Accounting Methods and Periods Flashcards
(47 cards)
What accounting methods do sole proprietorship use?
Cash, accrual, and hybrid
Individuals: when do they report?
Always on the calendar year-end
What account doesn’t exist under cash method?
Accounts receivable.
Individual Accrual: When does unearned income (prepaid income) recognized? Under GAAP?
In the year received.
GAAP: When earned.
I Accrual: Exception for service income recognition timing?
TP can elect to defer recognition into the next year IF the service is to be provided within the following year.
I Accrual: What must TP do if income is included in FS?
Must include the pmts in gross income in the year of receipt.
I Accrual: when can TP elect to defer recognition of advance pmt for goods?
When the method of accounting for sale is the same for tax and financial reporting purpose.
I Rental income: when is prepaid rent taxed for cash based TP? Accrual based TP?
Cash: Always when received.
Accrual: Above plus when (1) all the events have occurred to attach the taxpayer’s right to receive the income and (2) the amount of income can be determined with reasonable accuracy.
I Rental income: when is lease deposit taxed?
If refundable, not till it is clear the owner will keep it at the end of the lease term. Taxed only when the lessor receives an unrestricted right to it.
I Rental income: when is leasehold improvement taxed? At what value?
If it is made in lieu of rent.
At FV.
Business with inventory: what accounting method must be use in general? 3 Exceptions?
- Accrual.
1. Certain businesses like a small one could be qualified to use cash method, but it must use accrual method for purchases and sales (hybrid method).
2. If TP’s annual gross receipt do not exceed $1 million, he can use cash method for all items.
3. If the TP is delivering service and not a corporation, and annual gross receipts exceed $1 million but are less than $10 million, he can use cash method for all items.
When is income taxed?
When realized - received. Can’t be realized when valuation is not possible.
Inventory: What methods can be used?
Always ok with FIFO.
LIFO is allowed if it is also used for financial reporting.
Inventory: what are 2 major impacts of using LIFO when prices are rising?
- Higher COGS.
2. Lower taxable income.
Inventory: At what value is the inventory determined?
At lower of cost or market (replacement cost or reproduction cost).
Must be at cost if using LIFO.
Inventory: What is the method manufacturers, certain retailers, and wholesalers are required to use?
Uniform capitalization method - capitalize (include) all the direct and indirect costs allocable to property they produce and for property bought for resale. Rather than expensing in the period.
Uniform capitalization method: Which indirect production costs must be capitalized?
Virtually all.
Uniform capitalization method: Anyone is exempt to use it?
Small personal property dealers - those with $10 million or less in gross receipts during the preceding 3 yrs.
Uniform capitalization method: Are costs for storage if off-site included? Marketing selling? Research? Quality control? Advertising? Distributions? Taxes? Utilities, repairs, rent, depreciation? General and administrative expenses?
Storage: yes. Marketing: no. Research: no. QC: yes. Advertising. Distributions: no. Taxes: yes except income tax. Utilities ets: yes. GAE: no.
What must TP do if voluntary changing accounting method? Does this include change from incorrect methods to correct ones? Exception?
Any adjustment to income (increase) should be spread over 4 years starting with the year of change.
Yes.
If the adjustment is less than $25,000, all income can be included in the year of change.
Accounting method change: what must TP do if the change is involuntary due to IRS examination?
Any positive adjustment to income is included in the earliest tax year under examination.
Accounting method change: Does all method change must be reported? What about the ones designated as “automatic change” by IRS? On which form?
Yes.
Yes (automatic means IRS will automatically approve the change and there is no fee involved).
Form 3115.
How is income reported when installment sales is used (pmts are received over a period of time)?
The gross profit from the sale is recognized as cash is received;
Recognized gain = cash received x gross profit percentage.
Installment method ex:
In yr 1, TP sold real property for $200,000. Received $100,000 cash and $100,000 plus accrual interest next year. The buyer assumed a $50,000 mortgage. The adjusted basis was $75,000. TP incurred $10,000 expense.
Gross profit and recognized income?
First compute amount realized:
$200,000 + $50,000 - $10,000 = 240,000.
Gross profit = 240,000 - 75,000 = 165,000
Gross profit percentage (gross profit/contract price):
165,000 / 200,000 = 82.5%.
Income: 100,000 x 82.5% = $82,500 in year 1 and 2 each
