Question 1

Sturdy Co. ﬁled a short period return covering four months. It had an NOL of $75,000. With respect to the NOL, Sturdy Co.:

Accepted Answer

Consolidation return regulations require all members of the same group to use the same tax period
 ftus, Newco should select the same tax year as its parent, P Company.

Question 2

Schull Co. uses the LIFO method to account for its inventories. It can use the following method in combination with LIFO:

Accepted Answer

Speciﬁc identiﬁcation is a general inventory method and would be used in lieu of LIFO. Lower of cost or market cannot be used with LIFO. Dollar-value LIFO is an acceptable method

Question 3

Which of the following entities do not compute taxable income per se?

Accepted Answer

Form 1128 needs to be ﬁled on or before the 15th day of the third calendar month following the close of the short period

Question 4

CKC just received permission from the IRS to change its method of accounting. CKC is uncertain if it now wants to change methods. Since it already has received permission to change,

Accepted Answer

Tom would have had the greater tax liability due to the progressive tax rates structures.

Question 5

Hock Brothers uses the simpliﬁed dollar-value LIFO method to account for its inventory. Ending inventory at actual prices in 2012 and 2013 was $80,000 and $120,000, respectively. fte Consumer Price Index for 2012 and 2013 was 102% and 107%, respectively. fte value of Hock Brothers' ending inventory in 2013 is:

Accepted Answer

$116,079
2013 ending inventory at assumed base year prices: $120,000 × 1.02/1.07 = $114,393
Increment at base price: $114,393 - $80,000 = $34,393 Increment at 2013 base price: $34,393 × 1.07/1.02 = $36,079 Ending inventory value: $80,000 + $36,079 = $116,079

Question 6

Gyan sold an oriental rug in 2012 for $25,000. He acquired the rug in 2002 for $17,000. He received $6,000 in 2012 and $10,000 in 2013. Gyan sold the installment obligation on January 3, 2014 for $8,500. Gyan's long- term capital gain on the sale of the installment obligation is:

Accepted Answer

$-0- Loss is not recognized and no bad debt deduction is allowed on the repossession of retail property.

Question 7

In 2012, Rankin sold real estate he aquired in 1995 under an installment contract and used the installment method for tax purposes. In 2013, the buyer defaulted on the installment obligation and Rankin repossessed the property. Rankin sustained a $30,000 loss on the repossession. Rankin's recognized position in 2013 as a result of the repossession is:

Accepted Answer

Partnerships are conduits. As such, they determine their ordinary income, which passes through (with other items) to the partners.

Question 8

Susan and Tom had the same aggregate taxable income over the last ﬁve years. Susan's income was relatively smooth over this period but Tom's income ﬂuctuated greatly over this same time period. Assuming that tax rates have remained reasonably constant over this time period who would experience the greater total tax liability?

Accepted Answer

Tom would experience the greater total tax liability because his fluctuating income may have pushed him into higher tax brackets, resulting in higher taxes owed. Susan's relatively smooth income may have kept her in the same tax bracket, resulting in a consistent tax liability.

Question 9

Rubin Inc. uses the FIFO and lower of cost market methods to account for its inventory. Information regarding inventories is as follows.  Rubin Inc's ending inventory will be valued at:

Accepted Answer

Lower of cost or market is applied on an item-by-item basis. ftus, product X is valued at $1,200, product Y is valued at $600, and product Z is valued at $1,700, for a total of $3,500.

Question 10

Peter sold a painting in 2012 for $100,000. Peter bought the painting in 2011 for $60,000. Peter received $30,000 in 2012 and is to receive $15,000 per year (plus interest) for 2013 through 2016. How much gain must Peter recognize in 2012?

Accepted Answer

$3,000 ordinary income
Overall gain on sale if installment method is used: $110,000 - $25,000 = $85,000
Contract price: $110,000
Gross proﬁt percentage: $85,000/$110,000 = 77.3%
Gain recognized in 2012: $50,000 × 77.3% = $38,650 long term capital gain Gain recognized in 2013: $60,000 × 77% = $46,350 long-term capital gain
If Hal elects not to use the installment method then the recogized gain in the year of sale is an $82,000 long-term capital gain ($107,000 - $25,000 = $82,000). In 2001 when Hal collects on the note he will recognize ordinary income of $3,000 ($60,000 - $57,000 basis).

Question 11

Hal sold a rare automobile in 2012 for $110,000. Hal bought the automobile in 1988 for $25,000. Hal received $50,000 in 2012 and will receive $60,000 (plus interest) in 2013. Hal elects not to use the installment method for this sale. fte $60,000 note is worth $57,000 at the time of the sale. What gain (not including interest income) will Hal recognize in 2013 when he receives the $60,000?

Accepted Answer

$2,380
Overall gain: $25,000 - $17,000 = $8,000
Contract price: $25,000
Gross proﬁt percentage: $8,000/$25,000 = 32% Long-term capital gain recognized in 2012: $6,000 × 32% = $1,920 Long-term capital gain recognized in 2013: $10,000 × 32% = $3,200
Unpaid balance of installment obligation: $25,000 - $16,000 ($6,000 + $10,000) = $9,000 Basis in installment obligation: $9,000 - ($9,000 × 32%) = $6,120
Gain on sale of installment obligation: $8,500 - $6,120 = $2,380 (long-term capital gain)

Question 12

Campbell Co. incurred a variety of costs associated with its long-term construction contract. Which of the following costs must be capitalized and deducted as proﬁts are recognized?

Accepted Answer

$12,000
Overall gain on sale: $100,000 - $60,000 = $40,000
Contract price: $100,000
Gross proﬁt percentage: $40,000/$100,000 = 40%
Gain recognized in 2012: $30,000 × 40% = $12,000

Question 13

It is late December 2012 and Jones Company, a calendar year taxpayer, wants to shift income from 2012 to 2013. Which of the following methods will not achieve its objective?

Accepted Answer

Since inventories are an income-producing factor then the accrual basis must be used to account for them. However, a cash basis taxpayer can use the cash basis for all other transactions.

Question 14

Newco is a 90% subsidiary of P Company. With respect to its accounting period:

Accepted Answer

the tax beneﬁt rule deals with recoveries of amounts previously deducted

Question 15

In 2012, X Company received full payment of an account payable from Jones Company. X Company had written the account oﬀ as a bad debt in 2011. In deciding how to treat the payment from Jones Company, X Company would use:

Accepted Answer

Large C corporations, partnerships that have a C corporation as a partner, tax shelters, and trusts that are subject to tax on unrelated trade or business income (but only with respect to such income) cannot use the cash basis.

Question 16

In order to secure prior approval for a change in accounting period, the taxpayer:

Accepted Answer

the NOL can be carried forward only. the exceptions to this rule are not met.

Question 17

Which taxpayers cannot use the cash basis method of accounting?

Accepted Answer

Cash basis taxpayers take the deduction when the expense is paid, not when it is incurred
 the expense is considered to be paid when the check is mailed or delivered, not when it is cashed

Question 18

Mars uses the cash basis of accounting and is a calendar year ﬁrm. On December 31, 2012, it mailed checks in payment of expenses. fte checks were not cashed until January 2013. Mars may take a deduction for these expenses in:

Accepted Answer

Prepaying nonrefundable commissions will produce a deduction in the year of prepayment (2001). ftis will reduce income in 2001, which is not Jones Company's objective

Question 19

B&B Company uses the cash basis for accounting purposes. B&B primarily performs a service; however, it does sell a signiﬁcant amount of inventory.

Accepted Answer

the taxpayer should advise the IRS within 30 days of receiving permission to change accounting methods that it intends to continue to use the current method of accounting. However, even after the 30 days expire, a taxpayer is not precluded from continuing to use its current method of accounting.

Question 20

Mallie Co. uses the dollar-value LIFO inventory method. Inventory of January 1, 20112 was $100,000 at base year prices. Inventory on December 31, 2012 was $160,000 at base year prices and was $200,000 at actual prices. What is the value of Mallie Co.'s ending inventory?

Accepted Answer

$175,000
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Quiz 13: Tax Accounting