Question 1

If an installment sale contract does not charge interest on the sale of a capital asset,the IRS will impute interest and thereby increase the taxpayer's capital gain and interest income.

Accepted Answer

The answer of If an installment sale contract does not...

Question 2

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

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The answer of Which of the following taxpayers is required...

Question 3

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.

Accepted Answer

This statement is true. The taxpayer has the option to defer recognition of income and related costs until cumulative contract costs reach at least 10 percent of estimated contract costs. This election can help to avoid recognizing income before the project is sufficiently underway to justify it.

Question 4

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

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The answer of Which of the following statements regarding a...

Question 5

A C corporation is required to annualize its income:

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The answer of A C corporation is required to annualize...

Question 6

In 2010,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 2010,Cashmere incurred $300,000 of costs on the contract,and in 2011 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2011.

Accepted Answer

Cashmere can only recognize income on the contract in the year in which it is completed, which is 2011 in this case. Therefore, no income can be recognized in 2010.

Question 7

Gold Corporation,Silver Corporation,and Platinum Corporation are equal partners in the GSP Partnership,which was formed on July 1,2010.Gold and Silver uses a calendar tax year,and Platinum's tax year ends September 30.GSP is not a seasonal business.

Accepted Answer

According to the partnership tax rules, GSP may choose a tax year that does not conflict with the majority partner's tax year, which is Gold and Silver's tax year ending on December 31st. Therefore, GSP can choose December 31st as its tax year-end. Platinum, being a minority partner, can retain its tax year ending September 30th, as long as it files a short tax year return for the period between October 1st and December 31st to align with GSP's tax year-end. Therefore, option D is the most suitable choice.

Question 8

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

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The answer of Gold Corporation,Silver Corporation,and Copper Corporation are equal...

Question 9

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 30,2010,the shareholder-employee received $120,000 salary.The corporation paid the shareholder-employee a salary of $15,000 during the period beginning October 1,2010 through December 31,2010.

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The answer of Purple Corporation,a personal service corporation (PSC),adopted a...

Question 10

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 2010 is understated by $30,000.If Sandstone voluntarily changes accounting methods effective January 1,2010,the adjustment to the inventory is a § 481 adjustment and $7,500 must be added to taxable income for each year 2010,2011,2012,and 2013.

Accepted Answer

The § 481 adjustment of $7,500 needs to be added to taxable income for each year 2010, 2011, 2012, and 2013, as stated in the given information. This makes the statement true.

Question 11

For 2009,Godfrey had $5,000 in itemized deductions for state income taxes paid.In 2011,Godfrey's 2009 state income tax return was audited and he was required to pay an additional $4,000 of state income taxes.Godfrey was in the 35% tax bracket in 2009,but his marginal tax bracket in 2011 is 15%.He will itemize his deductions on his 2011 return.

Accepted Answer

The $4,000 payment in 2011 is not deductible because it was paid in 2011 and not in the year of the original deduction (2009). Godfrey does not need to amend his 2009 return because the deduction was valid at the time. However, the $4,000 payment in 2011 can still reduce his 2011 Federal income tax by $600 (15% of $4,000) since he is in a lower tax bracket in 2011.

Question 12

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 $3,000,000 and the farm is not considered a tax shelter.

Accepted Answer

The S corporation may report its income by the cash method because its annual gross receipts do not exceed $25 million and the farm is not considered a tax shelter. The choice A is incorrect because accrual accounting is required for any business that has material inventories. The choices C and D are incorrect because a business must use the same method of accounting for all of its sales unless a separate and distinct line of business is involved.

Question 13

Which of the following must use the accrual method of accounting?

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The answer of Which of the following must use the...

Question 14

If interest paid is attributed to the taxpayer's building which is under construction,the taxpayer must add the interest to the cost of the building.

Accepted Answer

According to tax laws, interest paid during the period of construction of a building is considered a part of the building's cost and is added to it. Therefore, the statement is true.

Question 15

The accrual method generally must be used to report income:

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The answer of The accrual method generally must be used...

Question 16

A cash basis taxpayer sold investment land in 2010.He received $35,000 in the year of sale and $105,000 in 2011.The cost of the land was $100,000.Under the installment method,the taxpayer would report a $10,000 gain in 2010.

Accepted Answer

Under the installment method, the gain is reported proportionally as payments are received. In 2010, the taxpayer received $35,000, which is 25% of the total $140,000 received. The total gain is $40,000 ($140,000 - $100,000 cost), so 25% of the gain is $10,000, which is reported in 2010.

Question 17

In the case of a sale reported under the installment method,no gain is reported until the seller has recovered the entire cost of the property sold.

Accepted Answer

The answer of In the case of a sale reported...

Question 18

Karen,an accrual basis taxpayer,sold goods in October 2010 for $10,000.The customer was unable to pay cash.So the customer gave Karen a note for $10,000 that was payable in April 2011.The note bore interest at the Federal rate.The fair market value of the note at the end of 2010 was $9,000.Karen collected $10,000 from the customer in April 2011.Under the accrual method:

Accepted Answer

Under the accrual method, income is recognized when it is earned, regardless of when it is received. Karen earned the $10,000 in 2010 when she sold the goods, so she must recognize the full $10,000 as income in 2010.

Question 19

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?

Accepted Answer

The answer of In regard to choosing a tax year...

Question 20

In the case of a partnership whose partners all use a calendar year,a reason that is acceptable to the IRS for using a tax year ending June 30th would be:

Accepted Answer

The only acceptable reason for a partnership to use a tax year other than the calendar year is if the partnership can demonstrate a natural business year that ends on a date other than December 31st. Since the question states that all partners use a calendar year, options A, B, and C are not valid reasons for using a June 30th tax year. Therefore, the best choice is D, which states that the partnership has a natural business year that ends on June 30th.

Quiz 16: Accounting Periods and Methods