Deck 16: Accounting Periods and Methods

Question 1

An S corporation may select any tax year as long as it ends on the last day of a month.

Answer 1

False

Question 2

Red Corporation and Green Corporation are equal partners in the R & G Partnership. Red's tax year ends September
30th, and Green is a calendar year taxpayer. The greatest aggregate deferral of income would occur if the partnership used a calendar year for tax purposes.

Answer 2

True

Question 3

A C corporation provides lawn maintenance services to various businesses and homeowners. The corporation has average annual gross receipts of $7 million. The corporation may use the cash method of accounting.

Answer 3

True

Question 4

The tax year of a doctor's incorporated medical practice may end on the last day of any month of the year.

Question 5

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 2019 until filing the tax return for the year ending June 30,
2020.

Question 6

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

Question 7

Alice, Inc., is an S corporation that has been in business for 18 years. Its annual gross receipts have never exceeded
$25 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.

Question 8

A positive § 481 adjustment from a change in method of accounting initiated by the taxpayer is spread equally over the year of change and the three following years.

Question 9

In 2009, a medical doctor who incorporated her practice elected a fiscal year ending September 30th. During the fiscal year ended September 30, 2019, she received a salary of $190,000. During the period from October 1, 2019 to December 31, 2019, the corporation paid the doctor a total salary of $60,000, and paid her $240,000 of salary in the following nine months. The corporation's salary deduction for the fiscal year ending September 30, 2020, is limited to
$240,000.

Question 10

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 11

A calendar year, cash basis corporation began business on April 1, 2019, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2019, 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 2019.

Question 12

A retailer sells widgets with a 90-day warranty and uses the accrual method. The retailer may estimate its warranty expense and deduct it.

Question 13

Laura Corporation changed its tax year-end from July 31 to December 31 in 2019. The income for the period August
1, 2019 through December 31, 2019 was $35,000. The corporate tax rate in the state where the corporation performs all of its business is 5% on the first $50,000 of income and 7% on income above $50,000. Laura's state tax for the short period is $2,033.

Question 14

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

Question 15

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

Question 16

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 2019 is understated by $10,000. If Sandstone voluntarily changes accounting methods effective January 1, 2019, the positive adjustment to the inventory is a § 481 adjustment, and $2,500 must be added to taxable income for each year 2019, 2020, 2021, and 2022.

Question 17

In 2019, T Corporation changed its tax year from ending each April 30 to ending each December 31. The corporation earned $60,000 during the period May 1, 2019 through December 31, 2019. The annualized income for the short year is $90,000.

Question 18

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 19

Ted, a cash basis taxpayer, received a $150,000 bonus in 2019 when he was in the 35% marginal tax bracket. In 2020, when Ted was in the 24% 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 2020 tax liability by
$14,000 (.35 × $40,000).

Question 20

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

Question 21

Under both the cash and accrual methods of accounting for tax purposes, a taxpayer may elect to defer prepaid revenue.

Question 22

A cash basis taxpayer sold investment land in 2019 for $200,000. He received $40,000 in the year of sale and
$160,000 in 2020. The cost of the land was $80,000. Under the installment method, the taxpayer would report a
$24,000 gain in 2019.

Question 23

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 these.

Question 24

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

A) A real estate management company operating as an S corporation with more than $25 million of gross receipts.
B) An incorporated public accounting firm with gross receipts in excess of $25 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 these.

Question 25

In 2019, Godfrey received a $50,000 sales commission on a long-term contract. But in 2020, the customer filed for bankruptcy and his 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 2019 but he is in the 24% marginal tax bracket in 2020.

A) Godfrey can amend his 2019 tax return and reduce his taxable income by $20,000.
B) Godfrey should deduct the $20,000 paid in 2020 and thus his tax savings will be $4,800.
C) Godfrey can reduce his 2020 tax liability by 35% × $20,000 = $7,000.
D) Godfrey should not have reported the income in 2019 because of the contingencies.
E) None of these.

Question 26

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 27

Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2019. Gold and Silver use a calendar tax year, and Platinum's tax year ends June 30. GSP is not a seasonal business.

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

Question 28

When a taxpayer with average annual gross receipts in excess of $25 million finances the construction of its building by borrowing, the interest is added to the cost of the building.

Question 29

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 these.

Question 30

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 $23 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 these.

Question 31

In 2019, Cashmere Construction Company, a small business, 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
2019, Cashmere incurred $300,000 of costs on the contract, and in 2020 the contract was completed at a total cost of
$425,000. Cashmere is not required to recognize any income from the contract until 2020.

Question 32

A C corporation is required to annualize certain tax factors:

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 these.

Question 33

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

A) A retail business with average annual gross receipts of $8,000,000.
B) A medical doctor with average annual gross receipts of $2 million.
C) An insurance agency with average annual gross receipts of $5 million.
D) All of these are required to use the accrual method.
E) None of these is required to use the accrual method.

Question 34

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 these have the same options.

Question 35

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

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

Question 36

Karen, an accrual basis taxpayer, sold goods in December 2019 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 2020. The note bore interest at the Federal rate. The fair market value of the note at the end of 2019 was $18,000. Karen collected $20,500 from the customer in April 2020, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize income of:

A) $20,500 in 2020.
B) $18,000 in 2019 and $2,500 in 2020.
C) $20,000 in 2019 and $500 in 2020.
D) $20,500 in 2020.
E) None of these.

Question 37

Purple Corporation, a personal service corporation (PSC), adopted a fiscal year ending September 30. The sole shareholder of the corporation is a calendar year taxpayer. During the fiscal year ending September 30, 2019, the shareholder-employee received $120,000 salary. The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1, 2019 through December 31, 2019.

A) The corporation salary expense for the fiscal year ending September 30, 2020 is limited to $120,000.
B) The corporation salary expense for the fiscal year ending September 30, 2020 is limited to $135,000.
C) The corporation salary expense for the fiscal year ending September 30, 2020 is limited to $60,000.
D) The corporation must switch to a calendar year.
E) None of these.

Question 38

A taxpayer who is required to use the percentage of completion method 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% of the estimated contract costs.

Question 39

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 these are correct.
E) None of these is correct.

Question 40

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 41

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 these.

Question 42

The installment method applies when 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 these.

Question 43

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, he must recognize $21,600 gain in the year of sale.
E) None of these.

Question 44

The taxpayer had incorrectly been using the cash method of accounting. For 2019, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2019 was $120,000 (positive). The adjustment as calculated as of the end of 2019 was $80,000 (positive). As a result of the change in method, the company must:

A) Increase its income for 2019 by $120,000.
B) Increase its income for 2019 by $80,000.
C) Increase its income for 2019 by $30,000.
D) Increase its income for 2019 by $40,000.
E) None of these.

Question 45

The accrual basis taxpayer sold land for $100,000 on December 31, 2019. He did not collect the $100,000 until January 2, 2020. 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 2020.
B) If the accrual basis taxpayer's basis in the land was $60,000, the gain must be reported in 2019.
C) If the accrual basis taxpayer's basis in the land was $60,000, the gain must be reported in 2020, 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 these.

Question 46

Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase. In 2019, the company refunded $400,000 for claims involving sales. The $400,000 consisted of $350,000 in refunds from 2019 sales and $50,000 in refunds from 2018 sales. All of the refunds from 2018 sales were for claims filed in 2018 and were paid in January and February 2019. At the end of 2019, the company had $12,000 in refund claims for sales in 2019 for which payment had been approved. These claims were paid in January 2019. Also in January 2020, the company received an additional $30,000 in claims for sales in 2019. This $30,000 was paid by Gray in February 2020. With respect to the above, Gray can deduct:

A) $350,000 in 2019.
B) $362,000 in 2019.
C) $392,000 in 2018.
D) $442,000 in 2019.
E) None of these.

Question 47

Abby sold her unincorporated business that 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, 2019, and $130,000 (plus interest at the Federal rate) in two years. Abby's gain to be reported in 2019 (exclusive of interest) is:

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

Question 48

The taxpayer had consistently used the cash method of accounting even though inventories were a material income- producing factor to its business and average annual gross receipts in the prior three-year period exceeded $25 million. 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: $600,000 for inventories, $300,000 for accounts receivable, and $120,000 for accounts payable. The adjustment due to the change in accounting method is:

A) A positive adjustment for $1,020,000.
B) A positive adjustment for $900,000.
C) A positive adjustment for $780,000.
D) A positive adjustment for $600,000.
E) None of these.

Question 49

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 stock.
D) Depreciable equipment sold for less than its original cost.
E) All of these.

Question 50

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 these.

Question 51

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 2017. The terms of the sale required Pat to pay $28,000 cash, assume the $56,000 mortgage, and give Pedro 11 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 2019 note as promised, what is the recognized gain to Pedro in 2019 (exclusive of interest)?

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

Question 52

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 him 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 these.

Question 53

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, Ivory has paid approximately 80% of the claims. In 2019, 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 2020. Also, in January 2020, claims for $8,000 were filed for deliveries made in 2019, and $6,000 was paid on these claims by March 15, 2020. Ivory has not elected to use the recurring item exception to economic performance. Under the all-events and economic performance tests, Ivory can accrue which of the following as an expense for 2019:

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

Question 54

Color, Inc., is an accrual basis taxpayer. In December 2019, the company received from a customer a $500 claim for defective merchandise. Color paid the customer in January 2020. Also, in December 2019, the company received a bill of $800 for office supplies that had been purchased and used in November 2019. The bill was not paid until January 2020. In January 2020, the company received a claim for $600 for defective merchandise purchased in 2019. Color paid the customer the $600 in February 2020. Assuming that Color uses the recurring item exception to economic performance, the company's deductions for 2019 as a result of these facts are:

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

Question 55

In 2019, 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 2020. Beth's recognized gain from the installment sale in 2019 is:

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

Question 56

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 these.

Question 57

In 2019, 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 2018 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 2018 tax return and reduce its income by $240,000.
B) The company should change its accounting method in 2019, with a $60,000 negative § 481 adjustment which decreases its 2019 taxable income.
C) The company should change its accounting method in 2019, and increase its 2019 income by $60,000, the amount of the positive § 481 adjustment to income.
D) The company should change its accounting method in 2019 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2019-2022.
E) None of these.

Question 58

Charlotte sold her unincorporated business for $600,000 in 2019. 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 these

Question 59

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 these.

Question 60

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2019, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%. During 2019, the corporation paid $24,000 on its estimated state income tax liability for that year. The remaining $6,000 of 2019 state income tax was paid in April 2020. In June 2019, the corporation paid
$9,000 on its year 2018 state income tax liability as a result of an audit of the 2018 return that was conducted in 2019. The company has elected to use the recurring item exception to economic performance. As a result of these facts,
The corporation should deduct in 2019 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 these.

Question 61

Barbara operates a sporting goods store. She uses the cash method and treats inventory as nonincidental supplies. At the beginning of the year, she had inventory of $26,000. She purchased $470,000 of goods during the year. Her ending inventory was $42,000. She makes sure to pay all of her suppliers by the last day of her tax year. What is Barbara's inventory deduction for the year?

A) $428,000.
B) $454,000.
C) $470,000.
D) $538,000.
E) None of these.

Question 62

Wendy sold property on the installment basis in 2017 for more than her basis in the property. She was to receive installment payments at the end of each year for the next five years. In 2019, 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 2019.
B) The income will be reported on Wendy's 2019 income tax return as income in respect of a decedent.
C) The entire gain must be recognized in 2017.
D) Wendy recognizes gain and reports it on her 2019 income tax return when the note is transferred into the estate.
E) None of these.

Question 63

Camelia Company is a large commercial real estate contractor that reports its income by using the percentage of completion method. In 2019, the company entered into a contract to construct a building for $900,000. Camelia estimated that the cost of constructing the building would be $600,000. In 2019, the company incurred $150,000 in costs under the contract. In 2020, the company incurred an additional $500,000 in costs to complete the contract.

A) Camelia must report $300,000 of income in 2019.
B) Camelia is not required to report any income from the contract until 2020 when the contract is completed.
C) Camelia must recognize $75,000 of income in 2019.
D) Camelia should amend its 2019 tax return to decrease the profit on the contract for that year.
E) None of these.

Question 64

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 that 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? $\begin{array}{ll} \text {Section1231Gain}& \text {Unrecaptured \( \$ 1250 \) GainTaxedat \( 25 \% \)}\end{array}$

A) $\begin{array}{ll}&& \$ 66,000 &&&&&&&&& \$ 0 \\\end{array}$
B) $\begin{array}{ll}&& \$ 0 &&&&&&&&&&& \$ 66,000 \\\end{array}$
C) $\begin{array}{ll}&& \$ 90,000 &&&&&&&&& \$ 90,000 \\\end{array}$
D) $\begin{array}{ll}&& \$ 90,000 &&&&&&&&& \$ 0 \\\end{array}$
E) $\begin{array}{ll}&&\$ 0 &&&&&&&&&&& \$ 110,000\end{array}$

Question 65

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 be recognized only 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 these.

Question 66

In the case of a small home construction company that builds under long-term contracts, generally:

A) The percentage of completion method is required to report the income from the construction contracts.
B) The percentage of completion method can be elected and will defer income until the contract is completed.
C) The completed contract method can be used and will defer income.
D) The accrual method must be used because inventories are an income-producing factor.
E) None of these is true.

Question 67

Under the percentage of completion method, if the actual costs are , the taxpayer must pay interest on the underpayment of prior years' taxes.

A) Greater than the estimated costs
B) Less than the estimated costs
C) Equal to or greater than the estimated costs
D) Equal to the estimated costs
E) None of these

Question 68

In 2019, Ramon sold land that had cost $80,000 for $200,000. The sales agreement called for a $50,000 down
payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years. What would be the consequences of the following (treat each part independently and assume that Ramon uses the installment method whenever possible):
a. In 2019, Ramon gave one of the $50,000 installment obligations to a close relative.
b. In 2019, Ramon transferred the installment obligations ($50,000) to his 100% owned corporation.
c. Ramon collected the $50,000 plus $12,000 interest on January 1, 2020, and died on January 2,
2020.

Question 69

This year, Sarah started a business selling unique kitchen items both in stores and online. She purchased $70,000 of goods during the year. Her ending inventory was $8,000, and she owed suppliers $15,000 at year end, including for all of the ending inventory. For tax purposes, Sarah adopted the cash method and the treatment of inventory as nonincidental supplies. Her deduction for inventory for the year is:

A) $55,000.
B) $62,000.
C) $70,000.
D) None of these.

Question 70

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 these would be considered related parties.

Question 71

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 these.

Question 72

Father sold land to Son for $500,000 in 2019. Father's basis in the land was $100,000. Son paid Father $50,000 and gave Father a note for $450,000 due in 2022. In 2020, 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 2020.
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 2020.
E) None of these.

Question 73

In 2019, Norma sold Zinc, Inc., common stock for $100,000 cash and a note receivable for $900,000. The note was due in 2020 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 2019 and she will be liable for interest on taxes deferred under the installment method.
C) Norma must recognize $75,000 gain in 2019 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 these.

Question 74

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 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 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 these are true.
E) None of these is true.

Question 75

Dr. Stone incorporated her medical practice and elected to use a fiscal year ending September 30. For the fiscal year ending September 30, 2019, the corporation earned $40,000 profits each month, before Dr. Stone's salary and income tax. Dr. Stone received a salary that averaged $30,000 per month. Next year (fiscal year ending September 30, 2020), Dr. Stone expects the average monthly profits before salary and taxes to be $48,000. What is the minimum salary Dr. Stone can receive for the last three months of calendar year 2019 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30, 2020?

Question 76

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 2020.

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, she 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 these.

Question 77

This year, Yuan started a business selling computer parts both in store and online. He purchased $60,000 of goods during the year via credit card. His ending inventory was $9,000. For tax purposes, Yuan adopted the cash method and the treatment of inventory as deductible when purchased per his books. His deduction for inventory for the year is:

A) $51,000.
B) $60,000.
C) $69,000.
D) None of these.

Question 78

Robin Construction Company began a long-term contract in 2019. 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 2019 was $350,000. The contract was completed in 2020 and the cost incurred that year was $125,000. Under the percentage of completion method:

A) Robin should report $300,000 of income in 2019.
B) Robin should report $90,000 of income in 2020.
C) Robin will receive interest (under the look-back method) on the underpayment of taxes in 2019.
D) Robin should report $325,000 of income in 2019.
E) None of these is correct.

Question 79

In 2019, Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2023. Father's basis was $100,000. In 2020, 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 2020?

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

Question 80

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 these.
E) None of these.