Tax Accounting - Answer Key

1. A

Certain farming businesses and individuals can use the cash method. C Corporations and partnerships with a c corp partner, where the production, purchase or sale of merchandise is not an income-producing factor, may use cash method if average gross annual receipts over the three-year prior period were $5 million or less.

2. D

Constructive receipt income (if available), must be reported in the year that the income is controlled by you; it cannot be pushed forward to be claimed in the upcoming year. Examples include checks received but not yet cashed and interest earned (accrued interest) but not yet paid.

3.
B

Shifting from LIFO to FIFO will move out the oldest inventory first. Typically this inventory has the lowest cost basis, therefore increasing the tax liability. Earnings will be higher because there will be a larger profit margin between the basis and sales price by using FIFO.

4.
C

The carry back for farming NOL is five years.

5.
B

Tower Builders cannot use the "completed contract" method because they are too large and have average annual gross receipts in excess of $10 million. Revenue is recognized at the end of the contract for completed contract method. To be a long-term contract the project cannot be completed in the same year of the contract origination.

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