【正文】 e a calendar year. Answer c. is incorrect because the partnership’s tax year is dependent upon the partners’ tax years. Answer d. is incorrect because S corporations generally must use a calendar tax year. A C corporation in the retail grocery business is permitted to elect any month end as the close of its taxable year. PTS: 1 DIF: 1 REF: p. 163 to 165 OBJ: 1 NAT: AICPA FNReporting | AACSB Analytic MSC: 5 min 5. In the case of a partnership whose partners all use a calendar year, a reason that is acceptable to the IRS for using a tax year ending June 30th would be: a. The accountant is already overburdened with calendar year tax returns and could not timely file the partnership’s return. b. A December 31st inventory would be required if a calendar year was used, and the employees do not want to work on New Year’s Eve. c. The pany’s ine does not fluctuate a great deal from year to year. d. The business has a natural business year that ends June 30th. e. None of the above. 1612 2020 Comprehensive Volume/Test Bank ANS: D The IRS has issued Revenue Ruling 8757 to objectively determine the entity’s natural business year. PTS: 1 DIF: 1 REF: p. 165 OBJ: 1 NAT: AICPA FNReporting | AACSB Analytic MSC: 5 min 6. Purple Corporation, a personal service corporation (PSC), adopted a fiscal year ending September 30th. The sole shareholder of the corporation is a calendar year taxpayer. During the fiscal year ending September 30, 2020, the shareholderemployee received $120,000 salary. The corporation paid the shareholderemployee a salary of $15,000 during the period beginning October 1, 2020 through December 31, 2020. a. The corporation salary expense for the fiscal year ending September 30, 2020 is limited to $120,000. b. The corporation salary expense for the fiscal year ending September 30, 2020 is limited to $135,000. c. The corporation salary expense for the fiscal year ending September 30, 2020 is limited to $60,000. d. The corporation must switch to a calendar year. e. None of the above. ANS: C The corporation can deduct only the annualized amount paid in the period from October 1, 2020 through December 31, 2020 calculated as follows: $15,000 + $15,000[(12 – 3)/3] = $60,000. PTS: 1 DIF: 1 REF: p. 166 | Example 6 OBJ: 1 NAT: AICPA FNMeasurement | AACSB Analytic MSC: 5 min 7. A C corporation is required to annualize its ine: I. The year the corporation changes its tax year. II. The last year the corporation is in existence. III. The first year the corporation is in existence, if the first tax return includes less than 12 months. a. Only I is true. b. Only III is true. c. Only I and II are true. d. Only II and III are true. e. I, II, and II are true. ANS: A PTS: 1 DIF: 1 REF: p. 168 | p. 169 OBJ: 1 NAT: AICPA FNReporting | AACSB Analytic MSC: 5 min Accounting Periods and Methods 1613 8. In 2020, Godfrey received a $5,000 refund of his 2020 state ine tax. He included the refund in his 2020 gross ine in accordance with the tax benefit rule (., because the state ine tax had been deducted on his 2020 Federal ine tax return). In 2020, Godfrey’s 2020 state ine tax return was audited and he was required to pay an additional $4,000 of state ine tax. Godfrey was in the 15% tax bracket in 2020 and 2020, but his marginal tax bracket in 2020 is 35%. He will itemize his deductions on his 2020 return. a. The $4,000 payment in 2020 is not deductible. b. Godfrey must amend his 2020 return. c. The $4,000 payment in 2020 will reduce his 2020 Federal ine tax by $600 ($4,000 ? 15%). d. Godfrey can reduce his 2020 Federal ine tax by $1,400 ($4,000 ? 35%). e. None of the above. ANS: D The tax year in which the $4,000 payment is made (2020) applies for the deduction even though the deduction is an adjustment to ine taxed at a lower rate. PTS: 1 DIF: 2 REF: p. 1610 | Example 12 OBJ: 1 NAT: AICPA FNMeasurement | AACSB Analytic MSC: 10 min 9. Which of the following taxpayers is required to use the accrual method of accounting? a. A retail business with average annual gross receipts of $800,000. b. A medical doctor with average annual gross receipts of $2 million. c. An insurance agency with average annual gross receipts of $2 million. d. All of the above are required to use the accrual method. e. None of the above is required to use the accrual method. ANS: E Generally, sales and cost of goods sold for a retail business must be reported by the accrual method because inventories are material. However, for option a., the small business exception applies. Therefore, the retailer in option a. can use the cash method. The cash method can be used in options b. and c. because the medical doctor and insurance agency are service entities. PTS: 1 DIF: 1 REF: p. 1611 to 1613 OBJ: 2 NAT: AICPA FNReporting | AACSB Analytic MSC: 5 min 10. Karen, an accrual basis taxpayer, sold goods in October 2020 for $10,000. The customer was unable to pay cash. So the customer gave Karen a note for $10,000 that was payable in April 2020. The note bore interest at the Federal rate. The fair market value of the note at the end of 2020 was $9,000. Karen collected $10,000 from the customer in April 2020. Under the accrual method: a. Karen must recognize $10,000 of ine in 2020. b. Karen must recognize $9,000 of ine in 2020. c. Karen must recognize $10,000 of ine in 2020. d. Karen must recognize $1,000 of ine in 2020. e. None of the above. 1614 2020 Comprehensive Volume/Test Bank ANS: A Karen, an accrual basis taxpayer, must recognize as ine in 2020 the amount she has the right to receive ($10,000). The interest is not subject to the original issue discount rules because the note was for less than a year. PTS: 1 DIF: 1 REF: p. 1614 OBJ: 2 NAT: AICPA FNMea