not elective.
C)The year-end must be the same day of the week in all years.
D)All of the above are correct.
E)None of the above is correct.

Question 36

For a taxpayer who is required to use the percentage of completion method,the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 10 percent of the estimated contract costs.

Question 37

In applying the lower of cost or market for tax purposes,the market price is the replacement cost of the goods,rather than their expected selling price.

Question 38

Gold Corporation,Silver Corporation,and Copper Corporation are equal partners in the GSC Partnership.The partners' tax year-ends are as follows:
Gold
December 31st
Silver
April 30th
Copper
September 30th

A)The partnership is free to elect any tax year.
B)The partnership may use any of the 3 year-end dates that its partners use.
C)The partnership must use a September 30th year-end.
D)The partnership must use a April 30th year-end.
E)None of the above.

Question 39

The taxpayer does need the IRS's permission to change from the FIFO inventory method to the LIFO method.

Question 40

In 2016,Cashmere Construction Company enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000.Cashmere estimates the total cost to complete the cottage to be $400,000.In 2016,Cashmere incurred $300,000 of costs on the contract,and in 2017 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2017.

Question 41

The taxpayer had incorrectly been using the cash method of accounting.For 2016,the company voluntarily changed to the accrual method.The adjustment due to the change in method as calculated at the beginning of 2016 was $120,000 (positive).The adjustment as calculated as of the end of 2016 was $80,000 (positive).As a result of the change in method,the company must:

A)Increase its income for 2016 by $120,000.
B)Increase its income for 2016 by $80,000.
C)Increase its income for 2016 by $30,000.
D)Increase its income for 2016 by $40,000.
E)None of the above.

Question 42

The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business.The taxpayer decided to voluntarily change to the accrual method of accounting.The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories,$30,000 for accounts receivable,and $12,000 for accounts payable.The adjustment due to the change in accounting method is:

A)A positive adjustment for $102,000.
B)A positive adjustment for $90,000.
C)A positive adjustment for $78,000.
D)A positive adjustment for $60,000.
E)None of the above.

Question 43

Which of the following must use the accrual method of accounting?
I)
A property management company,operating as a C corporation,with average annual gross receipts of $50 million.
II)
An incorporated law firm with average annual gross receipts of $6 million.
III)
An unincorporated grocery store with average annual gross receipts of $1,200,000.

A)All of the above must use the accrual method.
B)None of the above must use the accrual method.
C)Only I and II must use the accrual method.
D)Only I and III must use the accrual method.
E)Only III must use the accrual method.

Question 44

In the case of an accrual basis taxpayer,an item of income:

A)Is not recognized until cash is received.
B)From services is never recognized until the services are performed.
C)Is not recognized if the customer can return the goods.
D)Is recognized when all the events have occurred to fix the taxpayer's right to receive the income and the amount of the income can be determined with reasonable accuracy.
E)None of the above.

Question 45

Purple Corporation,a personal service corporation (PSC),adopted a fiscal year ending September 30th.The sole shareholder of the corporation is a calendar year taxpayer.During the fiscal year ending September 30,2016,the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1,2016 through December 31,2016.

A)The corporation salary expense for the fiscal year ending September 30,2017 is limited to $120,000.
B)The corporation salary expense for the fiscal year ending September 30,2017 is limited to $135,000.
C)The corporation salary expense for the fiscal year ending September 30,2017 is limited to $60,000.
D)The corporation must switch to a calendar year.
E)None of the above.

Question 46

In 2016,Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses.The total amount of the expense for 2015 was $300,000,$60,000 of the item was included in the ending inventory that year and $240,000 was deducted as cost of goods sold.

A)The company should amend its 2015 tax return and reduce its income by $240,000.
B)The company should change its accounting method in 2016,with a $60,000 negative § 481 adjustment which decreases its 2016 taxable income.
C)The company should change its accounting method in 2016,and increase its 2016 income by $60,000,the amount of the positive § 481 adjustment to income.
D)The company should change its accounting method in 2016 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2016-19.
E)None of the above.

Question 47

Generally,deductions for additions to reserves for estimated future costs (e.g. ,an allowance for estimated warranty costs)are not allowed for Federal income tax purposes because allowing the deduction would:

A)Result in a mismatching of revenues and expenses.
B)Violate established public policy.
C)Violate the all events test and economic performance requirement.
D)Violate the tax benefit rule.
E)None of the above.

Question 48

Which of the following taxpayers is required to use the accrual method of accounting?

A)A retail business with average annual gross receipts of $800,000.
B)A medical doctor with average annual gross receipts of $2 million.
C)An insurance agency with average annual gross receipts of $2 million.
D)All of the above are required to use the accrual method.
E)None of the above is required to use the accrual method.

Question 49

The accrual method generally is required for the following types of businesses:

A)A real estate management company,operating as an S corporation,with over $10 million of gross receipts.
B)An incorporated public accounting firm with gross receipts in excess of $5 million.
C)A partnership that has a partner that is an S corporation.
D)A grocery store with average annual gross receipts of $800,000.
E)None of the above.

Question 50

Which of the following statements regarding the matching principle is correct?

A)Tax accounting strictly follows the matching principle.
B)The matching principle of financial accounting is an important component of the cash method of accounting.
C)The matching principle of financial accounting is sometimes relevant to timing deductions for an accrual basis taxpayer's recurring items.
D)The matching principle has no relevance to tax accounting.
E)None of the above.

Question 51

Color,Inc. ,is an accrual basis taxpayer.In December 2016,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2017.Also,in December 2016,the company received a bill of $800 for office supplies that had been purchased and used in November 2016.The bill was not paid until January 2017.In January 2017,the company received a claim for $600 for defective merchandise purchased in 2016.Color paid the customer the $600 in February 2016.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2016 as a result of the above are:

A)$500.
B)$600.
C)$800.
D)$1,300.
E)$1,900.

Question 52

Karen,an accrual basis taxpayer,sold goods in December 2016 for $20,000.The customer was unable to pay cash.So the customer gave Karen a note for $20,000 that was payable in April 2017.The note bore interest at the Federal rate.The fair market value of the note at the end of 2016 was $18,000.Karen collected $20,500 from the customer in April 2017,$20,000 principal plus $500 interest.Under the accrual method,Karen must recognize income of:

A)$20,500 in 2017.
B)$18,000 in 2016 and $2,500 in 2017.
C)$20,000 in 2016 and $500 in 2017.
D)$20,500 in 2017.
E)None of the above.

Question 53

The taxpayer has consistently,but incorrectly,used an allowance for bad debts.At the beginning of the year,the balance in the allowance account is $90,000.

A)If the IRS examines the taxpayer's return and requires the taxpayer to change accounting methods,the taxpayer will be required to recognize an additional $90,000 of income (one-half in the current year and one-half in the following year)as the adjustment due to the change in accounting methods.
B)If the taxpayer voluntarily changes methods,the $90,000 adjustment can be spread over the current and three following years.
C)If the taxpayer voluntarily changes methods,the $90,000 reserve can be used to absorb bad debts until the account balance is zero.
D)If the IRS examines the taxpayer's return,no adjustment to the reserve account will be required if the balance is consistent with prior bad debt experience.
E)None of the above.

Question 54

In 2016,Godfrey received a $50,000 sales commission on a long-term contract.But in 2017,the customer filed bankruptcy and Godfrey's employer was not able to collect from the customer.Under the bonus agreement,Godfrey was required to repay the employer $20,000 of the bonus.Godfrey was in the 35% marginal tax bracket in 2016 but he is in the 25% marginal tax bracket in 2017.

A)Godfrey can amend his 2016 tax return and reduce his taxable income by $20,000.
B)Godfrey should deduct the $20,000 paid in 2017 and thus his tax savings will be $5,000.
C)Godfrey can reduce his 2017 tax liability by 35% × $20,000 = $7,000.
D)Godfrey should not have reported the income in 2016 because of the contingencies.
E)None of the above.

Question 55

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2016,the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2016,the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2016 state income tax was paid in April 2017.In June 2016,the corporation paid $9,000 on its year 2015 state income tax liability,as a result of an audit of the 2015 return that was conducted in 2016.The company has elected to use the recurring item exception to economic performance.As a result of the above,the corporation should deduct in 2016 on its Federal income tax return state income taxes of:

A)$24,000.
B)$30,000.
C)$33,000.
D)$39,000.
E)None of the above.

Question 56

The accrual basis taxpayer sold land for $100,000 on December 31,2016.He did not collect the $100,000 until January 2,2017.The land was held as an investment.

A)If the accrual basis taxpayer's basis in the land was $110,000,the loss would be recognized in 2017.
B)If the accrual basis taxpayer's basis in the land was $60,000,the gain must be reported in 2016.
C)If the accrual basis taxpayer's basis in the land was $60,000,the gain must be reported in 2017,unless the taxpayer elects to not use the installment method.
D)The accrual basis taxpayer must recognize the gain or loss in the year of sale.
E)None of the above.

Question 57

Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2016,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2016 sales and $50,000 in refunds from 2015 sales.All of the refunds from 2015 sales were for claims filed in 2015 and were paid in January and February 2016.At the end of 2016,the company had $12,000 in refund claims for sales in 2016 for which payment had been approved.These claims were paid in January 2016.Also in January 2016,the company received an additional $30,000 in claims for sales in 2016.This $30,000 was paid by Gray in February 2017.With respect to the above,Gray can deduct:

A)$350,000 in 2016.
B)$362,000 in 2016.
C)$392,000 in 2015.
D)$442,000 in 2016.
E)None of the above.

Question 58

The installment method can be used for which of the following sales with payments being made in the year following the year of sale?

A)A department store's credit card sales.
B)An individual's sale of common stock in a family owned business.
C)An individual's sale of General Electric common.
D)Depreciable equipment sold for less than its original cost.
E)All of the above.

Question 59

Andrew owns 100% of the stock of Crow's Farm Inc. ,an S corporation,that raises cattle and corn.The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.

A)The farm must report its sales and cost of goods sold by the accrual method because inventories are material to the business.
B)The income from the farm may be reported by the cash method.
C)The income from the sales of cattle may be reported by the cash method,but the income from the sales of corn must be reported by the accrual method.
D)The income from the sales of corn may be reported by the cash method,but the income from cattle sales must be reported by the accrual method.
E)None of the above.

Question 60

Ivory Fast Delivery Company,an accrual basis taxpayer,frequently has claims for damages to property the company delivered.Often the claim is not filed until a month after the delivery.In the past,approximately 80% of the claims are paid by Ivory.In 2016,claims for $80,000 were filed.The company refused to pay $20,000 of the claims (because they were not valid),and paid $50,000.The remaining $10,000 in claims were processed and paid in January 2017.Also,in January 2017,claims for $8,000 were filed for deliveries made in 2016,and $6,000 was paid on these claims by March 15,2017.Ivory has not elected to use the recurring item exception to economic performance.Under the all-events and economic performance tests,Ivory can accrue as an expense for 2016:

A)$68,000.
B)$66,000.
C)$60,000.
D)$50,000.
E)None of the above.

Question 61

Wendy sold property on the installment basis in 2014 for more than her basis in the property.Wendy was to receive installment payments at the end of each year for the next five years.In 2016,Wendy was killed in a car accident and the note was transferred to her estate.

A)The estate must recognize the gain from all the amounts collected on the installment obligation in 2016.
B)The income will be reported on Wendy's 2016 income tax return as income in respect of a decedent.
C)The entire gain must be recognized in 2014.
D)Gain is recognized by Wendy and reported on her 2016 income tax return when the note is transferred into the estate.
E)None of the above.

Question 62

In 2016,Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2020.Father's basis was $100,000.In 2017,after paying $8,000 interest but nothing on the principal,Son sold the land for $300,000 cash.What gain,if any,must Father recognize in 2017?

A)$0
B)$75,000
C)$100,000
D)$200,000
E)None of the above

Question 63

Todd,a CPA,sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.

A)If Todd uses the cash basis to report the income from his practice,he cannot use the installment method to report the gain on the sale of the land.
B)If Todd uses the accrual basis to report the income from his practice,he cannot use the installment method to report the gain from the sale of the land.
C)If Todd uses the installment method to report the gain,the contract price is $800,000.
D)If Todd does not use the installment method,his gain in the year of sale is $620,000 ($700,000 - $80,000).
E)None of the above.

Question 64

Charlotte sold her unincorporated business for $600,000 in 2016.The sales contract allocated $120,000 to equipment,$300,000 to land,and $180,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $150,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?

A)$0
B)$330,000
C)$450,000
D)$600,000
E)None of the above

Question 65

Abby sold her unincorporated business which consisted of equipment and goodwill.The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000).Abby had no basis in the goodwill.The sales price for the business was $250,000,with $150,000 for the equipment and $100,000 for the goodwill.The buyer agreed to pay $120,000 on June 30,2016,and $130,000 (plus interest at the Federal rate)in two years.Abby's gain to be reported in 2016 (exclusive of interest)is:

A)$40,000.
B)$51,000.
C)$102,000.
D)$118,000.
E)$170,000.

Question 66

Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

A)Interest will be imputed,thus increasing the total gross income from the transactions.
B)Interest will be imputed,thus decreasing the capital gain.
C)Interest will not be imputed because the contract is for less than five years.
D)Interest will be imputed,thus increasing the buyer's basis in the asset.
E)None of the above.

Question 67

Walter sold land (a capital asset)to an unrelated party for $100,000 cash and a 4% note for $150,000 due in three years.His basis in the land was $40,000.Walter and the purchaser are cash basis taxpayers.Which of the following statements is correct?

A)If the Federal rate is 3%,interest will be imputed at that rate.
B)If the Federal rate is 5%,interest will be imputed at that rate and the capital gain will be reduced.
C)If the Federal rate is 4.5%,interest will be imputed at that rate and the capital gain will be increased.
D)All of the above.
E)None of the above.

Question 68

Which of the following statements is true concerning the disposition of an installment note?

A)Deferred gain is not recognized by the transferor if the installment note is a non-taxable transfer to a controlled corporation.
B)Deferred gain must only be recognized if the installment note was transferred as a gift to a related party.
C)Transfer of an installment obligation to another party will not trigger immediate recognition of deferred gain.
D)Deferred gain must be recognized if the note is transferred to the owner's estate at his death.
E)None of the above.

Question 69

Robin Construction Company began a long-term contract in 2016.The contract price was $800,000.The estimated cost of the contract at the time it was begun was $500,000.The actual cost incurred in 2016 was $350,000.The contract was completed in 2017 and the cost incurred that year was $125,000.Under the percentage of completion method:

A)Robin should report $300,000 of income in 2016.
B)Robin should report $90,000 of income in 2017.
C)Robin will receive interest (under the lookback method)on the underpayment of taxes in 2016.
D)Robin should report $325,000 of income in 2016.
E)None of the above is correct.

Question 70

Juan,not a dealer in real property,sold land that he owned.His adjusted basis in the land was $700,000 and it was encumbered by a mortgage for $100,000.The terms of the sale required the buyer to pay Juan $200,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $900,000 (plus interest at the Federal rate)due in the following year.What is the gross profit percentage (gain ÷ contract price)?

A)$700/$1,100 = 63.64%.
B)$500/$1,200 = 41.67%.
C)$700/$1,200 = 58.33%.
D)$500/$1,100 = 45.45%.
E)None of the above.

Question 71

The installment method applies where a payment will be received after the tax year of the sale:

A)By an investor who sold real estate at a gain.
B)By an investor who sold real estate at a loss.
C)By an appliance dealer who sold inventory at a gain.
D)By an investor who sold IBM Corporation common stock at a gain.
E)None of the above.

Question 72

Kathy was a shareholder in Matrix,Inc. ,when she sold the corporation a commercial building.The building cost $500,000 and the balance in the accumulated depreciation account was $400,000.Matrix,Inc. ,paid $100,000 in the year of sale and gave Kathy a note for $400,000 plus adequate interest due in 2018.

A)Because Kathy is a shareholder in Matrix,she cannot report the gain by the installment method.
B)Generally,if Kathy owned 100% of the Matrix stock,Kathy cannot use the installment method.
C)Generally,if Kathy owned only 60% rather than 100% of the Matrix stock,she could use the installment method.
D)Kathy cannot use the installment method to report the gain because the realized gain is equal to the depreciation she claimed on the building.
E)None of the above.

Question 73

Pedro,not a dealer,sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2014.The terms of the sale required Pat to pay $28,000 cash,assume the $56,000 mortgage,and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate).The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2016 note as promised,what is the recognized gain to Pedro in 2016 (exclusive of interest)?

A)$12,000
B)$7,200
C)$4,800
D)$0
E)None of the above

Question 74

Father sold land to Son for $500,000 in 2016.Father's basis in the land was $100,000.Son paid Father $50,000 and gave Father a note for $450,000 due in 2019.In 2017,Son sold the land for $600,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

A)Father must recognize $400,000 of income in 2017.
B)The installment method is not permitted because this is a related-party transaction.
C)Father's gain is all ordinary income.
D)Father must recognize a $360,000 gain in 2017.
E)None of the above.

Question 75

Albert is in the 35% marginal tax bracket.He sold a building in the current year for $450,000.Albert received $110,000 cash at closing,the buyer assumed Albert's mortgage for $120,000,and the buyer gave Albert a 6% note for $220,000 due in two years.The Federal rate was 6%.Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straight-line depreciation).Assuming he did not elect out of the installment method,Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts?
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Section 1231 Gain Unrecaptured § 1250 Gain Taxed at 25%

A)$66,000 $0
B)$0 $66,000
C)$90,000 $90,000
D)$90,000 $0
E)$0 $110,000

Question 76

Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $10 million in the year of the sale and a note for $15 million,payable in three years with interest at the Federal rate.Gold's basis in the stock was $5 million.Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

A)The installment method is never permitted on the sale of stock.
B)If Ruby Corporation stock is traded on an established securities market,Gold must recognize a $20 million gain in the year of sale.
C)If the Ruby Corporation stock is not traded on a national exchange,Gold must recognize a $20 million gain.
D)All of the above are true.
E)None of the above is true.

Question 77

Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years.The note bore interest of 7% when the applicable Federal rate was 4%.Hal's cost of the land was $40,000.Because of the buyer's good credit record and the high interest rate on the note,Hal thought the fair market value of the note was at least $74,000.

A)Hal can elect to treat the $36,000 as a recovery of capital.
B)Hal must recognize $60,000 gain in the year of sale.
C)Hal must recognize $36,000 gain in the year of sale.
D)Unless Hal elects not to use the installment method,Hal must recognize $21,600 gain in the year of sale.
E)None of the above.

Question 78

In 2016,Beth sold equipment used in her business.Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation).Beth sold the property for $400,000,with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate)due in 2017.Beth's recognized gain from the installment sale in 2016 is:

A)$0.
B)$50,000.
C)$100,000.
D)$200,000.
E)None of the above.

Question 79

In 2016,Norma sold Zinc,Inc. ,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2017 with accrued interest at the Federal rate.Norma's basis in the stock was $250,000.This was Norma's only installment sale transaction.Which of the following statements is correct?

A)Norma cannot use the installment method to report her gain if the stock is listed on the New York Stock Exchange.
B)Norma must recognize $75,000 gain in 2016 and she will be liable for interest on taxes deferred under the installment method.
C)Norma must recognize $75,000 gain in 2016 and she will not be liable for interest on the taxes deferred under the installment method if the stock is not publicly traded.
D)Norma should treat the $100,000 received as a recovery of capital.
E)None of the above.

Question 80

Related-party installment sales include all of the following except the first seller's:

A)Brothers and sisters.
B)Controlled corporations.
C)Lineal descendants and ancestors.
D)Uncles and aunts.
E)All of the above would be considered related parties.