Fed Tax 1 Ch 11

The uniform capitalization rules​ (UNICAP) require the capitalization of some overhead costs that are expensed for financial accounting purposes. True False

True

Which of the following companies whose business involves long−term contracts will be eligible to use the completed contract​ method? A. a home construction company averaging​ $30 million in gross revenues each year B. only companies whose contract price is collected upon completion of the contract C. A small specialized historic renovation company whose projects typically last three years. Revenues average​ $20 million per year. D. all of the above

A. a home construction company averaging​ $30 million in gross revenues each year

An installment sale is best defined as A. any disposition of property where at least one payment is received after the close of the taxable year in which disposition occurs. Your answer is correct. B. any disposition of publicly traded securities or inventory where at least one payment is received after the close of the taxable year in which disposition occurs. C. any disposition of property in which at least three payments are received. D. any disposition of property in which the installment method is elected by the taxpayer.

A. any disposition of property where at least one payment is received after the close of the taxable year in which disposition occurs.

A business uses the same inventory method for both financial reporting and tax reporting. Because of the UNICAP​ requirement, ending inventory is likely to be A. higher for tax reporting purposes than for financial reporting purposes. B. the same for both financial and tax reporting as UNICAP requires uniform inventory accounting methods. C. higher for financial reporting purposes than for tax reporting purposes. D. none of the above.

A. higher for tax reporting purposes than for financial reporting purposes.

The installment method may be used for sales of all kinds of property with the exception of A. marketable securities. B. capital assets. C. personal property. D. real property.

A. marketable securities.

Which of the following businesses is most likely to benefit from an election to account for its inventory under​ LIFO? A. A company producing the newest version of a tablet with ultra—long battery life. It believes it has a one−year lead over the competition. B. A company producing parts for the auto industry—costs in this field tend to steadily climb. C. A company producing products with copper as a key component—copper prices fluctuate widely. D. None of the above.

B. A company producing parts for the auto industry—costs in this field tend to steadily climb.

Which of the following statements regarding UNICAP is incorrect​? A. The UNICAP rules result in more costs being included in inventory for tax purposes than for financial accounting. B. UNICAP requires that advertising and selling costs be allocated between inventory and cost of sales. C. Interest must be included in inventory if the property produced is real property or long−lived property. D. Taxpayers with gross receipts averaging more than​ $26,000,000 or more for the prior three years must apply the UNICAP provisions.

B. UNICAP requires that advertising and selling costs be allocated between inventory and cost of sales.

Which of the following partnerships can use the cash method of​ accounting? A. a chocolate manufacturer with average revenues of​ $30 million B. a CPA firm with average revenues of​ $30 million C. Both of the partnerships can elect the cash method of accounting. D. Neither of the partnerships can elect the cash method of accounting.

B. a CPA firm with average revenues of​ $30 million

The look−back interest adjustment involves the A. calculation of gross profit on an installment sale collection. B. calculation of interest on additional tax that would have been due if actual cost rather than estimated cost had been used on the percentage of completion method. C. calculation of additional tax due if actual cost rather than estimated cost had been used on the percentage of completion method. D. calculation of interest on an installment sale.

B. calculation of interest on additional tax that would have been due if actual cost rather than estimated cost had been used on the percentage of completion method.

In Year​ 1, a contractor agrees to build a building for​ $2,500,000 by the end of year 2. The​ builder's cost is estimated to be​ $1,800,000. The actual costs in Year 1 are​ $900,000 and Year​ 2's actual costs are​ $1,300,000. Under the completed contract​ method, the gross profit for Year 1 is A. $700,000. B. $300,000. C. $0. D. $350,000.

C. $0.

Under the percentage of completion​ method, gross income is reported A. when the contract is completed. B. using a percentage that is determined by dividing current year costs by the expected total revenue. C. based on the portion of work that has been completed. D. based on the portion of work that is incomplete.

C. based on the portion of work that has been completed.

Do accounting rules determine the amount of income to be reported by a​ taxpayer? A. The accounting methods used by a taxpayer determine the exact amount of income to be reported by a taxpayer in any given year and over the life of the taxpayer. B. The accounting methods used by a taxpayer have no bearing on the amount of income to be reported by a taxpayer in any given year or over the life of the taxpayer. C. In the long​ run, the amount of income reported by a taxpayer will vary significantly depending on the accounting methods used by the taxpayer. In a given year the amount of income reported by a taxpayer generally be the same regardless of the accounting method used by the taxpayer. D. In the long​ run, the amount of income reported by a taxpayer will generally be the same regardless of the accounting methods used by the taxpayer. In a given year the amount of income reported by a taxpayer can vary significantly depending on the accounting method used by the taxpayer.

D. In the long​ run, the amount of income reported by a taxpayer will generally be the same regardless of the accounting methods used by the taxpayer. In a given year the amount of income reported by a taxpayer can vary significantly depending on the accounting method used by the taxpayer.

How does a​ taxpayer's tax accounting method affect the amount of tax​ paid? A. The accounting methods used by a taxpayer affect the amount of tax paid by allowing the taxpayer to pay its taxes by installment on a monthly basis. Interest accrues on the unpaid balance. B. The accounting methods used by a taxpayer dictate the​ taxpayer's capital gain tax rate. It is preferable to adopt an accounting method that will result in a lower tax rate. C. The accounting methods used by a taxpayer dictate the​ taxpayer's regular tax rate. It is preferable to adopt an accounting method that will result in a lower tax rate. D. The accounting methods used by a taxpayer can accelerate or defer the recognition of​ income, and,​ thereby, change when the tax must be paid.​ Also, because of the progressive tax rate​ structure, taxes can be saved by spreading income over several​ years, rather than having income bunched into one​ year, pushing the taxpayer into higher brackets.

D. The accounting methods used by a taxpayer can accelerate or defer the recognition of​ income, and,​ thereby, change when the tax must be paid.​ Also, because of the progressive tax rate​ structure, taxes can be saved by spreading income over several​ years, rather than having income bunched into one​ year, pushing the taxpayer into higher brackets

A new business is established. It is not a seasonal business. All of the following are acceptable accounting tax years with the exception of A. an S corporation year ending October 31. B. a C corporation​ (not a personal service​ corporation) tax year ending on April 30. C. a partnership tax year ending on October 31 with three equal partners whose tax years end on September​ 30, October​ 31, and November 30. D. a C corporation​ (not a personal service​ corporation) tax year ending on February 15.

D. a C corporation​ (not a personal service​ corporation) tax year ending on February 15.

Under the cash method of​ accounting, all of the following are true with the exception of A. to some​ extent, a taxpayer may control the year in which an expense is deductible by choosing when to make the payment. B. gross income includes the value of property received. C. income is reported in the tax year in which payments are actually or constructively received. D. fixed assets are always expensed as the taxpayer pays for the assets.

D. fixed assets are always expensed as the taxpayer pays for the assets.

When accounting for long−term contracts​ (other than those for​ services), all of the following accounting methods may be acceptable with the exception of A. the completed contract method. B. the percentage of completion method. C. the modified percentage of completion method. D. the installment sale method.

D. the installment sale method.

For purposes of the accrual method of​ accounting, the economic performance test is met when A. all events have occurred that establish the fact of a liability. B. all events have occurred that fix the​ taxpayer's right to receive income. C. the amount of the item can be reasonably estimated. D. the property or services are actually provided.

D. the property or services are actually provided.

A cash−basis lawyer purchases an office building to use in her legal practice. To acquire the​ mortgage, the taxpayer must pay​ $5,000 in points. The taxpayer will deduct the points in the year paid. True False

False

A cash−basis taxpayer pays a bill with a credit card. The underlying expenditure is not deductible until the credit card bill is paid. True False

False

A taxpayer sells a parcel of land on the installment sale basis and will recognize the gain over the five−year installment schedule. Form 6252 must be included with his tax return only in the year of sale. True False

False

A taxpayer who uses the LIFO method of inventory valuation may use the lower of cost or market method. True False

False

A subsidiary corporation filing a consolidated return with its parent corporation must change its accounting period to conform with its​ parent's tax year. True False

True

Many taxpayers use the LIFO method of inventory valuation because during inflationary​ periods, LIFO normally results in the lowest valuation of ending inventory​ and, hence, the lowest taxable income. True False

True

Points paid on a mortgage to buy a personal residence are deductible in the year paid. True False

True

The installment method is not applicable to sales of inventory and marketable securities. True False

True