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Exam 18: Accounting Periods and Methods

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Question 1

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Mogo Manufacturing Company accounts for its inventories by the FIFO method.The company has consistently allocated building depreciation to production and general administration on the basis of the number of square feet occupied.According to the measurements used,manufacturing requires 90% of the square footage and general administration utilizes 10% of the total square feet.This year,2014,the accountant realized that 5 years ago an addition was made to the portion of the building used for general administration,and the depreciation allocation had not been adjusted.What are the tax accounting implications of this discovery?

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The company has consistently used an inc...

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Terry,Inc. ,makes gasoline storage tanks.All production is done under contract.The company makes three basic models,but each model must be adapted to customer specifications for the location of outlets,insulation,and paint.It takes from three to six months to complete a tank.How should Terry account for the income for the business?

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Terry,Inc.could have the percentage of completion or the accrual method apply.If Terry would like to avoid the percentage of completion method and instead use the accrual method,it should argue that the products are not "unique." Terry would argue that the modifications for individual customers are minor and add very little to the costs of production.

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For a taxpayer who is required to use the percentage of completion method,the taxpayer 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 percent of the estimated contract costs.

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:

In 2014,Beth sold equipment used in her business.Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation) .Beth sold the property for $400,000,with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate) due in 2015.Beth's recognized gain from the installment sale in 2014 is:

In the case of a taxpayer who uses the lower-of-cost-or-market inventory method:

In the case of a sale reported under the installment method,gain is recognized in each year the seller collects on the installment contract.

In 2014,Godfrey received a $50,000 sales commission on a long-term contract.But in 2015,the customer filed bankruptcy and Godfrey's 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 2014 but he is in the 25% marginal tax bracket in 2015.

In 2014,Cashmere Construction Company enters into a contract to build a beach cottage for Martha and Rob for a total price of $500,000.Cashmere estimates the total cost to complete the cottage to be $400,000.In 2014,Cashmere incurred $300,000 of costs on the contract,and in 2015 the contract was completed at a total cost of $425,000.Cashmere is not required to recognize any income from the contract until 2015.

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

In determining the cost of goods manufactured and thus the cost of the ending inventory:

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,approximately 80% of the claims are paid by Ivory.In 2014,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 2015.Also,in January 2015,claims for $8,000 were filed for deliveries made in 2014,and $6,000 was paid on these claims by March 15,2015.Ivory has not elected to use the recurring item exception to economic performance.Under the all-events and economic performance tests,Ivory can accrue as an expense for 2014:

Related-party installment sales include all of the following except the first seller's:

Which of the following statements regarding a 52-53 week tax year is not correct?

Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.

In the case of a change from the lower-of-cost-or-market FIFO to the LIFO inventory method:

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.

Sandstone,Inc. ,has consistently included some factory overhead as a current expense,rather than as a cost of producing goods.As a result,the beginning inventory for 2014 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1,2014,the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2014,2015,2016,and 2017.

A manufacturer must capitalize the following costs relative to inventories:

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2014,the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2014,the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2014 state income tax was paid in April 2015.In June 2014,the corporation paid $9,000 on its year 2013 state income tax liability,as a result of an audit of the 2013 return that was conducted in 2014.The company has elected to use the recurring item exception to economic performance.As a result of the above,the corporation should deduct in 2014 on its Federal income tax return state income taxes of: