Question 1

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 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).

Accepted Answer

This is true as Ted can claim a refund of the $40,000 in 2017, which reduces his taxable income by the same amount. As a result, Ted's tax liability for 2017 will decrease by $14,000, which is 35% of the $40,000 refund.

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.

Accepted Answer

Since Snow Corporation began business on May 1, 2016, it only operated for part of the year and does not need to annualize its income. Similarly, Brown Corporation sold all its assets and liquidated before the end of the calendar year, so it also does not need to annualize its income. Therefore, neither corporation needs to adjust their income based on a partial year of operation.

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.

Accepted Answer

The annualized income for the short year can be calculated by dividing the actual income earned during the short year by the number of months in the short year (8) and then multiplying it by 12.

Annualized income = (Actual income during short year / Number of months in short year) x 12

= ($60,000 / 8) x 12

= $90,000

Therefore, the statement is true.

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.

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.

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.

Accepted Answer

The answer of Franklin Company began business in 2012 and...

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.

Accepted Answer

The partnership can choose to use a calendar year and Partner F can retain his tax year ending on June 30th. This is allowed by the IRS regulations.

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.

Accepted Answer

According to the IRS, a C corporation with average annual gross receipts of less than $26 million for the three preceding tax years may use the cash method of accounting. Therefore, since the corporation in this scenario has average annual gross receipts of $3,500,000, it 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.

Accepted Answer

The answer of A doctor's incorporated medical practice may end...

Question 10

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's tax year is determined by the corporation's Articles of Incorporation or bylaws, and is generally not dependent on the tax year of its 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.

Accepted Answer

As an S corporation with annual gross receipts not exceeding $1 million, Alice, Inc. may use the cash method of accounting for its retail store and rental property income unless it 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.

Accepted Answer

This is true because of Partner A's tax year ending on June 30th. Partners B and C will report income earned in the partnership from July through December 2016 on their tax return for the 2016 calendar year, while Partner A can defer this income until their tax return for the 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.

Accepted Answer

The corporation's salary deduction for the fiscal year ending September 30, 2017, is limited to $240,000, which includes the $60,000 paid from October 1, 2016, to December 31, 2016, and the $240,000 paid in the following 9 months. Therefore, the statement is true.

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.

Accepted Answer

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

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.

Accepted Answer

Under the cash method of accounting, income is only recognized when it is actually received or collected, whereas under the accrual method, income is recognized when it is earned or when the right to receive it arises, even if it has not yet been collected. This can result in a tax liability for income that has not yet been received or collected. Therefore, using the cash method can provide an advantage in terms of tax planning and cash flow management.

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.

Accepted Answer

The statement is true. The fact that the CPA practice is a PSC does not restrict its ability to choose a fiscal year end of April 30th, and the 40% of annual revenue earned in March and April is a common occurrence for CPA practices due to the April 15th tax filing deadline in the United States.

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.

Accepted Answer

The answer of The ability of the CPA to timely...

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%.

Accepted Answer

Since Laura Corporation changed its tax year-end in 2016, it will have a short tax year from August 1, 2016, to December 31, 2016. The income for this period is $35,000, which falls in the bracket of income from $0 to $50,000 and is therefore taxed at 15%. However, since a portion of this income will be taxed at 34%, it must mean that Laura Corporation had income from $75,001 to $100,000 during its previous tax year, which was from August 1, 2015, to July 31, 2016, and it will be taxed at the same rate for that portion of income earned in June and July 2016. Therefore, the answer is true.

Question 19

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

Accepted Answer

According to the IRS, if a partnership does not have a required tax year, the tax year of each partner who owns 50 percent or more of the partnership determines 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.

Accepted Answer

This statement is true. A retailer cannot deduct any amount from the customer's account until a claim for refund has been received.

Quiz 18: Accounting Periods and Methods