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Allowable Taxable Year. For each of the following cases,
indicate whether the taxpayer has selected an allowable tax year in an initial
year. If the year selected is not acceptable, indicate what an acceptab le year
would be.
a. A corporation selects a January 15 year-end.
b. A corporation selects a March 31 year-end.
c. A corporation selects a year that ends on the last Friday
in March.
d. A partnership selects a year that ends on December 31 and
has three equal partners whose years end on March 31, April 30, and June 30.
e. An S corporation selects a December 31 year-end.

Change in Accounting Period. In which of the following
instances is a taxpayer permitted to change accounting periods without IRS
approval?
a. A calendar-year taxpayer who wishes to change to a year
that ends on the last Friday in December.
b. ABC Partnership has filed its tax return using a
fiscal-year ending on March 31 for over 40 years. The partnership wishes to
change to a calendar year-end that coincides with its partners’ year-end.
c. Iowa Corporation, a newly acquired subsidiary, wishes to
change its year-end to coin – cide with its parent.

Annualization . Each of the following cases involves a
taxable year of less than 12 months. In which situations is annualization
required?
a. A new corporation formed in September elects a calendar
year.
b. A calendar-year individual dies on June 15.
c. Jean, who has been using a calendar year, marries Hank, a
fiscal-year taxpayer. Soon after the marriage, Jean changes her tax year to
coincide with her husband’s tax year.
d. A calendar-year corporation liquidates on April 20.

Short Period Return. Lavanya, a single taxpayer, is a
practicing accountant. She obtains permission to change her tax year from the
calendar year to a year ending July 31. Her practice income for the seven
months ending July 31 is $38,500. In addition, Lavanya has $3,000 of interest
income and $6,500 of itemized deductions. What is her tax for the short period?

Cash Basis Expenses. How much of the following expenses are
currently deductib le by a cash basis taxpayer?
a. Medical prescriptions costing $20 paid by credit card
(medical expenses already exceed the AGI floor). b. Prepaid interest (not
related to points) of $200 on a residential loan.
c. Taxpayer borrows $300 from the bank to make a charitable
contribution. The $300 is paid to the charitable organization before the end of
the tax year.
d. Taxpayer gives a note to his church indicating an intent
to contribute $300.
e. A calendar-year individual mails a check for $200 to his
church on December 31. The check is postmarked December 31 and clears the bank
on January 4.

Economic Perfonnance. In light of the economic performance
requirement, how much is deductible by the following accrual-basis corporate
taxpayers this year?
a. Camp Corporation sells products with a one -year
warranty. Camp estimates that the warranty costs on products sold during this
year will amount to $80,000. Camp performs $38,000 of warranty work on products
sold last year and $36,000 of warranty work on products sold this year.
b. Data Corporation agrees to pay $10,000 this year and
$10,000 next year to a software developer. The developer comp letes all work on
the software and delivers the product to Data this year.
c. Palm Corporation pays $5,000 to a supplier to guarantee
delivery of raw materials. The $5,000 is refundable if Palm decides not to
acquire the materials.
d. This year North Corporation pays a $1,000 security
deposit on space it rents for a new office. In addition, North pays current
year rent of $18,000. The security deposit is refundable if the property is
returned in good condition.

Single-Pool LIFO. Prime Corporation begins operations in
late 2019. Prime decides to use the single-pool LIFO method. Year-end
inventories under FIFO are as follows:
The price index for 2019 is 130%; for 2020, 134 %; and 2021,
140 %. What are 2020 and 2021 inventories?

Installment Sale. Ace Construction Company sells a used
crane to Go Construction for $80,000. The crane, which originally cost
$900,000, is fully depreciated. Under Sec. 1245 depreciation recapture rules,
the entire gain is taxable as ordinary income. Ace receives a down payment of
$20,000 and is to receive $20,000 per year for three additional years plus
interest of 8%, which is greater than the applicable federal rare.
a. Compute the gain from the sale.
b. How much gain is taxable in the year of the sale?
c. What income does Ace report in each of the next three
years?

Installment Sales. First Company sold the following assets
during the year. Indicate whether First Company can use the installment method
to report each transaction. If not, how is the transaction reported? Assume
First Company is an accrual basis taxpayer.
a. First Company sold stock in a publicly held company
costing $35,000. First Company received a $20,000 down payment and is to
receive $20,000 per year for two years plus interest.
b. First Company sold land costing $150,000. First Company
received a $20,000 down payment and is to receive $20,000 per year for five
years plus interest.
c. First Company initiated credit sales of merchandise. The
company previously sold merchandise only to cash customers. Cash sales this
year totaled $4,000,000. Credit sales totaled $500,000. Ar year end, First
Company has receivables of $100,000. The company expects to collect only
$85,000 of the current receivables.