Acct 421a Chapter 16
ACCT 421A: CORPORATE TAX : Chapter Sixteen
DISCUSSION QUESTIONS
5. How are farmers treated differently from other producers in regard to tax accounting? Since farmers are usually allowed to use the cash method of accounting, the UNICAP rules do not apply to farmers, except in the case of plants with a reproduction period of more than two years. The farmer can elect to use the farm price method of the unit-livestock-price-method. A farmer may also elect to average the income from farming as if it was earned over the three preceding years. Farmers are also granted special treatment in regard to the year income must be reported following a natural disaster or drought.
6. In December 2011, Nell, a cash basis taxpayer, paid insurance premiums of $12,000 on rental property for the period February 1, 2012 through January 31, 2013. How much of the premiums can Nell deduct in 2011? None of the insurance premiums paid of $12,000 can be deducted in 2011. The prepayment period extends beyond the tax year following the year of payment and therefore must be capitalized.
7. In 2011, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled $80,000 and the inventory on hand totaled $520,000. What is the amount of the adjustment due to the change in accounting method?
The adjustment due to the change in accounting method is $480,000 ($240,000 - $80,000 + $320,000). Under the cash method, the accounts payable have not been included in income, the accounts payable have not been deducted, and the inventory has been deducted.
8. Compare the cash basis and accrual basis of accounting as applied to the following: a) Fixed assets Fixed assets are accounted for in the same manner by both cash and accrual basis taxpayers. They are capitalized and depreciated over their depreciable lives. b) Prepaid expenses Under the one-year rule, both
DISCUSSION QUESTIONS
5. How are farmers treated differently from other producers in regard to tax accounting? Since farmers are usually allowed to use the cash method of accounting, the UNICAP rules do not apply to farmers, except in the case of plants with a reproduction period of more than two years. The farmer can elect to use the farm price method of the unit-livestock-price-method. A farmer may also elect to average the income from farming as if it was earned over the three preceding years. Farmers are also granted special treatment in regard to the year income must be reported following a natural disaster or drought.
6. In December 2011, Nell, a cash basis taxpayer, paid insurance premiums of $12,000 on rental property for the period February 1, 2012 through January 31, 2013. How much of the premiums can Nell deduct in 2011? None of the insurance premiums paid of $12,000 can be deducted in 2011. The prepayment period extends beyond the tax year following the year of payment and therefore must be capitalized.
7. In 2011, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled $80,000 and the inventory on hand totaled $520,000. What is the amount of the adjustment due to the change in accounting method?
The adjustment due to the change in accounting method is $480,000 ($240,000 - $80,000 + $320,000). Under the cash method, the accounts payable have not been included in income, the accounts payable have not been deducted, and the inventory has been deducted.
8. Compare the cash basis and accrual basis of accounting as applied to the following: a) Fixed assets Fixed assets are accounted for in the same manner by both cash and accrual basis taxpayers. They are capitalized and depreciated over their depreciable lives. b) Prepaid expenses Under the one-year rule, both