Study Unit 5 Flashcards
When does a cash-method taxpayer account for income?
A cash-method taxpayer accounts for income when cash or its equivalent is
* Acutally received or * Constructively received.
When does an accrual-method taxpayer account for income?
An accrual-method taxpayer accounts for income when it is earned.
When is prepaid rent included in gross income under the (1) cash basis and (2) accrual basis?
Basis When to Include in Gross Income
Cash When Received
Accrual When Received
When are prepaid expenses deductible under the (1) cash basis and (2) accrual basis?
Basis When to Deduct
Cash Over the period of expense (except when the 12-month rule applies)
Accrual Over the period of expense
When is prepaid income for services included in gross income under the (1) cash basis and (2) accrual basis?
Basis When to Include in Gross Income
Cash When received
Accrual Accrued over the period of service, but not beyond the end of the following tax year
When is prepaid income for merchandise sales included in gross income under the (1) cash basis and (2) accrual basis?
Basis When to Include in Gross Income
Cash When received
Accrual When reported for accounting purposes
When are warranty expenses deductible under the (1) cash basis and (2) accrual basis?
Basis When to Deduct
Cash When Paid
Accrual When Paid
When are related party expenses deductible under the (1) cash basis and (2) accrual basis?
Basis When to Deduct
Cash When includible in gross income of the related party
Accrual When includible in gross income of the related party
Under the percentage-of-completion method of accounting for long-term contracts, how is gross profit (income) recognized in the current period calculated?
Contract price - Cost incurred to date - Remaining estimated cost to complete = Estimated total gross profit X Total cost to date / Total estimated cost of contract = Gross profit recognized to date - Gross profit recognized in prior periods = Gross profit recognized in current period
For installment sales, how is current-year installment sale income calculated?
Current-year income = Current-year receipts x [(Contract price - cost of goods sold)/Contract price]
NOTE: A loss is fully recognized in the year realized.
List the taxpayers who are required to use the accrual method.
- C Corporations
- Taxpayers that maintain inventory (unless the average of annual gross receipts for the 3-year period ending with the prior
tax year is lower that the threshold) - Partnerships with a C corporation as a partner
- Charitable trusts with unrelated income
- Tax shelters
What are unrelated businesses of tax-exempt organizations?
An unrelated business is a trade or business activity regularly carried on for the production of income or loss that is not substantially related to the performance of the exempt purpose or function. Income from unrelated business (UBI) is taxable.
Give examples of principals of trusts.
Receipts Disbursements
- Capital Gains * Principal payments on debt
- Replacement property * Capital expenditures
- Nontaxable Stock dividends * Fiduciary fees (on principal)
- Stock splits * Tax on principal items (e.g., capital gains)
- Stock rights
- Liquidating dividends
Give examples of income of trust.
Receipts Disbursements
- Business income * Business expenses
- Insurance proceeds for lost profits * Production of income expenses (e.g., repair, insurance, etc.)
- Interest * Depreciation
- Rents * Fiduciary fees (not on principal)
- Taxable dividends
Compare a simple trust and complex trust.
Simple Trust Complex Trust
Distributes all income currently May accumulate income
Does not distribute the principal May distribute the principal
(Only distributes income) (distributes other than income)
Provides for no charitable Provides for charitable contributions
Contributions
