Ch 18- - South Western Federal Taxation 2021 individual income-taxes 44th edition Testbank PDF

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Chapter 18 Accounting Periods and Methods - South Western Federal Taxation 2021 individual income-taxes 44th edition Testbank - Professor Joseph Callaghan...

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Chapter 18: Accounting Periods and Methods True / False 1. The tax year of a physician’s incorporated medical practice may end on the last day of any month of the year. a. True b. Fals e ANSWER: Fals e 2. A C corporation that does not have a natural business year must use a calendar year as its tax year. a. True b. Fals e ANSWER: Fals e 3. A C corporation’s selection of a tax year generally is independent of the tax year of its principal shareholders. a. True b. Fals e ANSWER: True 4. 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 she joined the partnership. The partnership may use a calendar year and F may continue to use the tax year ending June 30th. a. True b. Fals e ANSWER: True 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 2020 until filing the tax return for the year ending June 30, 2021. a. True b. Fals e ANSWER: True 6. An S corporation may select any tax year as long as it ends on the last day of a month. a. True b. Fals e ANSWER: Fals e 7. The ability of the CPA to prepare a tax return in a timely manner is justification for the partnership’s use of a particular Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods tax year. a. True b. Fals e ANSWER: Fals e 8. Laura Corporation changed its tax year-end from July 31 to December 31 in 2020. The income for the period August 1, 2020 through December 31, 2020 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. a. True b. Fals e ANSWER: True 9. In 2020, 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, 2020 through December 31, 2020. The annualized income for the short year is $90,000. a. True b. Fals e ANSWER: True 10. Ted, a cash basis taxpayer, received a $150,000 bonus in 2020 when he was in the 35% marginal tax bracket. In 2021, 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 2021 tax liability by $14,000 (.35 ×$40,000). a. True b. Fals e ANSWER: True 11. 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. True b. Fals e ANSWER: True 12. A calendar year, cash basis corporation began business on April 1, 2020, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2020, and purchased a 24month 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 2020. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods b. Fals e ANSWER: Fals e 13. Alice, Inc., is an S corporation that has been in business for 18 years. Its annual gross receipts never have exceeded $26 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. a. True b. Fals e ANSWER: True 14. A retailer sells widgets with a 90-day warranty and uses the accrual method. The retailer may estimate its warranty expense and deduct it. a. True b. Fals e ANSWER: Fals e 15. 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. a. True b. Fals e ANSWER: True 16. 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. a. True b. Fals e ANSWER: True 17. Sandstone, Inc., consistently has included some factory overhead as a current expense rather than as a cost of producing goods. As a result, the beginning inventory for 2020 is understated by $10,000. If Sandstone voluntarily changes accounting methods effective January 1, 2020, the positive adjustment to the inventory is a § 481 adjustment, and $2,500 must be added to taxable income for each year 2020, 2021, 2022, and 2023. a. True b. Fals e ANSWER: True 18. A cash basis taxpayer sold investment land in 2020 for $200,000. He received $40,000 in the year of sale and $160,000 in 2021. The cost of the land was $80,000. Under the installment method, the taxpayer would report a $24,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods gain in 2020. a. True b. Fals e ANSWER: True 19. In the case of a sale reported under the installment method, gain is recognized in each year the seller collects on the installment contract. a. True b. Fals e ANSWER: True 20. 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. a. True b. Fals e ANSWER: Fals e 21. In 2020, Cashmere Construction Company, a small business, enters into a contract to build a beach cottage for Martha and Rico for a total price of $500,000. Cashmere estimates the total cost to complete the cottage to be $400,000. In 2020, Cashmere incurred $300,000 of costs on the contract, and in 2021 the contract was completed at a total cost of $425,000. Cashmere is not required to recognize any income from the contract until 2021. a. True b. Fals e ANSWER: True 22. When a taxpayer with average annual gross receipts in excess of $26 million finances the construction of its building by borrowing, the interest is added to the cost of the building. a. True b. Fals e ANSWER: True 23. 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. a. True b. Fals e ANSWER: True 24. Under both the cash and accrual methods of accounting for tax purposes, a taxpayer may Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods elect to defer prepaid revenue. a. True b. Fals e ANSWER: Fals e Multiple Choice 25. 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. ANSWER: d 26. 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 an April 30 year-end. ANSWER: c 27. Gold Corporation, Silver Corporation, and Platinum Corporation are equal partners in the GSP Partnership, which was formed on July 1, 2020. 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. ANSWER: a 28. 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 physicians to conduct their practice. b. A C corporation that is in the retail grocery business. Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods c. A real estate partnership. d. An S corporation engaged in manufacturing. ANSWER: b 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. ANSWER: a 30. A C corporation is required to annualize taxable income for: 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. A year when there has been a greater than 50% change in the ownership of the stock. ANSWER: c 31. In 2020, Godfrey received a $50,000 sales commission on a long-term contract. But in 2021, 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 2020 but he is in the 24% marginal tax bracket in 2021. a. Godfrey can amend his 2020 tax return and reduce his taxable income by $20,000. b. Godfrey should deduct the $20,000 paid in 2021 and thus his tax savings will be $4,800. c. Godfrey can reduce his 2021 tax liability by 35% ×$20,000 = $7,000. d. Godfrey should not have reported the income in 2020 because of the contingencies. ANSWER: c 32. 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. An attorney with average annual gross receipts of $2 million. c. An insurance agency with average annual gross receipts of $5 million. d. None of these are required to use the accrual method. ANSWER: d 33. Karen, an accrual basis taxpayer, sold goods in December 2020 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 2021. The note bore interest at the Federal rate. The fair market value of the note at the end of 2020 was $18,000. Karen collected $20,500 from the customer in April 2021, $20,000 principal plus $500 interest. Under the accrual method, Karen must recognize gross income of: a. $20,500 in 2020. b. $18,000 in 2020 and $2,500 in 2021. c. $20,000 in 2020 and $500 in 2021. Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods d. $20,500 in 2021. ANSWER: c 34. 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 $26 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. ANSWER: b 35. 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. ANSWER: d 36. 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 $50,000,000. II. An incorporated law firm with average annual gross receipts of $50,000,000. III. An unincorporated grocery store with average annual gross receipts of $50,000,000. a. All of these must use the accrual method. b. None of these 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. ANSWER: d 37. 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 $26 million of gross receipts. b. An incorporated public accounting firm with gross receipts in excess of $26 million. c. A grocery store with average annual gross receipts of $800,000. d. None of these. ANSWER: d 38. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods the claims. In 2020, 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 2021. Also, in January 2021, claims for $8,000 were filed for deliveries made in 2020, and $6,000 was paid on these claims by March 15, 2021. 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 2020: a. $68,000. b. $66,000. c. $60,000. d. $50,000. ANSWER: d 39. Color, Inc., is an accrual basis taxpayer. In December 2020, the company received from a customer a $500 claim for defective merchandise. Color paid the customer in January 2021. Also, in December 2020, the company received a bill of $800 for office supplies that had been purchased and used in November 2020. The bill was not paid until January 2021. In January 2021, the company received a claim for $600 for defective merchandise purchased in 2020. Color paid the customer the $600 in February 2021. Assuming that Color uses the recurring item exception to economic performance, the company’s deductions for 2020 as a result of these facts are: a. $500. b. $600. c. $800. d. $1,300. ANSWER: d 40. Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2020, the corporation’s income subject to state income tax was $500,000 and the state corporate tax rate was 6%. During 2020, the corporation paid $24,000 on its estimated state income tax liability for that year. The remaining $6,000 of 2020 state income tax was paid in April 2021. In June 2020, the corporation paid $9,000 on its year 2019 state income tax liability as a result of an audit of the 2019 return that was conducted in 2020. The company has elected to use the recurring item exception to economic performance. As a result of these facts, the corporation should deduct in 2020 on its Federal income tax return state income taxes of: a. $24,000. b. $30,000. c. $33,000. d. $39,000. ANSWER: d 41. Gray Company, a calendar year taxpayer, allows customers to return defective merchandise for a full refund within 30 days of the purchase. In 2020, the company refunded $400,000 for claims involving sales. The $400,000 consisted of $350,000 in refunds from 2020 sales and $50,000 in refunds from 2019 sales. All of the refunds from 2019 sales were for claims filed in 2019 and were paid in January and February 2020. At the end of 2020, the company had $12,000 in refund claims for sales in 2020 for which payment had been approved. These claims were paid in January 2020. Also in January 2021, the company received an additional $30,000 in claims for sales in 2020. This $30,000 was paid by Gray in February 2021. With respect to the above, Gray can deduct: a. $350,000 in 2020. b. $362,000 in Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods 2020. c. $392,000 in 2019. d. $442,000 in 2020. ANSWER: b 42. 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. ANSWER: c 43. In 2020, 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 2019 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 2019 tax return and reduce its income by $240,000. b.The company should change its accounting method in 2020, with a $60,000 negative § 481 adjustment which decreases its 2020 taxable income. c. The company should change its accounting method in 2020, and increase its 2020 income by $60,000, the amount of the positive § 481 adjustment to income. d.The company should change its accounting method in 2020 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2020-2023. ANSWER: b 44. 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. ANSWER: b 45. When the IRS requires a taxpayer to change accounting methods: a. The taxpayer may be subject to penalties and interest. b. The taxpayer generally is required to make the change as of the beginning of the earliest open year. Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Accounting Periods and Methods c. The adjustments due to the change cannot be spread over subsequent years. d. Choices a., b., and c. are correct. ANSWER: d 46. The taxpayer had consistently used the cash method of accounting even though inventories were a material incomeproducing factor to its business and average annual gross receipts in the prior three...