Question 1

A disadvantage to using the accrual method of accounting,as compared to the cash method,is that under the accrual method the income may be recognized before it is actually collected.

Accepted Answer

The statement is true. Under the accrual method, income is recognized when it is earned, regardless of whether it has been collected or not. This can result in a mismatch between the income recognized and the actual cash received, which can create cash flow issues for a business.

Question 2

In 2003,a medical doctor who incorporated his practice elected a fiscal year ending September 30th.During the fiscal year ended September 30,2011,he received a salary of $180,000.During the period from October 1,2011 to December 31,2011,the corporation paid the doctor a total salary of $50,000,and paid him $200,000 of salary in the following 9 months.The corporation's salary deduction for the fiscal year ending September 30,2012,is limited to $200,000.

Accepted Answer

The question states that the corporation's salary deduction for the fiscal year ending September 30,2012, is limited to $200,000. Since the corporation paid the doctor a total salary of $250,000 during this fiscal year, the deduction is limited to $200,000. Therefore, the statement is true (option A).

Question 3

A partnership cannot elect to use a tax year other than a calendar year merely because the partnership's CPA is too busy to prepare a calendar year return.

Accepted Answer

The IRS requires partnerships to use a calendar year unless they can establish a business purpose for using a different fiscal year. A busy CPA does not qualify as a valid business purpose.

Question 4

Alice,Inc.,is an S corporation that has been in business for five years.Its annual gross receipts have never exceeded $1 million.The corporation operates a retail store and also owns rental property.The sales from the retail store and the rental income may be reported by the cash method,unless Alice previously elected the accrual method.

Accepted Answer

According to the IRS, S corporations that have average annual gross receipts of $25 million or less for the three previous tax years are generally allowed to use the cash method of accounting for tax purposes. Since Alice, Inc.'s annual gross receipts have never exceeded $1 million, it is eligible to use the cash method for reporting its sales from the retail store and rental income, unless it previously elected the accrual method.

Question 5

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.R & G Partnership must use September 30th as its tax year,unless it has a business purpose for using a different tax year.

Accepted Answer

This is correct as per the tax rules. Since Red Corporation's tax year ends on September 30th and Green Corporation is a calendar year taxpayer, the tax year for the partnership should be September 30th unless there is a valid business purpose for using a different tax year.

Question 6

A retailer must actually receive a claim for refund from the customer before a deduction can be taken for the refund.

Accepted Answer

This is because deducting for a refund before actually receiving a claim from the customer could result in inaccuracies and potential legal issues.

Question 7

A CPA practice that is incorporated earns 60% of its annual revenues in the months of February,March,and April.Because the CPA practice is a professional services corporation (PSC),it must use a calendar year to report its income.

Accepted Answer

The answer of A CPA practice that is incorporated earns...

Question 8

Franklin Company began business in 2008 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2008 through 2011.As a result of an audit by the IRS,Franklin was required to change to the accrual method of accounting beginning with 2012.The net adjustment due to the change is a positive adjustment to income.

Accepted Answer

When switching from the cash method to the accrual method, it is common for there to be a positive adjustment to income. This is because the accrual method requires recognition of revenue when earned, rather than when received, which can increase reported income in the year of the switch.

Question 9

A doctor's incorporated medical practice may end the last day of any month of the year.

Accepted Answer

The answer of A doctor's incorporated medical practice may end...

Question 10

A C corporation provides office janitorial services to various businesses.The corporation has average annual gross receipts of $3,500,000.The corporation cannot use the cash method of accounting.

Accepted Answer

According to the IRS, a C corporation with average annual gross receipts of $25 million or less for the prior three-year period may use the cash method of accounting. Since the corporation's annual gross receipts are $3,500,000, it is eligible to use the cash method of accounting.

Question 11

A C corporation in the manufacturing business must use a calendar year as its tax year unless the corporation has a business reason for using a tax year that is not a calendar year.

Accepted Answer

The answer of A C corporation in the manufacturing business...

Question 12

An S corporation's tax year,generally,is determined by the tax year of its principal shareholders.

Accepted Answer

The answer of An S corporation's tax year,generally,is determined by...

Question 13

Snow Corporation was a calendar year corporation that sold all of its assets and liquidated as of April 30,2012.Brown Corporation began business on May 1,2012 and elected to use a calendar year.Both Snow Corporation and Brown Corporation must annualize their income for their 2012 returns.

Accepted Answer

Snow Corporation does not need to annualize its income because it liquidated and ceased operations. Brown Corporation, however, must annualize its income since it began operations partway through the year.

Question 14

In 2011,T Corporation changed its tax year from ending each September 30th to ending each December 31st.The corporation earned $25,000 during the period October 1,2011 through December 31,2011.The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.

Accepted Answer

The annualized income for the short period will be calculated by multiplying the actual income earned during the short period by 12/3, which is 4. Therefore, the annualized income for the short period will be $100,000 ($25,000 x 4). Since the tax rates are progressive, the tax on $100,000 will be greater than the tax on $25,000, making the statement true.

Question 15

A calendar year,cash basis corporation began business on October 1,2012 and paid $2,400 for a 24-month liability insurance policy.An accrual basis,calendar year taxpayer also began business on October 1,2012 and purchased a 12-month liability insurance policy.The cash basis corporation can deduct $2,400 as insurance expense for its first tax year ending on December 31,2012,but the accrual basis taxpayer can deduct only $300 (3/12 ´ $1,200).

Accepted Answer

The cash basis corporation can only deduct the portion of the insurance that applies to the current tax year, which is $300 (3/24 of $2,400), not the entire $2,400. The accrual basis taxpayer can deduct $300 because it matches the expense to the period it covers.

Question 16

For purposes of determining the partnership's tax year,there may be more than one principal partner.

Accepted Answer

The determination of the partnership's tax year is based on the tax year of the principal partners. There may be multiple principal partners, each with their own tax year, that are relevant to the partnership's tax year determination.

Question 17

Laura Corporation changed its tax year-end from June 30th to December 31st in 2011.The income for the period July 1,2011 through December 31,2011 was $45,000.The corporate tax rate is 15% on the first $50,000 of income,25% on income from $50,001 to $75,000,and 34% on income from $75,001 to $100,000.A portion of Laura's July - December 2011 income will be taxed at 34%.

Accepted Answer

The income for the period July 1, 2011 through December 31, 2011 was $45,000, which is greater than $34,000. Therefore, a portion of Laura's July - December 2011 income will be taxed at 34%.

Question 18

The DEF Partnership had three equal partners when it was formed.Partners D and E were calendar year taxpayers and Partner F's tax year ended on June 30th before he joined the partnership.Partner F was required to change his tax year to end on December 31st upon joining the partnership.

Accepted Answer

The answer of The DEF Partnership had three equal partners...

Question 19

Ted,a cash basis taxpayer,received a $150,000 bonus in 2011 when he was in the 35% marginal tax bracket.In 2012,when Ted was in the 28% marginal tax bracket,it was discovered that the bonus was incorrectly computed,and Ted was required to refund $40,000 to his employer.As a result of the refund,Ted can reduce his 2012 tax liability by $14,000 (.35 ´ $40,000).

Accepted Answer

Since Ted is a cash basis taxpayer, the bonus income was included in his 2011 income and taxed at the 35% marginal tax bracket. However, when he had to refund a portion of the bonus in 2012, he could use the refund to reduce his taxable income for that year and therefore reduce his tax liability. The reduction in tax liability would be equal to his marginal tax rate in the year of the refund, which was 28%. Therefore, Ted can reduce his 2012 tax liability by $14,000 (.28 x $40,000).

Question 20

The Seagull Partnership has three equal partners.Partner A's tax year ends June 30th,and Partners B and C use a calendar year.If the partnership uses the calendar year to report its income,Partner A is permitted to defer partnership income earned from July through December 2011 until he files his tax return for his year ending June 30,2012.

Accepted Answer

Partner A can defer reporting the partnership income earned from July through December 2011 until the tax year ending June 30, 2012, because the partnership uses a calendar year, allowing Partner A to align the income reporting with his fiscal year.

Quiz 16: Accounting Periods and Methods