Question 1. Camelia Company is a large commercial real estate contractor

1. Camelia Company is a large commercial real estate contractor that reports its income by the percentage of completion method. In 2014, the company entered into a contract to construct a building for $900,000. Camelia estimated that the cost of constructing the building would be $600,000. In 2014, the company incurred $150,000 in costs under the contract. In 2015, the company incurred an additional $500,000 in costs to complete the contract. The company’s marginal tax rate in all years was 35%.

a. Camelia must report $300,000 of income in 2014.

b. Camelia is not required to report any income from the contract until 2015 when the contract is completed.

c. Camelia must recognize $75,000 of income in 2014.

d. Camelia should amend its 2014 tax return to decrease the profit on the contract for that year.

e. None of the above.

2. Dr. Stone incorporated her medical practice and elected to use a fiscal year ending September 30th. For the fiscal year ending September 30, 2014, the corporation earned $40,000 profits each month, before Dr. Stone’s salary and income tax. Dr. Stone received a salary that averaged $30,000 per month. Next year (fiscal year ending September 30, 2015), Dr. Stone expects the average monthly profits before salary and taxes to be $48,000. What is the minimum salary Dr. Stone can receive for the last three months of calendar year 2014 to ensure that the corporation can deduct salary equal to the corporation’s before salary income for the fiscal year ending September 30, 2015?

3. The Yellow Equipment Company, an accrual basis C corporation, is a manufacturer’s representative and works on a commission basis (15% of sales that it places) and does not carry inventory. In November 2014, Yellow made a sale and collected a commission for $20,000. In June of 2015, the customer had not received the equipment from the manufacturer and canceled the order. As a result, Yellow was required to refund the $20,000 commission to the manufacturer. Yellow’s taxable income in 2014 was $70,000, and in 2015 Yellow’s taxable income was $25,000 after deducting the refund. The applicable tax rate schedule is 15% on the first $50,000 of income and 25% on income in excess of $50,000. What is the effect of the refund on Yellow’s 2015 tax liability?

4. Ramon sold land in 2014 with a cost of $80,000 for $200,000. The sales agreement called for a $50,000 down payment and a $50,000 payment plus 8% interest to be received on the first day of each year for the next three years. What would be the consequences of the following (treat each part independently and assume Ramon uses the installment method whenever possible):

a. In 2014, Ramon gave one of the $50,000 installment obligations to a close relative.

b. In 2014, Ramon transferred the installment obligations ($50,000) to his 100% owned corporation.

c. Ramon collected the $50,000 plus $12,000 interest on January 1, 2015, and died on January 2, 2015.

5. Brown Corporation had consistently reported its income by the cash method. The corporation should have used the accrual method because inventories are material to the business. In 2014, Brown timely filed a request to change to the accrual method. At the beginning of 2014, Brown had accounts receivable of $75,000. Also, Brown had merchandise on hand with a cost of $150,000 and accounts payable for merchandise of $45,000. The accounts receivable, inventory, and accounts payable balance per books were zero. Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2014.

6. John sold an apartment building for $600,000. His basis in the building was $360,000 and it was subject to $30,000 of depreciation recapture. John received $150,000 in the year of sale, the buyer assumed John’s mortgage payable of $240,000, and the buyer gave John an 8% (the current Federal rate) note of $210,000 due in 5 years. The interest on the note was payable each June 30th, beginning in the year following the year of the sale. John incurred $30,000 of selling expenses which he paid in the year of sale. Compute John’s installment sales gain that should be reported in the year of sale.

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