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Exam 16: Accounting Periods and Methods

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Question 41

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Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method.In 2015,the company entered into a contract to construct a building for $900,000.Camelia estimated that the cost of constructing the building would be $600,000.In 2015,the company incurred $150,000 in costs under the contract.In 2016,the company incurred an additional $500,000 in costs to complete the contract.The company's marginal tax rate in all years was 35%.

A) Camelia must report $300,000 of income in 2015.
B) Camelia is not required to report any income from the contract until 2016 when the contract is completed.
C) Camelia must recognize $75,000 of income in 2015.
D) Camelia should amend its 2015 tax return to decrease the profit on the contract for that year.
E) None of the above.

F) C) and E)
G) B) and C)

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Question 42

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Albert is in the 35% marginal tax bracket.He sold a building in the current year for $450,000.Albert received $110,000 cash at closing,the buyer assumed Albert's mortgage for $120,000,and the buyer gave Albert a 6% note for $220,000 due in two years.The Federal rate was 6%.Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straight-line depreciation) .Assuming he did not elect out of the installment method,Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts? ​ Section 1231 Gain Unrecaptured § 1250 Gain Taxed at 25%

A) $66,000 $0
B) $0 $66,000
C) $90,000 $90,000
D) $90,000 $0
E) $0 $110,000

F) A) and E)
G) B) and D)

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Question 43

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In 2015,Norma sold Zinc,Inc. ,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2016 with accrued interest at the Federal rate.Norma's basis in the stock was $250,000.This was Norma's only installment sale transaction.Which of the following statements is correct?

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

Kathy was a shareholder in Matrix,Inc. ,when she sold the corporation a commercial building.The building cost $500,000 and the balance in the accumulated depreciation account was $400,000.Matrix,Inc. ,paid $100,000 in the year of sale and gave Kathy a note for $400,000 plus adequate interest due in 2017.

Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $10 million in the year of the sale and a note for $15 million,payable in three years with interest at the Federal rate.Gold's basis in the stock was $5 million.Assume that Gold Corporation will report the gain by the installment method where the method is permitted.

Walter sold land (a capital asset) to an unrelated party for $100,000 cash and a 4% note for $150,000 due in three years.His basis in the land was $40,000.Walter and the purchaser are cash basis taxpayers.Which of the following statements is correct?

Dr.Stone incorporated her medical practice and elected to use a fiscal year ending September 30th.For the fiscal year ending September 30,2015,the corporation earned $40,000 profits each month,before Dr.Stone's salary and income tax.Dr.Stone received a salary that averaged $30,000 per month.Next year (fiscal year ending September 30,2016),Dr.Stone expects the average monthly profits before salary and taxes to be $48,000.What is the minimum salary Dr.Stone can receive for the last three months of calendar year 2015 to ensure that the corporation can deduct salary equal to the corporation's before salary income for the fiscal year ending September 30,2016?

In the case of a small home construction company that builds under long-term contracts,generally:

In 2015,Father sold land to Son for $50,000 cash and an installment note for $150,000 due in 2019.Father's basis was $100,000.In 2016,after paying $8,000 interest but nothing on the principal,Son sold the land for $300,000 cash.What gain,if any,must Father recognize in 2016?

The Yellow Equipment Company,an accrual basis C corporation,is a manufacturer's representative and works on a commission basis (15% of sales that it places) and does not carry inventory.In November 2015,Yellow made a sale and collected a commission for $20,000.In June of 2016,the customer had not received the equipment from the manufacturer and canceled the order.As a result,Yellow was required to refund the $20,000 commission to the manufacturer.Yellow's taxable income in 2015 was $70,000,and in 2016 Yellow's taxable income was $25,000 after deducting the refund.The applicable tax rate schedule is 15% on the first $50,000 of income and 25% on income in excess of $50,000.What is the effect of the refund on Yellow's 2016 tax liability?

Robin Construction Company began a long-term contract in 2015.The contract price was $800,000.The estimated cost of the contract at the time it was begun was $500,000.The actual cost incurred in 2015 was $350,000.The contract was completed in 2016 and the cost incurred that year was $125,000.Under the percentage of completion method:

Under the percentage of completion method,if the actual costs are ____ the estimated costs,the taxpayer must pay interest on the underpayment of prior years' taxes.

Which of the following statements is true concerning the disposition of an installment note?

Ramon sold land in 2015 with a cost of $80,000 for $200,000.The sales agreement called for a $50,000 down payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years.What would be the consequences of the following (treat each part independently and assume Ramon uses the installment method whenever possible): a.In 2015,Ramon gave one of the $50,000 installment obligations to a close relative. b.In 2015,Ramon transferred the installment obligations ($50,000) to his 100% owned corporation. c.Ramon collected the $50,000 plus $12,000 interest on January 1,2016,and died on January 2,2016.

Wendy sold property on the installment basis in 2013 for more than her basis in the property.Wendy was to receive installment payments at the end of each year for the next five years.In 2015,Wendy was killed in a car accident and the note was transferred to her estate.

Charlotte sold her unincorporated business for $600,000 in 2015.The sales contract allocated $120,000 to equipment,$300,000 to land,and $180,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $150,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?

Brown Corporation had consistently reported its income by the cash method.The corporation should have used the accrual method because inventories are material to the business.In 2015,Brown timely filed a request to change to the accrual method.At the beginning of 2015,Brown had accounts receivable of $75,000.Also,Brown had merchandise on hand with a cost of $150,000 and accounts payable for merchandise of $45,000.The accounts receivable,inventory,and accounts payable balance per books were zero.Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2015.

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

Father sold land to Son for $500,000 in 2015.Father's basis in the land was $100,000.Son paid Father $50,000 and gave Father a note for $450,000 due in 2018.In 2016,Son sold the land for $600,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.