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Exam 16: Accounting Periods and Methods

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Question 1

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

A) True
B) False

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Question 2

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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.

A) True
B) False

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Question 3

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A calendar year,cash basis corporation began business on April 1,2015,and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on April 1,2015,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 2015.

In 2015,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 1,2015 through December 31,2015.The annualized income for the short year is $90,000.

Laura Corporation changed its tax year-end from July 31st to December 31st in 2015.The income for the period August 1,2015 through December 31,2015 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 2015 income will be taxed at 34%.

Ted,a cash basis taxpayer,received a $150,000 bonus in 2015 when he was in the 35% marginal tax bracket.In 2016,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 2016 tax liability by $14,000 (.35 × $40,000).

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.

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

In 2005,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2015,he received a salary of $190,000.During the period from October 1,2015 to December 31,2015,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 30,2016,is limited to $240,000.

Franklin Company began business in 2011 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2011 through 2015.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2016.The net adjustment due to the change is a positive adjustment to income.The adjustment may be spread equally over 2016 and the three following years.

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.

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.

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 2015 until he files his tax return for his year ending June 30,2016.

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

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.

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

Snow Corporation began business on May 1,2015,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 30,2015.Neither Snow Corporation nor Brown Corporation must annualize their income for their 2015 returns.

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

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.

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