Question;18. LO.1 Red, White, and Blue are unrelated corporations engaged in real estate development.The three corporations formed a joint venture (treated as a partnership) to develop a tract of land. Assuming that the venture does not have a natural business year, what tax year must the joint venture adopt under the following circumstances?Tax Year Ending Interest in Joint Venturea. Red March 31 60%Blue June 30 20%White October 31 20%b. Red October 31 30%White September 30 40%Blue January 31 30%19. LO.1 Zorn conducted his professional practice through Zorn, Inc. The corporation uses a fiscal year ending September 30 even though the business purpose test for a fiscal year cannot be satisfied. For the year ending September 30, 2013, the corporation paid Zorn a salary of $180,000, and during the period January through September 2013, the corporation paid him a salary of $150,000.a. How much salary should Zorn receive during the period October 1 through December 31, 2013?b. Assume that Zorn received only $24,000 of salary during the period October 1 through December 31, 2013. What would be the consequences to Zorn, Inc.? 20. LO.1 Mauve Corporation began operations as a farm supplies business and used a fiscal year ending October 31. The company gradually went out of the farm supplies business and into the mail-order Christmas gifts business. The company has received permission from the IRS to change to a fiscal year ending January 31, effective for the year ending January 31, 2014. For the short period November 1, 2013, through January31, 2014, Mauve earned $20,000. Calculate Mauve?s tax liability for the short periodNovember 1, 2013, through January 31, 2014.21. LO.2 Gold, Inc., is an accrual basis taxpayer. In 2013, an employee accidentally spilled hazardous chemicals on leased property. The chemicals destroyed trees on neighboring property, resulting in $30,000 of damages. In 2013, the owner of the property sued Gold,Inc., for the $30,000. Gold?s attorney believes that it is liable and that the only issue is whether the neighbor will also seek punitive damages that could be as much as three times the actual damages. In addition, as a result of the spill, Gold was in violation of its lease and was therefore required to pay the landlord $15,000. However, the amount due for the lease violation is not payable until the termination of the lease in 2016. None of these costs were covered by insurance. Jeff Stuart, the president of Gold, Inc., is generally familiar with the accrual basis tax accounting rules and is concerned about when the company will be allowed to deduct the amounts the company is required to pay as a result of this environmental disaster. Write Mr. Stuart a letter explaining these issues.Gold?s address is 200 Elm Avenue, San Jose, CA 95192.22. LO.2 Compute Mary?s income or deductions for 2013 using (1) the cash basis and (2) the accrual basis for each of the following:a. In May 2013, Mary paid a license fee of $1,200 for the period June 1, 2013, throughMay 31, 2014.b. In December 2013, Mary collected $10,000 for January 2014 rents. In January 2014,Mary collected $2,000 for December 2013 rents.c. In June 2013, Mary paid $7,200 for an office equipment service contract for the period July 1, 2013, through December 31, 2014.d. In June 2013, Mary purchased office furniture for $273,000. She paid $131,000 in cash and gave a $142,000 interest-bearing note for the balance. The office furniture has an MACRS cost recovery period of seven years. Mary did not make the ? 179 election and elected not to take additional first-year depreciation.23. LO.2, 5 What accounting method (cash or accrual) would you recommend for the following businesses?a. A gift shop with average annual gross receipts of $900,000.b. An accounting partnership with annual gross receipts of $12 million.c. A drywall subcontractor who works on residences and has annual gross receipts of $3 million.d. An incorporated insurance agency with annual gross receipts of $6 million.24. LO.2 How do the all events and economic performance requirements apply to the following transactions by an accrual basis taxpayer?a. The company guarantees its products for six months. At the end of 2013, customers had made valid claims for $600,000 that were not paid until 2014. Also, the company estimates that another $400,000 in claims from 2013 sales will be filed and paid in 2014.b. The accrual basis taxpayer reported $200,000 in corporate taxable income for 2013.The state income tax rate was 6%. The corporation paid $7,000 in estimated state income taxes in 2013 and paid $2,000 in 2012 state income taxes when it filed its 2012 state income tax return in March 2013. The company filed its 2013 state income tax return in March 2014 and paid the remaining $5,000 of its 2013 state income tax liability.c. An employee was involved in an accident while making a sales call. The company paid the injured victim $15,000 in 2013 and agreed to pay the victim $15,000 a year for the next nine years.25. LO.3 Ross Company is a computer consulting firm. The company also sells equipment to its clients. The sales of equipment account for approximately 40% of the company?s gross receipts. The company has consistently used the cash method to report its income from services and the accrual method to report its income from the sale of inventory. InJune of the current year, Ross?s accountant discovered that as a small business, the company qualifies to use the cash method for all of its activities. The company is a calendar year taxpayer. As of the beginning of the current year, the company had $120,000 of inventory on hand and $90,000 of accounts receivable from the sales of equipment and $30,000 of receivables from the consulting services.a. Compute the adjustment due to the change in accounting method.b. Is the adjustment positive or negative? Explain.c. When can the adjustment be taken into account in computing taxable income?26. LO.4, 6 Floyd, a cash basis taxpayer, has received an offer to purchase his land. The cash basis buyer will pay him either $100,000 at closing or $50,000 at closing and $56,000 two years after the date of closing. If Floyd recognizes the entire gain in the current year, his marginal tax rate will be 25% (combined Federal and state rates). However, if he spreads the gain over the two years, his marginal tax rate on the gain will be only 20%. Floyd does not consider the buyer a credit risk, and he understands that shifting the gain to next year with an installment sale will save taxes. But he realizes that the deferred payment will, in effect, earn only $6,000 for waiting two years for the other $50,000. Floyd believes he can earn a 10% before-tax rate of return on his after-tax cash.Floyd?s adjusted basis for the land is $25,000, the buyer is also a cash basis taxpayer, and the short-term Federal rate is 4%. Floyd has asked you to evaluate the two alternatives on an after-tax basis.
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