CHAPTER 16 ACCOUNTING PERIODS AND METHODS

1.
A doctor’s incorporated medical practice may end the last
day of any month of the year.
a. True
b. False

2.
A C corporation that does not have a natural business year
must use a calendar year as its tax year.
a. True
b. False

A C corporation’s
selection of a tax year, generally, is independent of the tax year of its
principal shareholders.
c. True
d. False

3. 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. The partnership may use a calendar year and partner F may continue
to use the tax year ending June 30th.
a. True
b. False

4.
The tax year of one of the principal partners may determine
the partnership’s tax year.
a. True
b. False

5. 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 2014 until he files his tax return for his year ending June
30, 2015.
a. True
b. False

6. 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.
a. True
b. False

7. A CPA practice that
is incorporated earns 40% of its annual revenues in the months of March and
April. Although the CPA practice is a professional services corporation (PSC),
it may use a fiscal year ending April 30th.
a. True
b. False

8.
The ability of the CPA to timely prepare a tax return is a
justification for the partnership’s use of a particular tax year.
a. True
b. False

9. In 2004, a medical
doctor who incorporated his practice elected a fiscal year ending September
30th. During the fiscal year ended September 30, 2014, he received a salary of
$190,000. During the period from October 1, 2014 to December 31, 2014, the
corporation paid the doctor a total salary of $60,000, and paid him $240,000 of
salary in the following 9 months. The corporation’s salary deduction for the
fiscal year ending September 30, 2015, is limited to $240,000.
a. True
b. False

10.Laura Corporation
changed its tax year-end from July 31st to December 31st in 2014. The income
for the period August 1, 2014 through December 31, 2014 was $35,000. 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 June – December 2014 income will be taxed at 34%.

a. True
b. False

11.In 2014, T
Corporation changed its tax year from ending each April 30th to ending each
December 31st. The corporation earned $60,000 during the period May 1, 2014
through December 31, 2014. The annualized income for the short year is $90,000.
a. True
b. False

12.Snow Corporation
began business on May 1, 2014, and elected to use the calendar year for tax
purposes. Brown Corporation, a calendar year corporation, sold all of its
assets and liquidated as of April 30, 2014. Neither Snow Corporation nor Brown
Corporation must annualize their income for their 2014 returns.
a. True
b. False

13.Ted, a cash basis
taxpayer, received a $150,000 bonus in 2014 when he was in the 35% marginal tax
bracket. In 2015, 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
2015 tax liability by $14,000 (.35 × $40,000).
a. True
b. False

14.Generally, an
advantage to using the cash method of accounting, as compared to the accrual
method, is that under the cash method income is not recognized until it is
collected, rather than being taxed as soon as the taxpayer has the right to
collect the income.
a. True
b. False

15.A calendar year, cash
basis corporation began business on April 1, 2014, and paid $2,400 for a
24-month liability insurance policy. An accrual basis, calendar year taxpayer
also began business on April 1, 2014, and purchased a 24- month liability
insurance policy. The accrual basis taxpayer must amortize the premiums over 24
months but the cash basis taxpayer may deduct the total premiums in 2014.
a. True
b. False

.

16.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.
a. True
b. False