Accounting Periods & Methods Flashcards
Osprey Corporation, an accrual basis taxpayer, reported taxable income for 2021 and paid $123,000 on its estimated state income tax for the year. During 2021, the company received a $12,300 refund upon filing its 2020 state income tax return. The company filed its 2021 state income tax return in August 2022 and paid the $30,750 state income tax due for 2021. In December 2021, the company received a notice from the state tax commission that an additional $18,450 of income tax was due for 2019 because of an error on the return. The company acknowledged the error in December 2021 and paid the additional $18,450 in tax in February 2022.
What is Osprey’s 2021 Federal income tax deduction for state income taxes?
2021 estimated tax payment: $123k
Plus: 2021 state tax paid: $30,750
=$153,750
*NOTE: Even though an additional state income tax was incurred and paid within the applicable tax year, prior year deductions for state income tax are not allowed. Thus it is not included in our computation.
Gaffney Corporation is a wholesale distributor of auto parts and uses the cash method of accounting. The company’s sales have been about $7,375,000 per year for the last few years. However, Gaffney has the opportunity to acquire an unincorporated competitor with annual sales of $8,112,500.
Complete the following paragraph regarding the accounting implications of acquiring the competitor.
For the year of acquisition, Gaffney and the acquired business will be treated as __. Gaffney __ consider the combined gross receipts of both businesses. in determining if the average annual gross receipts for the prior three-year period exceed $__ statutory threshold. Therefore, Gaffney will likely be __ for the year of acquisition.
For the year of acquisition, Gaffney and the acquired business will be treated as a single business. Gaffney must consider the combined gross receipts of both businesses. in determining if the average annual gross receipts for the prior three-year period exceed $26,000,000 statutory threshold. Therefore, Gaffney will likely be able to continue using the cash method for the year of acquisition.
In 2021, Aurora received a $40,500 bonus computed as a percentage of profits. In 2022, Aurora’s employer determined that the 2021 profits had been incorrectly computed, and Aurora had to refund the $12,150 in 2022. Assume that Aurora was in the 35% tax bracket in 2021 but in the 12% bracket in 2022.
a. In 2021, how much is Aurora required to include in income?
b. In 2022, what is the amount of the deduction Aurora can claim?
What is the reduction in taxes for 2022 as a result of the deduction?
a. The full $40,500 bonus must be included in income in the year that it was received.
b. The $12,150 portion of the bonus refunded to the employer can be claimed at the higher tax rate (of the year received or current year) as a deduction. Therefore, 35% of $12,150 will give Aurora a $4,253 deduction in 2022.
In 2021, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $60,500. The clients signed notes receivable to Chaya that have a fair market value of $51,425 at year-end. In addition, Chaya sold a 36-month service contract on April 1, 2021, and received payment in full of $29,040.
How much gross income does Chaya report from these transactions in 2021?
From services to clients: $60,500
From service contract: $7,260
= ($29,040 / 3 years) x (9 month period / 12 months)
*April 1 to December 31 is where the 9-mo. period is derived from
On December 30, 2021, Whitney sold a piece of property for $212,200. Her basis in the property was $95,490, and she incurred $2,122 in selling expenses. The buyer paid $10,610 down with the balance payable in $20,159 installments over the next ten years. In addition, the buyer assumed a $31,830 mortgage on the property.
Under the installment sales method, what is the total contract price, the total gain on the sale, and the amount of gain reported in 2021?
Under the installment sales method, the total contract price is $212,200, the total gain on the sale is $146,418 and the amount of gain reported in 2021 is $7,321.
Farhad canceled a note issued by Emma (Farhad’s niece) that arose in connection with the sale of property. At the time of the cancellation, the note had a basis to Farhad of $164,700, a face amount of $296,460, and a fair market value of $222,345.
Presuming that the initial sale by Farhad qualified as an installment sale, how much gain does the cancellation result in for Farhad?
Face amount - property basis
=$296,460 - 164,700
=$131,760 gain on cancellation of note
Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a long-term contract. The gross contract price was $3,633,000. Jebali finished construction in 2021 at a cost of $3,269,700. However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $106,200. In 2022, the dispute is settled and Jebali fixed the doorway at a cost of $84,960.
a. How much must Jebali include in gross income for these items? What amount of deductions is Jebali allowed for 2021?
b. In 2022, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year?
a. Jebali must include $3,526,800 in gross income and is allowed deductions of $3,269,700 for 2021.
Gross income = $3,633,000 - 106,200 reconstruction = $3,526,800
Deductions are as stated
b.In 2022, Jebali must include $106,200 gross income and may deduct $84,960 as expenses in that year.
Addtl. Info:
Cost savings = $106,200 - 84,960 = $21,240
Contract profit = $3,633,000 - 3,269,700 - 21,240 = $342,060
Total profit = $342,060 + 21,240 = 363,300
Shumpert, Inc., entered into a contract that was to take two years to complete, with an estimated cost of $2,120,000. The contract price was $2,968,000. Costs of the contract for 2020, the first year, totaled $1,590,000.
a. What was the gross profit reported by the percentage of completion method for 2020?
b. After the contract was completed at the end of 2021 at a total cost of $2,226,000, what was the gross profit reported by the percentage of completion method for 2021?
a. $1,590,000 year 1 actual costs/ 2,120,000 est. costs= 75%
($2,968,000 contract price x 75% completion rate) - 1,590,000 year 1 actuals $636,000 year 1 profits
b. $2,968,000 contract price - 2,226,000 total costs- 636,000 prior year claimed profits=$106,000 year 2 profits
The taxpayer’s ending inventory is valued as follows:
Item Cost Market
Rakes $20,800 $19,760
Shovels 9,360 10,400
Hoes 15,600 16,640
Under the lower of cost or market method, what is the value of the taxpayer’s inventory?
=$19,760 + 9,360 + 15,600
=$44,720
Shondee Corporation uses the lower of cost or market and FIFO inventory methods. At the end of 2020, the FIFO cost of the ending inventory was $198,000, and the market value of the inventory was $168,300. The corporation switched to LIFO in 2021.
As a result, how much must Shondee add to its gross income for each of the years 2021, 2022, and 2023?
= ($198,000 - 168,300) / 3 years
=$9,900
With 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. Real estate partnership
b. C-corporation that is in the retail grocery business
c. S-corporation engaged in manufacturing
d. C-corporation formed by physicians to conduct their practice
C-corporation that is in the retail grocery business
Which of the following taxpayers is required to use the accrual method of accounting?
a. Retail business with average annual gross receipts of $8 million
b. Attorney with average annual gross receipts of $2 million
c. Insurance agency with average annual gross receipts of $5 million
d. None of the above
None of the above. The threshold to require an entity to use the accrual method is $26 million or more in annual gross receipts for 3 consecutive years prior to the taxable year.
Imani, an accrual basis taxpayer, sold goods in December 2021 for $20,000. The customer was unable to pay cash. So the customer gave Imani a note for $20,000 that was payable in April 2022. The note bore interest at the Federal rate. The fair market value of the note at the end of 2021 was $18,000. Imani collected $20,500 from the customer in April 2022, $20,000 principal plus $500 interest. Under the accrual method, Imani must recognize gross income of:
a. $20,000 in 2021 and $500 in 2022
b. $20,500 in 2022
c. $18,000 in 2021 and $2,500 in 2022
d. $20,500 in 2021
a. $20,000 in 2021 and $500 in 2022
The $20k liability is incurred in 2021 but the customer could have paid off the note prior to its maturity date, thereby interest income would have been at its applicable amount. Since interest is not easily identifiable until the note is paid off, it must be claimed in the year in which it was received even under the accrual method.
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 never exceeded $26 million, and the farm is not considered a tax shelter.
a. 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.
b. 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.
c. The farm must report its sales and cost of goods sold by the accrual method because inventories are material to the business.
d. The income from the farm may be reported by the cash method.
d. The income from the farm may be reported by the cash method.
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.
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.
