Tax accounting rated questions and
answers 100% correct.
12-Month Rule ANS - When a business prepays business expenses, it may immediately deduct the
prepayment if:
1 - the contract period does not last more than a year
AND
2 - the contract period does not extend beyond the end of the taxable year following the tax year in
which the taxpayer makes the payment
>DOES NOT apply to interest or rent
Accounting Method ANS - Used to determine which items of income and deduction to recognize during
a particular year
What is the overriding requirement for any tax accounting method? ANS - The method must "clearly
reflect income" and be applied consistently
Accounting Period ANS - Affect when taxpayers determine their income and deductions
All-Events Test ANS - This test requires that businesses recognize income (or a liability) when:
1 - all events have occurred that determine or fix their right to receive the income
AND
2 - the amount of the income can be determined with reasonable accuracy
When is the all-events test requirement met? ANS - On the earliest of the following 3 dates:
1 - When they complete the task required to earn the income
2 - When the payment for the task is due from the customer
3 - When the business receives payment for the task
, Allowance Method ANS - A method of writing off bad debt expense that is used for financial reporting
purposes
Arm's-Length Amount ANS - An indicator of extravagance in business expenses;
If the amount of the expense is the amount typically charged in the market by unrelated parties, the
amount is considered to be reasonable
Casualty Losses ANS - Occur when business assets are stolen, damaged, or completely destroyed by a
force outside the control of the business;
May be deducted in the year the casualty occurs or in the year the theft of an asset is discovered
What amount of casualty loss is deducted if the asset is completely destroyed or stolen? ANS - The
business calculates the amount of the loss as though it sold the asset for the insurance proceeds, if any.
That is, the loss is the amount of insurance proceeds minus the adjusted tax basis of the asset.
What amount of casualty loss is deducted if the asset is only partially destroyed? ANS - The amount of
the loss is that amount of the insurance proceeds minus the lesser of:
1 - the asset's tax basis
OR
2 - the decline in the value of the asset due to the casualty
Deferral Method ANS - A method of accounting for advance payment for goods;
Under this method, a business will recognize the advance payment by the earlier of:
1 - when the business would recognize the income for tax purposes if it had not received the advance
payment
OR
2 - when it recognizes the income for financial reporting purposes
Direct Write-Off Method ANS - A method of determining bad debt expense for tax purposes in which
businesses determine which debts are uncollectible and write them off by debiting bad debt expense
and directly crediting the actual account receivable account that is uncollectible
answers 100% correct.
12-Month Rule ANS - When a business prepays business expenses, it may immediately deduct the
prepayment if:
1 - the contract period does not last more than a year
AND
2 - the contract period does not extend beyond the end of the taxable year following the tax year in
which the taxpayer makes the payment
>DOES NOT apply to interest or rent
Accounting Method ANS - Used to determine which items of income and deduction to recognize during
a particular year
What is the overriding requirement for any tax accounting method? ANS - The method must "clearly
reflect income" and be applied consistently
Accounting Period ANS - Affect when taxpayers determine their income and deductions
All-Events Test ANS - This test requires that businesses recognize income (or a liability) when:
1 - all events have occurred that determine or fix their right to receive the income
AND
2 - the amount of the income can be determined with reasonable accuracy
When is the all-events test requirement met? ANS - On the earliest of the following 3 dates:
1 - When they complete the task required to earn the income
2 - When the payment for the task is due from the customer
3 - When the business receives payment for the task
, Allowance Method ANS - A method of writing off bad debt expense that is used for financial reporting
purposes
Arm's-Length Amount ANS - An indicator of extravagance in business expenses;
If the amount of the expense is the amount typically charged in the market by unrelated parties, the
amount is considered to be reasonable
Casualty Losses ANS - Occur when business assets are stolen, damaged, or completely destroyed by a
force outside the control of the business;
May be deducted in the year the casualty occurs or in the year the theft of an asset is discovered
What amount of casualty loss is deducted if the asset is completely destroyed or stolen? ANS - The
business calculates the amount of the loss as though it sold the asset for the insurance proceeds, if any.
That is, the loss is the amount of insurance proceeds minus the adjusted tax basis of the asset.
What amount of casualty loss is deducted if the asset is only partially destroyed? ANS - The amount of
the loss is that amount of the insurance proceeds minus the lesser of:
1 - the asset's tax basis
OR
2 - the decline in the value of the asset due to the casualty
Deferral Method ANS - A method of accounting for advance payment for goods;
Under this method, a business will recognize the advance payment by the earlier of:
1 - when the business would recognize the income for tax purposes if it had not received the advance
payment
OR
2 - when it recognizes the income for financial reporting purposes
Direct Write-Off Method ANS - A method of determining bad debt expense for tax purposes in which
businesses determine which debts are uncollectible and write them off by debiting bad debt expense
and directly crediting the actual account receivable account that is uncollectible
