b. Determine the amount and character of the recognized gain from the sale of the land.
The from the sale of the land is $[removed], of which $[removed] is not subject to recapture.
Problem 17-45 (LO. 2, 3, 5)
Anna received tangible personal property with a fair market value of $65,000 as a gift in 2014. The donor had purchased the property for $77,000 and had taken $77,000 of depreciation. Anna used the property in her business. Anna sells the property for $23,000 in 2016.
a. Indicate whether the following statements are “True” or “False” regrading the tax status when Anna sells the property.
The property is a § 1231 asset for Anna.
Anna’s carryover basis was $65,000.
The property has § 1245 depreciation recapture potential of $77,000.
b. When she sells the property for $23,000, how much of the gain, if any, is § 1245 depreciation recapture? $[removed]
Problem 17-52 (LO. 7)
On August 10, 2014, Jasper purchased business equipment for $40,000. On his 2014 tax return, $40,000 of § 179 immediate expense was taken on the equipment. On July 14, 2015, Jasper sold the equipment for $12,000. What is the nature of disposition gain or loss? Where is it reported on the 2015 Form 4797?
Refer to Form 4797.
The property was a § 1231 asset. Therefore, the gain of $[removed] is treated as ordinary income . As such it is reported on the 2015 Form 4797, .
Discussion Question 18-3 (LO. 1)
A law practice was incorporated on January 1, 2016, and expects to earn $25,000 per month before deducting the lawyer’s salary. The lawyer owns 100% of the stock. The corporation (a personal service corporation) and the lawyer both use the cash method of accounting. The corporation does not need to retain any of the earnings in the business; thus, the salary of the lawyer (a calendar year taxpayer) will equal the corporation’s net income before salary expense.
Complete the statement below in response to the following question: “If the corporation could choose any tax year and pay the lawyer’s salary at a time that would be most tax efficient (but at least once every 12 months), what tax year should the corporation choose and when should the salary be paid each year?”
The ideal tax year would end on , and the salary would be paid each . By using a year, the lawyer will always have $[removed] of deferred income.
Discussion Question 18-7 (LO. 2)
In December 2016, Nell, Inc., an accrual basis taxpayer, paid $12,000 for insurance premiums for her business for the 2017 calendar year.
Nell Inc., can deduct $[removed] of insurance premiums in 2016.
Discussion Question 18-10 (LO. 2)
Based on the following events, complete the statements regarding cash and accrual methods of accounting:
a. Purchased new equipment, paying $50,000 cash and giving a note payable for $30,000 due next year.
must capitalize the cost of the equipment, $[removed], and recover the cost through depreciation over the class life of the asset.
b. Paid $3,600 for a three-year service contract on the new equipment.
must capitalize the prepaid expense and recover its cost through a three-year amortization.
c. Paid $1,800 for services to be provided over the current and following years. Assume that the accrual basis taxpayer has not adopted Rev. Proc. 2004–34.
will report $1,800 in the year of receipt.
d. Received a $3,000 note from a customer for services provided in the current year. The market value of the note was only $2,400.
includes the $3,000 in gross income in the year the services are performed. will include the $2,400 in income when the note is received.
Problem 18-43 (LO. 1)
In 2015, Juan entered into a contract to write a book. The publisher advanced Juan $50,000, which was to be repaid out of future royalties. If the book was not completed by the end of 2016, however, Juan would be required to repay the publisher for the advance. Juan did not complete the book in 2016, and in accordance with the agreement, he repaid the $50,000 to the publisher in 2017. Juan is a cash basis taxpayer.
a. Indicate whether the following statements are “Correct” or “Incorrect”. Assume Juan’s marginal tax rate is 15% in 2015 and 35% in 2017.
Juan would be required to include in 2015 gross income the $50,000.
In 2015, he would be allowed a deduction for the repayment.
In 2017, he would be allowed a deduction for the repayment.
The deduction in 2017 would reduce his 2017 tax by $17,500.
b. What if Juan’s marginal tax rate was 35% in 2015 and 15% in 2017?
The repayment in 2017 would usually reduce his taxes by $[removed] . However, § 1341 permits the repayment of the income received under a claim of right to reduce his taxes in 2017 by $[removed].
Problem 18-46 (LO. 2, 5)
Select the accounting method that the taxpayers are allowed to use in the following businesses.
A gift shop with average annual gross receipts of $900,000.
An accounting partnership with annual gross receipts of $12 million.
A drywall subcontractor who works on residences and has annual gross receipts of $3 million.
An incorporated insurance agency with annual gross receipts of $6 million.
Problem 18-47 (LO. 2)
Blue Company, an architectural firm, has a bookkeeper who maintains a cash receipts and disbursements journal. At the end of the year (2016), the company hires you to convert the cash receipts and disbursements into accrual basis revenues and expenses. The total cash receipts are summarized as follows:
Collections on accounts receivable
Total cash receipts
The accounts receivable from customers at the end of the year are $120,000. You note that the accounts receivable at the beginning of the year were $190,000. The cash sales included $30,000 of prepayments for services to be provided over the period January 1, 2016, through December 31, 2018.
Do not round intermediate computations. If required, round your final answers to the nearest dollar.
a. Of the adjustments below, classify as either “Yes” (those that will be made) or “No” (not made) regarding the $590,000 of cash receipts to be converted to the accrual method.
The ending accounts receivable are added to the cash receipts.
The beginning accounts receivable are added to the cash receipts.
The loan proceeds are deducted from the cash receipts.
The entire amount of the prepayment for services is deducted from the cash receipts.
The company’s accrual basis gross income for 2016 is $[removed].
b. Which method should be recommended for Blue to use, the cash method or the accrual method?
c. The company does not maintain an allowance for uncollectible accounts. Would you recommend that such an allowance be established for tax purposes?
Problem 18-59 (LO. 5)
Rust Company is a real estate construction company with average annual gross receipts of $4,000,000. Rust uses the completed contract method, and the contracts require 18 months to complete.
a. Which of the following costs would be allocated to construction in progress by Rust? Classify the following costs as either one that should be “Capitalized” or one that should be “Expensed”.
The payroll taxes on direct labor.
The current services pension costs for employees whose wages are included in direct labor.
Accelerated depreciation (for financial statement purposes) on equipment used for the contracts.
Freight charges on materials assigned to contracts.
The past service costs for employees whose wages are included in direct labor.
Bidding expenses for contracts awarded.
b. Assume that Rust generally builds commercial buildings under contracts with the owners and reports the income using the completed contract method. The company is considering building a series of similar stores for a retail chain. The gross profit margin would be a low percentage, but the company’s gross receipts would triple.
Complete a letter to your client, Rust Company, explaining the tax accounting implications of entering into these contracts.
Hoffman, Young, Raabe, Maloney, & Nellen, CPAs5191 Natorp BoulevardMason, OH 45040
September 18, 2016
Rust CompanyP. O. Box 1000Harrisonburg, VA 22807
To the Board of Directors of Rust Company:
You asked me to summarize the tax accounting implications upon entering into the proposed line of high-volume and low-gross-profit-rate contracts. The new contracts would generally cause of your tax liabilities.
With the increased volume, gross receipts would exceed $[removed] a year, and the company be required to use the percentage of completion method. Under your present method of accounting, the completed contract method, the on a contract is recognized the contract is completed, which is generally the year following the year when the contract is started or the second year after the contract is started. Under the percentage of completion method, of the profit on a contract is included in the income each year.
As a result of exceeding $[removed] in gross receipts, these contracts subject to the percentage of completion method—and not just the new type of contract you are considering. Therefore, in deciding whether to enter these contracts, or the contract terms, you should take into account the added interest caused by payments of income taxes.
Please contact me if you would like to ask any questions, or if you would like me to calculate the actual effects of changing to the percentage of completion method.
Stuart Day, CPA Partner