CGC1
What are trusts, estates, beneficiaries, and other parties?
The Code does not contain a definition of a trust. However, the term usually refers to an arrangement created by a will or by an inter vivos (lifetime) declaration through which trustees take title to property for the purpose of protecting or conserving it for the beneficiaries. An estate is created upon the death of every individual. The estate is charged with collecting and conserving all of the individual's assets, satisfying all liabilities, and distributing the remaining assets to the heirs identified by state law or the will. A beneficiary is a person who derives advantage from something, esp. a trust, will, or life insurance policy.
Calculate the domestic production activities deduction
The Domestic Production Activities deduction is based on the following formula: 9% × Lesser of Qualified production activities income Taxable (or modified adjusted gross) income or AMTI The deduction cannot exceed 50% of an employer's W-2 wages paid to employees engaged in qualified production activities
What impact do free on board (FOB) terms have on inventory valuation?
When Walgreens obtains legal title to goods, it must record them as purchases in that fiscal period, assuming a periodic inventory system. Thus, goods shipped to Walgreens f.o.b. shipping point, but in transit at the end of the period, belong to Walgreens. It should show the purchase in its records, because legal title to these goods passed to Walgreens upon shipment of the goods. To disregard such purchases results in understating inventories and accounts payable in the balance sheet, and understating purchases and ending inventories in the income statement.
What is the best method to use for depreciation based on given circumstances?
1. Activity method (units of use or production). 2. Straight-line method. 3. Decreasing charge methods (accelerated): a. Sum-of-the-years'-digits. b. Declining-balance method. 4. Special depreciation methods: a. Group and composite methods. b. Hybrid or combination methods.
Identify when to exclude an item from gross income
1. Donative items 2. Personal and welfare items 3. Wage and salary supplements 4. Investor items 5. Other benefits
Determine the cost recovery under MACRS
3 year 200% - ADR midpoints of 4 years or less 5 year 200% - ADR midpoints more than 4 years and less than 10 years 7 year 200% - ADR midpoints of more than 10 years and less than 16 years 10 year 200% - ADR midpoints of more than 16 years and less than 20 years 15 year 200% - ADR midpoints of more than 20 years and less than 25 years 20 year 200% - ADR midpoints of more than 25 years and less other than real property with an ADR midpoint of 27.5 years and more
Identify medical expenses and calculate the medical expense deduction
A medical expense does not have to relate to a particular ailment to be deductible. Because the definition of medical care is broad enough to cover preventive measures, the cost of periodic physical and dental exams qualifies even for a taxpayer in good health. Amounts paid for unnecessary cosmetic surgery are not deductible medical expenses. However, if cosmetic surgery is deemed necessary, it is deductible as a medical expense.
Determine the correct filing requirement and status for a taxpayer
A taxpayer who is unmarried or separated from his or her spouse by a decree of divorce or separate maintenance and does not qualify for another filing status must use the rates for single taxpayers. It generally is advantageous for married individuals to file a joint return, because the combined amount of tax is lower.
How is the value of long-term notes payable calculated?
Like a bond, a note is valued at the present value of its future interest and principal cash flows. The company amortizes any discount or premium over the life of the note, just as it would the discount or premium on a bond.
Identify listed property and special rules for them
Listed property, Property that includes (1) any passenger automobile; (2) any other property used as a means of transportation; (3) any property of a type generally used for purposes of entertainment, recreation, or amusement; (4) any computer or peripheral equipment (with an exception for exclusive business use); (5) any cellular telephone (or other similar telecommunications equipment); and (6) any other property of a type specified in the Regulations. If listed property is predominantly used for business, the taxpayer is allowed to use the statutory percentage method of cost recovery. Otherwise, the straight-line cost recovery method must be used.
Explain why congress creates tax credits that reduce federal tax collections
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How are transactions between a partner and the partnership reported?
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How is a partner's income tax return affected by specific partnership items?
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How is a selling partner's gain or loss on the sale or exchange of a partnership interest reported?
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Identify business-related tax credits
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Identify tax credits that apply to individual taxpayers
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Identify the difference between refundable and nonrefundable credits and how they are applied
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Identify the taxpayers subject to passive loss rules that limit deductions for losses
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What accounting periods and accounting methods can partnerships use?
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What are the impacts to individual partners when liquidating a partnership?
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What are the rules pertaining to partnership taxation?
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What tax impacts are there when forming a partnership with cash and property contributions?
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Are there limits on deductions for partnership losses?
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Describe how passive loss rules apply to rental activities
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Determine a partner's basis in the partnership interest and explain how liabilities affect the basis computation.
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Discuss the rules for identifying a passive activity
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Do partnership provisions also apply to limited liability companies (LLCs) and limited liability partnerships (LLPs)?
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Does a partnership have a taxable income?
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Explain how discounts offered to customers have on the value of receivables
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Explain why at-risk and passive loss limitations were put into tax law
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Apply the rules for material participation
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Determine the proper application of a casualty loss deduction
A casualty is defined as "the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected or unusual nature" " (e.g., floods, storms, fires, auto accidents). Individuals may deduct a casualty loss only if the loss is incurred in a trade or business or in a transaction entered into for profit or arises from fire, storm, shipwreck, or other casualty or from theft. Individuals usually deduct personal casualty losses as itemized deductions subject to a $100 nondeductible amount and to an annual floor equal to 10 percent of adjusted gross income that applies after the $100 per casualty floor has been applied. Special rules are provided for the netting of certain casualty gains and losses.
What is a contingency, and when do the disclosure requirements require recording in the accounting records?
A contingency is "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Whenever there is a contingency, companies determine if the contingency is probable and can be reasonably estimated. If both of these criteria are met, the company records the contingency in the financial statements.
Determine how to apply a bad debt deduction
A deduction is permitted if a business account receivable subsequently becomes partially or completely worthless, providing the income arising from the debt previously was included in income. Available methods are the specific charge-off method and the reserve method. However, except for certain financial institutions, TRA of 1986 repealed the use of the reserve method for 1987 and thereafter. If the reserve method is used, partially or totally worthless accounts are charged to the reserve. A nonbusiness bad debt deduction is allowed as a short-term capital loss if the loan did not arise in connection with the creditor's trade or business activities. Loans between related parties (family members) generally are classified as nonbusiness. §166.
Apply dependency exemption rules
A dependency exemption is available for either a qualifying child or a qualifying relative. Qualifying Child Qualifying Relative Relationship Support Abode Relationship or member of household Age Gross income Support Joint return Joint return Citizenship or residency Citizenship or residency
Determine the tax effects of worthless securities, including §1244 stock
A loss (usually capital) is allowed for a security that becomes worthless during the year. The loss is deemed to have occurred on the last day of the year. Special rules apply to securities of affiliated companies and small business stock. §165. The ordinary loss treatment is limited to $50,000 ($100,000 for married individuals filing jointly) per year. Losses on § 1244 stock in excess of the statutory limits receive capital loss treatment.
Determine if certain items are considered income by applying the Internal Revenue Code rule
Alimony and separate maintenance payments are deductible by the party making the payments and are includible in the gross income of the party receiving the payments. No income is realized if the goods or services are provided at no charge. No income is recognized by the annuitant at the time the cash value of the annuity increases because the taxpayer has not actually received any income. A narrow exception permits a prize or award to be excluded from gross income if all of the following requirements are satisfied: -The prize or award is received in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement (e.g., Nobel Prize, Pulitzer Prize, or faculty teaching award). -The recipient transfers the prize or award to a qualified governmental unit or nonprofit organization. -The recipient was selected without any action on his or her part to enter the contest or proceeding. -The recipient is not required to render substantial future services as a condition for receiving the prize or award.
How are dividends payable recorded?
Amount owed by a corporation to its stockholders as a result of board of directors' authorization; reported in equity
What are the basic assumptions used in accounting?
An implicit assumption is that users need reasonable knowledge of business and financial accounting matters to understand the information contained in financial statements. This point is important. It means that financial statement preparers assume a level of competence on the part of users. This assumption impacts the way and the extent to which companies report information.
Arrive at the correct number of personal exemptions
An individual cannot claim a personal exemption if he or she is claimed as a dependent by another. When a husband and wife file a joint return, they claim two personal exemptions. As long as an individual qualified as a dependent at the time of death, the full amount of the exemption is claimed for the year.
Correctly apply the tax rules for deductible and nondeductible losses of individuals
An individual may deduct the following losses under § 165(c): Losses incurred in a trade or business. Losses incurred in a transaction entered into for profit. Losses caused by fire, storm, shipwreck, or other casualty or by theft. Because a casualty must be sudden, unexpected, and unusual, progressive deterioration (such as erosion due to wind or rain) is not a casualty because it does not meet the suddenness test.
What method is used to cost allocate an intangible asset?
As a basis for amortization, one of two amounts is used: the ratio of current revenues to current and anticipated revenues (the percent-of-revenue approach), or the straight-line method over the remaining useful life of the asset (straight-line approach). Must use whichever of those amounts is greater.
Understand basic property transaction rules
Capital assets include any property held by the taxpayer other than property listed in § 1221. The list in § 1221 includes inventory, accounts receivable, and depreciable property or real estate used in a business. Thus, the sale or exchange of assets in these categories usually results in ordinary income or loss treatment. Capital gains are taxable, and capital losses are netted against them, resulting in a net capital gain or loss. The special tax rate applicable to long-term capital gains is called the alternative tax computation. It is used only if the taxpayer's regular tax rate exceeds the applicable alternative tax rate. The 0 percent rate, noted above, applies only if the taxpayer's regular tax bracket is 15 percent or less.
How are research and development costs accounted for?
Research and development (R&D) costs are not in themselves intangible assets. Costs Associated with R&D Activities: Materials, Equipment, and Facilities. Personnel. Purchased Intangibles. Contract Services. Indirect Costs.
How are stock splits accounted for?
Companies record no entry for a stock split, but make a memorandum note to indicate the changed par value and the increased number of shares.
What is the cost of property, plant, and equipment?
Cost of land: Includes all expenditures made to acquire land and to ready it for use. Land costs typically include (1) the purchase price; (2) closing costs, such as title to the land, attorney's fees, and recording fees; (3) costs incurred in getting the land in condition for its intended use, such as grading, filling, draining, and clearing; (4) assumption of any liens, mortgages, or encumbrances on the property; and (5) any additional land improvements that have an indefinite life. Cost of buildings: Includes all expenditures related directly to their acquisition or construction. These costs include (1) materials, labor, and overhead costs incurred during construction, and (2) professional fees and building permits. Cost of equipment: Includes the purchase price, freight and handling charges incurred, insurance on the equipment while in transit, cost of special foundations if required, assembling and installation costs, and costs of conducting trial runs.
How are short-term payables recorded?
Current liabilities: Notes payable Short-term debt: Notes payable refinanced Total liabilities
What is depreciation?
Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset
Understand the ethical guidelines that will apply to you in your tax practice
Do not take questionable positions on a client's tax return in the hope that the return will not be selected for audit by the IRS. Any positions taken should be supported by a good-faith belief that they have a realistic possibility of being sustained if challenged. The client should be fully advised of the risks involved and of the penalties that will result if the position taken is not successful. A practitioner can use a client's estimates if they are reasonable under the circumstances. If the tax law requires receipts or other verification, the client should be so advised. In no event should an estimate be given the appearance of greater accuracy than is the case. For example, an estimate of $1,000 should not be deducted on a return as $999. Every effort should be made to answer questions appearing on tax returns. A question need not be answered if the information requested is not readily available, the answer is voluminous, or the question's meaning is uncertain. The failure to answer a question on a return cannot be justified on the grounds that the answer could prove disadvantageous to the taxpayer. Upon learning of an error on a past tax return, advise the client to correct it. Do not, however, inform the IRS of the error. If the error is material and the client refuses to correct it, consider withdrawing from the engagement. This will be necessary if the error has a carryover effect and prevents the current year's tax liability from being determined correctly.
Recognize the economic, social, equity, and political considerations that justify various aspects of the tax law.
Economic considerations. The emphasis here is on tax provisions that help regulate the economy and encourage certain activities and types of businesses. Social considerations. Some tax provisions are designed to encourage (or discourage) certain socially desirable (or undesirable) practices. Equity considerations. Of principal concern in this area are tax provisions that alleviate the effect of multiple taxation, recognize the wherewithal to pay concept, mitigate the effect of the annual accounting period concept, and recognize the eroding effect of inflation. Political considerations. Of significance in this regard are tax provisions that represent special interest legislation, reflect political expediency, and exhibit the effect of state and local law.
Distinguish between the economic, accounting, and tax concepts of gross income
Economic income: The change in the taxpayer's net worth, as measured in terms of market values, plus the value of the assets the taxpayer consumed during the year. Because of the impracticality of this income model, it is not used for tax purposes. Accounting income: The accountant's concept of income is generally based upon the realization principle. Financial accounting income may differ from taxable income (e.g., accelerated depreciation might be used for Federal income tax and straight-line depreciation for financial accounting purposes). Differences are included in a reconciliation of taxable and accounting income on Schedule M-1 or Schedule M-3 of Form 1120 for corporations. Tax income: Unearned (prepaid) income received by an accrual basis taxpayer often is taxed in the year of receipt.
Determine the benefit derived from deductions for and from adjusted gross income
Following is a partial list of the items classified as deductions for AGI by § 62: • Expenses attributable to a trade or business carried on by the taxpayer. A trade or business does not include the performance of services by the taxpayer as an employee. • Expenses incurred by a taxpayer in connection with the performance of services as an employee if the expenses are reimbursed and other conditions are satisfied. • Deductions that result from losses on the sale or exchange of property by the taxpayer. • Deductions attributable to property held for the production of rents and royalties. • The deduction for payment of alimony. • The deduction for part of the self-employment tax paid by a self-employed taxpayer. • The deduction for the medical insurance premiums paid by a self-employed taxpayer for coverage of the taxpayer, a spouse, and any dependents. • Certain contributions to pension, profit sharing, and annuity plans of self-employed individuals. • The deduction for certain retirement savings allowed by § 219 (e.g., traditional IRAs). • The penalty imposed on premature withdrawal of funds from time savings accounts or deposits. • The deduction for moving expenses. • The deduction for interest paid on student loans. • The deduction for qualified tuition and related expenses under § 222 The deduction for up to $250 for teacher supplies for elementary and secondary school teachers
Why are bonds issued at a price different from face value?
If the rate employed by the investment community (buyers) differs from the stated rate, the present value of the bonds computed by the buyers (and the current purchase price) will differ from the face value of the bonds. The difference between the face value and the present value of the bonds determines the actual price that buyers pay for the bonds. This difference is either a discount or premium. • If the bonds sell for less than face value, they sell at a discount. • If the bonds sell for more than face value, they sell at a premium.
How do the impairment rules impact asset value?
If the sum of the expected future net cash flows is less than the carrying amount of the asset, an impairment has occurred (recoverability test). The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset (fair value test). The loss is reported as part of income from continuing operations, "Other expenses and losses" section.
Identify if accountants have ethical rules to follow related to financial reporting
In accounting, as in other areas of business, we frequently encounter ethical dilemmas. Some of these dilemmas are simple and easy to resolve. However, many are not, requiring difficult choices among allowable alternatives. Companies that concentrate on "maximizing the bottom line," "facing the challenges of competition," and "stressing short-term results" place accountants in an environment of conflict and pressure. Basic questions such as, "Is this way of communicating financial information good or bad?" "Is it right or wrong?" and "What should I do in the circumstance?" cannot always be answered by simply adhering to GAAP or following the rules of the profession. Technical competence is not enough when encountering ethical decisions. Doing the right thing is not always easy or obvious. The pressures "to bend the rules," "to play the game," or "to just ignore it" can be considerable. For example, "Will my decision affect my job performance negatively?" "Will my superiors be upset?" and "Will my colleagues be unhappy with me?" are often questions business people face in making a tough ethical decision. The decision is more difficult because there is no comprehensive ethical system to provide guidelines. Time, job, client, personal, and peer pressures can complicate the process of ethical sensitivity and selection among alternatives.
How are stock issuances recorded?
In issuing stock, companies follow these procedures: First, the state must authorize the stock, generally in a certificate of incorporation or charter. Next, the corporation offers shares for sale, entering into contracts to sell stock. Then, after receiving amounts for the stock, the corporation issues shares. The corporation generally makes no entry in the general ledger accounts when it receives its stock authorization from the state of incorporation.
Define all parts of the federal income tax formula
Income (broadly conceived) Less: Exclusions (income that Is not subject to tax) Gross income (income that is subject to tax) Less: Certain deductions (usually referred to as deductions for adjusted gross income) Adjusted gross income Less: The greater of certain personal and employee deductions (usually referred to as itemized deductions) or The standard deduction (including any additional standard deduction and Less: Personal and dependency exemptions Taxable income Tax on taxable income (see the Tax Tables and Tax Rate Schedules in Appendix A) Less: Tax Credits (including Federal income tax withheld and other prepayments of Federal income tax) Tax due for refund
Describe when income must be reported from the discharge of indebtedness
Income from discharge of indebtedness: A transfer of appreciated property (fair market value is greater than adjusted basis) in satisfaction of a debt is an event that triggers the realization of income. The transaction is treated as a sale of the appreciated property followed by payment of the debt. Foreclosure by a creditor is also treated as a sale or exchange of the property.
Calculate the contribution to a retirement account
Individual Retirement Accounts (IRAs) A type of retirement plan to which an individual with earned income can contribute a statutory maximum of $5,000 in 2009, 2010, 2011, and 2012. IRAs can be classified as traditional IRAs or Roth IRAs. With a traditional IRA, an individual can contribute and deduct a maximum of $5,000 per tax year in 2012. The deduction is a deduction for AGI. However, if the individual is an active participant in another qualified retirement plan, the deduction is phased out proportionally between certain AGI ranges (note that the phaseout limits the amount of the deduction and not the amount of the contribution). With a Roth IRA, an individual can contribute a maximum of $5,000 per tax year in 2012. No deduction is permitted. However, if a five-year holding period requirement is satisfied and if the distribution is a qualified distribution, the taxpayer can make tax-free withdrawals from a Roth IRA. The maximum annual contribution is phased out proportionally between certain AGI ranges
Describe the role played by the IRS and the courts in the evolution of the federal tax system
Influence of the IRS. Many tax provisions are intended to aid the IRS in the collection of revenue and the administration of the tax law. Influence of the courts. Court decisions have established a body of judicial concepts relating to tax law and have, on occasion, led Congress to enact statutory provisions to either clarify or negate their effect.
What is the difference between a tangible and intangible asset?
Intangible assets are assets that lack physical substance and that are not financial instruments. Intangible assets derive their value from the rights and privileges granted to the company using them. They are normally classified as long-term assets. Companies write off (amortize) limited-life intangible assets over their useful lives and they periodically assess indefinite-life intangibles for impairment.
What is the estimated useful life of a trademark, copyright, and patent?
Long-term assets Trademark: 10 year periods Copyright: Life of creator + 70 years Patent: 20 year period
Identify limitations on itemized deductions
Medical, casualty and theft, and investment interest deductions are not subject to the 3 percent reduction. The 3 percent reduction may not reduce itemized deductions that are subject to the reduction to below 20 percent of their initial amount. Beginning in 2006, this reduction is subject to a partial phase out, and for 2010, all of the reduction is phased out. Under the sunset provision, the phaseout of itemized deductions was scheduled to be reinstated beginning in 2011. The Tax Relief Act (TRA) of 2010 put off the reinstatement for two years (i.e., 2011 and 2012).
Calculate the moving expense deduction
Moving expenses: A deduction for AGI is permitted to employees and self-employed individuals provided certain tests are met. The taxpayer's new job must be at least 50 miles farther from the old residence than the old residence was from the former place of work. In addition, an employee must be employed on a full-time basis at the new location for 39 weeks in the 12-month period following the move. Deductible moving expenses include the cost of moving the household and personal effects, transportation, and lodging expenses during the move. The cost of meals during the move is not deductible. Qualified moving expenses that are paid (or reimbursed) by the employer can be excluded from the employee's gross income. In this case, the related deduction by the employee is not permitted.
How is off-balance-sheet financing used?
Off-balance-sheet financing is an attempt to borrow funds in such a way to prevent recording obligations. Examples of off-balance-sheet arrangements are (1) non-consolidated subsidiaries, (2) special-purpose entities, and (3) operating leases.
How are construction-project interest costs recorded?
Only actual interest (with modifications) should be capitalized. The rationale for this approach is that during construction, the asset is not generating revenue and therefore companies should defer (capitalize) interest cost. Once construction is completed, the asset is ready for its intended use and revenues can be earned. Any interest cost incurred in purchasing an asset that is ready for its intended use should be expensed.
What are unearned (or deferred) revenues, and how are they recorded?
Payment received before delivering goods or rendering services Aug. 1 Cash 216,000 Unearned revenue 216,000 (12,000 x $18) Dec. 31 Unearned revenue 90,000 Subscription revenue 90,000 ($216,000 x 5/12 = $90,000)
Determine if a taxpayer should pay the tax on a particular item of income
Personal services must be included in the gross income of the person who performs the services. Income from property (interest, dividends, and rent) must be included in the gross income of the owner of the property. Income received by the taxpayer's agent is considered to be received by the taxpayer. Each partner in a partnership must report his or her distributive share of the partnership's income and deductions for the partnership's tax year ending in or with the partner's tax year. For Federal tax purposes, each spouse is taxed on one-half of the income from property belonging to the community.
Identify deductible and nondeductible, personal expenses
Persons who retire and move to a new location incur personal nondeductible moving expenses. If the retired person accepts a full-time job in the new location, the moving expenses are deductible.
What impact do constraints have on reporting accounting information?
Providing useful financial information is limited by a pervasive constraint on financial reporting—cost should not exceed the benefits of a reporting practice.
Determine the special rules that apply to the following items: public policy limitations, political activities, excessive executive compensation, investigation of business opportunities, hobby losses, vacation-home rentals, payment of others' expenses, personal expenditures, capital expenditures, related-party transactions, and expenses related to tax-exempt income
Public policy limitations: The courts developed the principle that a payment in violation of public policy is not a necessary expense and is not deductible Political activities: Allowing deductions might encourage abuses and enable businesses to have undue influence on the political process. Excessive executive compensation: The compensation of shareholder-employees of closely held corporations is subject to the reasonableness requirement. The millionaire's provision limits the amount the employer can deduct for the compensation of a covered executive to $1 million annually. The third limitation applies only to covered executives of companies receiving Troubled Asset Relief Program (TARP) assistance. In this case, the deduction for compensation paid to a covered executive is limited to $500,000. Investigation of business opportunities: If the taxpayer is in a business that is the same as or similar to that being investigated, all investigation expenses are deductible in the year paid or incurred. Hobby losses: The Code restricts the amount of losses that an individual can deduct for hobby activities so that these transactions cannot be used to offset income from other sources. The hobby loss rules apply only if the activity is not engaged in for profit. Hobby expenses are deductible only to the extent of hobby income. Vacation-home rentals: Section 280A allows deductions on residences used primarily for personal purposes only to the extent of the income generated. Only a break-even situation is allowed; no losses can be deducted. Payment of others' expenses: To be deductible, an expense must be incurred for the taxpayer's benefit or arise from the taxpayer's obligation. An individual cannot claim a tax deduction for the payment of the expenses of another individual. Personal expenditures: Section 262 states that "except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses." To justify a deduction, an individual must be able to identify a particular section of the Code that sanctions the deduction. Capital expenditures: The Code specifically disallows a deduction for "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate." The Regulations further define capital expenditures to include those expenditures that add to the value or prolong the life property or adapt the property to a new or different use. Related-party transactions: The tax law places restrictions upon the recognition of gains and losses between related parties because of the potential for abuse. For example, restrictions are placed on the deduction of losses from the sale or exchange of property between related parties. In addition, under certain circumstances, related-party gains that would otherwise be classified as capital gain are classified as ordinary income. Expenses related to tax-exempt income: Certain income, such as interest on municipal bonds, is tax-exempt. The law also allows the taxpayer to deduct expenses incurred for the production of income. Deduction dis-allowance provisions, however, make it impossible to make money at the expense of the government by excluding interest income and deducting interest expense.
What are the characteristics of different types of corporate bonds?
SECURED AND UNSECURED BONDS. Secured bonds are backed by a pledge of some sort of collateral. Mortgage bonds are secured by a claim on real estate. Collateral trust bonds are secured by stocks and bonds of other corporations. Bonds not backed by collateral are unsecured. A debenture bond is unsecured. A "junk bond" is unsecured and also very risky, and therefore pays a high interest rate. TERM, SERIAL BONDS, AND CALLABLE BONDS. Bond issues that mature on a single date are called term bonds; issues that mature in installments are called serial bonds. Serially maturing bonds are frequently used by school or sanitary districts, municipalities, or other local taxing bodies that receive money through a special levy. Callable bonds give the issuer the right to call and retire the bonds prior to maturity. CONVERTIBLE, COMMODITY-BACKED, AND DEEP-DISCOUNT BONDS. If bonds are convertible into other securities of the corporation for a specified time after issuance, they are convertible bonds. Two types of bonds have been developed in an attempt to attract capital in a tight money market—commodity-backed bonds and deep-discount bonds. Commodity-backed bonds (also called asset-linked bonds) are redeemable in measures of a commodity, such as barrels of oil, tons of coal, or ounces of rare metal. REGISTERED AND BEARER (COUPON) BONDS. Bonds issued in the name of the owner are registered bonds and require surrender of the certificate and issuance of a new certificate to complete a sale. A bearer or coupon bond, however, is not recorded in the name of the owner and may be transferred from one owner to another by mere delivery. INCOME AND REVENUE BONDS. Income bonds pay no interest unless the issuing company is profitable. Revenue bonds are so called because the interest on them is paid from specified revenue sources.
Describe the purpose of each of these three sources of tax law: statutory, administrative, and judicial
Statutory Sources of Tax Law Internal Revenue Code Codification of the Federal tax law provisions in a logical sequence Have had three codes: 1939, 1954, 1986 Administrative Sources of Tax Law Treasury Department Regulations Revenue Rulings Revenue Procedures, and Various other administrative pronouncements Judicial Sources There are four courts of original jurisdiction (trial courts): 1. U.S. Tax Court: Regular 2. U.S. Tax Court: Small Cases Division 3. Federal District Court 4. U.S. Court of Federal Claims
Identify when receipts can be excluded under the tax-benefit rule
Tax benefit rule is a provision that limits the recognition of income from the recovery of an expense or a loss properly deducted in a prior tax year to the amount of the deduction that generated a tax saving. Assume that last year Gary had medical expenses of $3,000 and adjusted gross income of $30,000. Because of the 7.5 percent limitation, Gary could deduct only $750 of these expenses [$3,000 - (7.5% × $30,000)]. If this year Gary is reimbursed by his insurance company for the $3,000 of expenses, the tax benefit rule limits the amount of income from the reimbursement to $750 (the amount previously deducted with a tax saving).
What items are included in payroll and the associated payables?
Taxes: Social Security Taxes Income Tax Withholding
What is the rule-setting authority of the Financial Accounting Standards Board, the Securities and Exchange Commission with regard to accounting regulations and enforcement, and the International Accounting Standards Board?
The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee (IASC). It is responsible for developing International Financial Reporting Standards (the new name for International Accounting Standards issued after 2001), and promoting the use and application of these standards.
Understand the audit process utilized by the IRS as part of the administration of tax law.
The IRS utilizes mathematical formulas and statistical sampling techniques to select tax returns that are most likely to contain errors and to yield substantial amounts of additional tax revenues upon audit. The mathematical formula yields what is called a Discriminant Index Formula (DIF) score. It is the DIF score given to a particular return that may lead to its selection for audit. To update the DIF components, the IRS selects a cross section of returns, which are subject to various degrees of inspection (i.e., information return verification, correspondence, and face-to-face audits with filers). The results of these audits highlight areas of taxpayer noncompliance and enable the IRS to use its auditors more productively.
What is the effect of the dollar-value last-in, first-out (LIFO) on income and asset valuation?
The LIFO (last-in, first-out) method matches the cost of the last goods purchased against revenue. LIFO will result in lower current assets and lower net income.
Calculate the amortization amount for an intangible asset
The amount of the deduction is determined by amortizing the adjusted basis of such intangibles ratably over a 15-year period beginning in the month in which the intangible is acquired.
Calculate the tax liability
The basic Federal income tax rate structure is progressive, with current rates ranging from 10 percent to 35 percent. The tax liability is computed using either the Tax Table method or the Tax Rate Schedule method. Tax Table is a table that is provided for taxpayers with less than $100,000 of taxable income. Separate columns are provided for single taxpayers, married taxpayers filing jointly, heads of households, and married taxpayers filing separately.
Determine the effect of the carry back and carryover provisions
The carryover period is 20 years. A loss sustained in 2012 is used in this order: 2010, 2011, 2013 through 2032. A three-year carryback period is available for any portion of an individual's NOL resulting from a casualty or theft loss. The three-year carryback rule also applies to NOLs that are attributable to presidentially declared disasters that are incurred by a small business.
Understand why we have an income tax, its legal basis, and how congress uses tax law.
The income tax has proved to be a major source of revenue for the Federal government. The current law is entitled the Internal Revenue Code of 1986, which largely carries over the provisions of the 1954 Code. One trend that has caused considerable concern is the increasing complexity of the Federal income tax laws. In the name of tax reform, Congress has added to this complexity by frequently changing the tax laws. Most recent legislation continues this trend.
Identify generally accepted accounting principles
The major sources of GAAP come from the organizations discussed earlier in this chapter. It is composed of a mixture of over 2,000 documents that have developed over the last 60 years or so. It includes such items as FASB Standards, Interpretations, and Staff Positions; APB Opinions; and AICPA Research Bulletins.
Identify the objectives of financial accounting
The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity. The objective of financial reporting identifies investors and creditors as the primary users for general-purpose financial statements.
Identify the deductibility of state and local income taxes and sales taxes
The position of the IRS is that state and local income tax imposed upon an individual are deductible only as itemized deductions, even if the taxpayer's sole source of income is from a business, rents, or royalties. Individuals can elect to deduct either their state and local income tax or their sales/use tax paid as an itemized deduction on Schedule A of Form 1040.
What are qualitative characteristics of accounting information?
The primary qualitative characteristics are relevance and faithful representation.
How is a bond issue-price determined?
The selling price of a bond issue is set by the supply and demand of buyers and sellers, relative risk, market conditions, and the state of the economy. The investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal. The rate used to compute the present value of these cash flows is the interest rate that provides an acceptable return on an investment commensurate with the issuer's risk characteristics. The interest rate written in the terms of the bond indenture (and often printed on the bond certificate) is known as the stated, coupon, or nominal rate. The issuer of the bonds sets this rate. The stated rate is expressed as a percentage of the face value of the bonds (also called the par value, principal amount, or maturity value).
How are the accounting entries different for straight-line and effective interest amortization?
The straight-line method amortizes a constant amount each interest period. Interest Expense Discount on Bonds Payable Cash The preferred procedure for amortization of a discount or premium is the effective interest method (also called present value amortization). Under the effective interest method, companies: 1. Compute bond interest expense fi rst by multiplying the carrying value (book value) of the bonds at the beginning of the period by the effective-interest rate. 2. Determine the bond discount or premium amortization next by comparing the bond interest expense with the interest (cash) to be paid.
What is goodwill?
The value of all favorable attributes that relate to a company over and above the cost (purchase price) of the company's identifiable tangible and intangible net assets. Goodwill is often referred to as the most intangible of intangible assets; the only way to sell it is to sell the business. Companies do not amortize goodwill because it is considered to have an indefinite life.
What is an imputed interest rate, and how is it used?
To estimate the present value of a note under such circumstances, a company must approximate an applicable interest rate that may differ from the stated interest rate. This process of interest-rate approximation is called imputation, and the resulting interest rate is called an imputed interest rate.
How is the accounting different for a bond issuance between interest dates?
To record interest payment include return of accrued interest Cash Interest Payable Bonds Payable Interest Expense Interest Payable Cash
Does the income statement reflect gains from treasury stock reissuance?
Treasury stock is not an asset. When a company purchases treasury stock, a reduction occurs in both assets and stockholders' equity. It is inappropriate to imply that a corporation can own a part of itself. A corporation may sell treasury stock to obtain funds, but that does not make treasury stock a balance sheet asset. When a corporation buys back some of its own outstanding stock, it has not acquired an asset; it reduces net assets. The possession of treasury stock does not give the corporation the right to vote, to exercise preemptive rights as a stockholder, to receive cash dividends, or to receive assets upon corporate liquidation. Treasury stock is essentially the same as unissued capital stock. No one advocates classifying unissued capital stock as an asset in the balance sheet.
Use any of the methods to determine the allowance for bad debt
Under the direct write-off method, when a company determines a particular account to be uncollectible, it charges the loss to Bad Debt Expense. The allowance method of accounting for bad debts involves estimating uncollectible accounts at the end of each period.
Identify the time periods for the different tax depreciation methods
Under the modified accelerated cost recovery system (MACRS) , the cost of an asset is recovered over a predetermined period that is generally shorter than the useful life of the asset or the period the asset is used to produce income. Straight-line method for personal property: The property is depreciated using the class life (recovery period) of the asset with a half-year convention or a mid-quarter convention, whichever is applicable. The major characteristics of the accelerated cost recovery system (ACRS) are listed in Concept Summary 8.5. Note that for personalty, except for 20-year property, the recovery period expired (all of the cost recovery basis has been recovered) prior to 2005.
What method is used to calculate depletion?
Units-of-production method (Total cost - Salvage value) / Total estimated units available
Record receivables sold with recourse and without recourse
When buying receivables without recourse, the purchaser assumes the risk of collectibility and absorbs any credit losses. The seller uses a Due from Factor account (reported as a receivable) to account for the proceeds retained by the factor to cover probable sales discounts, sales returns, and sales allowances. For receivables sold with recourse, the seller guarantees payment to the purchaser in the event the debtor fails to pay. To record this type of transaction, the seller uses a financial components approach, because the seller has a continuing involvement with the receivable. Values are now assigned to such components as the recourse provision, servicing rights, and agreement to reacquire. In this approach, each party to the sale only recognizes the assets and liabilities that it controls after the sale.
What is a lump-sum purchase of assets, and how is each asset valued?
When this common situation occurs, the company allocates the total cost among the various assets on the basis of their relative fair values. The assumption is that costs will vary in direct proportion to fair value. To determine fair value, a company should use valuation techniques that are appropriate in the circumstances.
Identify limitation on certain itemized deductions applicable to high-income taxpayers
You must reduce your total itemized deductions by 3% of the excess of your adjusted gross income over the applicable threshold: $300,000 if married filing jointly, $250,000 for a single taxpayer, and $150,000 for married filing separately.
List the business and personal expenditures that are deductible either as miscellaneous itemized deductions or as other itemized deductions
itemized deductions Personal and employee expenditures allowed by the Code as deductions from adjusted gross income. Examples include certain medical expenses, interest on home mortgages, state income taxes, and charitable contributions. Itemized deductions are reported on Schedule A of Form 1040. Certain miscellaneous itemized deductions are reduced by 2 percent of the taxpayer's adjusted gross income. In addition, a taxpayer whose adjusted gross income exceeds a certain level (indexed annually) must reduce the itemized deductions by 3 percent of the excess of adjusted gross income over that level. Miscellaneous itemized deductions: A special category of itemized deductions that includes expenses such as professional dues, tax return preparation fees, job-hunting costs, unreimbursed employee business expenses, and certain investment expenses. Such expenses are deductible only to the extent they exceed 2 percent of adjusted gross income. §67.
How does the accounting change if a stock dividend is large vs. small?
small (ordinary) stock dividends A stock dividend (a corporation's issuance of its own stock to its stockholders, on a pro rata basis) of less than 20-25 percent of the number of shares previously outstanding. The company transfers, from retained earnings to capital stock and additional paid-in capital, the fair value of the stock issued. Payment of the stock dividend does not affect any asset or liability, but is a reclassification of stockholders' equity. large stock dividend A stock dividend (a corporation's issuance of its own stock to its stockholders, on a pro rata basis) of more than 20-25 percent of the number of shares previously outstanding. The company transfers, from retained earnings to capital stock, the par value of the stock issued. Such a distribution (often referred to as a split-up effected in the form of a stock dividend) typically reduces the market price of the stock, making it more marketable. The effects of large stock dividends thus make them more like stock splits than like an ordinary stock dividend.
