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Exam 18: Accounting Periods and Methods

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Question 61

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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?

A) If the Federal rate is 3%, interest will be imputed at that rate.
B) If the Federal rate is 5%, interest will be imputed at that rate and the capital gain will be reduced.
C) If the Federal rate is 4.5%, interest will be imputed at that rate and the capital gain will be increased.
D) All of the above.
E) None of the above.

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

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Question 62

Multiple Choice

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Crow Corporation has used the LIFO inventory method for the past 10 years. During that time, the prices Crow pays for the inventory have increased by 50%. Its inventory value when it first adopted LIFO was $5,000,000. The company began using a just-in-time inventory system the same year it adopted LIFO, and although sales have increased, the quantities of goods on hand at year end has not changed in the past ten years. The corporation's marginal tax rate has been 35% in all of the years. As a result of the LIFO election:

A) The company has deferred $5,000,000 of income tax.
B) The company has deferred $1,750,000 ($5,000,000 × .35) of income tax.
C) The LIFO election did not defer any income tax because the quantity of goods on hand has not changed.
D) The company has deferred $875,000 [(.50) ($5,000,000) (.35) ] of income tax.
E) None of the above.

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

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Question 63

Multiple Choice

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In 2017, 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 2018. Beth's recognized gain from the installment sale in 2017 is:

If an installment sale contract does not charge interest on the sale of a capital asset, only capital gain will be recognized over the life of the contract.

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, 2017, 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?

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

Teal, Inc., used the lower of cost or market to value inventory in 2017. The ending inventory at cost was $400,000 and the ending inventory at market was $385,000. In 2018, Teal changed to the LIFO method. The company's beginning LIFO inventory is $400,000.

In 2017, 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 2017, Cashmere incurred $300,000 of costs on the contract, and in 2018 the contract was completed at a total cost of $425,000. Cashmere is not required to recognize any income from the contract until 2018.

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 regarding a 52-53 week tax year is correct?