Accounting Methods and Periods

Question 1

What does it mean when tax rules treat ambiguous circumstances liberally?

Answer 1

-Assume income is recognized

Question 2

When does realization of income occur?

Answer 2

-Generally when a transaction results in the receipt of property or right capable of valuation

Question 3

What is realization?

Answer 3

-Event that triggers taxation of income

Question 4

Are receipts representing COGS recognized as income?

Answer 4

-No. Return of capital is not income

Question 5

Define gross income.

Answer 5

-Amount of realized income after eliminating deferred and excluded income

Question 6

Do regular corporations have restrictions on their year end?

Answer 6

-No. Partnerships and S corporations do however

Question 7

What are the major highlights of accrual accounting?

Answer 7

• Unearned (prepaid) income recognized in year received
• To extent accrued expenses are deductible, deduction can be claimed in period liability becomes certain (all events test)

Question 8

What are the major highlights of the cash method?

Answer 8

• No accounts receivable
• Can write off a loan but not AR because a loan requires an entry
• Prepaid expenses prorated if it would distort taxable income

Question 9

Who cannot use the cash method of accounting?

Answer 9

• Regular C corporations (w/ exceptions)
• Partnerships w a C corporation as a partner
• Tax shelters

Question 10

What are the exceptions for corporations to use the cash method of accounting?

Answer 10

• C corp where annual gross receipts for prior 3 yr period don’t exceed $5 million (once test failed accrual required for all future years)
• Personal Service Corporations

Question 11

In general businesses w/ inventories must use accrual method for purchases and sales. What are the exceptions?

Answer 11

• Taxpayers whose average gross receipts less than $1 million (same 3 yr test)
• Taxpayers with annual gross receipts less than $10 million whose primary business is delivering services

Question 12

Manufacturers and certain retailers and wholesalers required to use uniform capitalization method. Who are the exceptions?

Answer 12

-Small personal property dealers w/ less than $10 million in gross receipts (same 3 yr test)

Question 13

What are the requirements to use LIFO?

Answer 13

• Must also be used for financial reporting

- Taxpayers can value inventory at LCM unless using LIFO (cost must be used)

Question 14

What method is generally used for long term contracts?

Answer 14

-Percentage of completion method

Question 15

Can taxpayers change their accounting method once selected?

Answer 15

-Only with IRS permission

Question 16

What is the major highlight of the completed contract method?

Answer 16

-No income is recognized until construction process is completed

Question 17

Are leasehold improvements included in income?

Answer 17

-Only if made in lieu of rent