Reference no: EM1310162
1.Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years. For 2009, the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%. During 2009, the corporation paid $18,000 on its estimated state income tax liability for that year. The remaining $12,000 of 2009 state income tax was paid in March 2010. In June 2009, the corporation paid $4,000 on its year 2007 state income tax liability, as a result of an audit of the 2007 return that was conducted in 2009. As a result of the above:
a.Pink should deduct $18,000 as state income taxes for 2009.
b.Pink should deduct $22,000 as state income taxes for 2009.
c.Pink should deduct $30,000 as state income taxes for 2009.
d.Pink should deduct $34,000 as state income taxes for 2009.
e.None of the above.
2.The taxpayer has consistently, but incorrectly, used an allowance for bad debts. At the beginning of the year, the balance in the allowance account is $90,000.
a.If the IRS examines the taxpayer's return and requires the taxpayer to change accounting methods, the taxpayer will be required to recognize an additional $90,000 of income (one-half in the current year and one-half in the following year) as the adjustment due to the change in accounting methods.
b.If the taxpayer voluntarily changes methods, the $90,000 adjustment can be spread over the current and three following years.
c.If the taxpayer voluntarily changes methods, the $90,000 reserve can be used to absorb bad debts until the account balance is zero.
d.If the IRS examines the taxpayer's return, no adjustment to the reserve account will be required if the balance is consistent with prior bad debt experience.
e.None of the above.
3.When the IRS requires a taxpayer to change accounting methods:
a.The taxpayer may be subject to penalties and interest.
b.The taxpayer generally is required to make the change as of the beginning of the current tax year.
c.The adjustments due to the change can be spread over subsequent years.
d.All of the above are correct.
e.None of the above is correct.
4.The installment method applies to which of the following sales with payments being made in the year following the year of sale?
a.An automobile dealer's sale of an SUV.
b. A cash basis individual's sale of General Electric common stock.
c.A manufacturer's sale of fully-depreciated equipment.
d.All of the above.
e.None of the above.
5.Abby sold property and reported the gain by the installment method. Her basis in the property was $120,000 and it was subject to $30,000 of depreciation recapture. Abby sold the property for $80,000 cash on the date of sale, June 30, 2008, and a note for $170,000 (plus interest at the Federal rate) due on June 30, 2009. Abby's gain to be reported in 2008 (exclusive of interest) is:
a.$30,000.
b.$41,600.
c.$62,000.
d.$130,000.
e.None, because she had not recovered her cost as of the end of 2007.
6.Jay sold land (a capital asset) to an unrelated party for $20,000 cash and a 9% note for $100,000 due in two years. His basis in the land was $40,000. Which of the following statements is correct?
a.If the Federal rate is 6%, interest will be imputed at that rate.
b.If the Federal rate is 7%, interest will not be imputed.
c.If the Federal rate is 9%, interest will be imputed at 10%.
d.All of the above.
e.None of the above.
7.Related-party installment sales include all of the following except the first seller's:
a.Brothers and sisters.
b.Controlled corporations.
c.Lineal descendants.
d.Partnerships in which the seller has an interest.
e.All of the above would be considered related parties.
8.Father sold land to Son for $100,000 in 2008. Father's basis in the land was $40,000.Son paid Father $25,000 and gave Father a note for $75,000 due in 2010. In 2009, Son sold the land for $80,000 cash and a note for $80,000 due in 2011. The notes all bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.
a.Father must recognize $60,000 of income in 2008.
b.Father's gain is all ordinary income.
c.Father must recognize a $45,000 gain in 2009.
d.Son is not permitted to use the installment method to report his gain.
e.None of the above.