The IRS audited the tax returns of Darryl Strawberry, a former major league outfielder. It contended that, between 1986 and 1990, Strawberry earned $422,250 for autograph signings, appearances, and product endorsements, but he reported only $59,685 of income. Strawberry attributed the shortfall to his receipt of cash for autograph sessions and promotional events. He allegedly concealed the cash payments in separate bank accounts of which his CPA was unaware. What tax compliance issues regarding the alleged underreporting are pertinent?
> Dvorak Music produces two durable music stands: Stand A requires 2 labor hours and stand B requires 1 labor hour. The company has only 350 available labor hours per week. Further, the company can sell all it can produce of either product. Required: a.
> Refer to the data in Exercise 4-16. (Round all decimal answers to four places and all dollar answers to the nearest dollar.) Required: a. Calculate profit as a percent of sales in the prior year. b. Suppose sales in the current year increase by 15 per
> Parrish Plumbing provides plumbing services to residential customers from Monday through Friday. Ken Parrish, the owner, believes that it is important for his employees to have Saturday and Sunday off to spend with their families. However, he also recogn
> Wilde Home & Garden is organized into three departments. The following sales and cost data are available for the prior year: Required: a. What is the weighted average contribution margin ratio? b. What level of sales is needed to earn a profit of $
> Rhetorix, Inc. produces stereo speakers. The selling price per pair of speakers is $1,000. The variable cost of production is $300 and the fixed cost per month is $49,000. For November, the company expects to sell 125 pairs of speakers. Required: a. Ca
> Rhetorix, Inc., produces stereo speakers. The selling price per pair of speakers is $1,000. The variable cost of production is $300 and the fixed cost per month is $49,000. Required: a. Calculate the contribution margin associated with a pair of speake
> Gabby’s Wedding Cakes creates elaborate wedding cakes. Each cake sells for $600. The variable cost of making the cakes is $250, and the fixed cost per month is $8,750. Required: a. Calculate the break-even point for a month in units. b. How many cakes
> Lopez Mfg. is interested in estimating fixed and variable manufacturing costs using data from October. Based on judgment, the plant manager classified each manufacturing cost as fixed, variable, or part fixed and part variable: Required: a. Use account
> Madrigal Theater Company is interested in estimating fixed and variable costs. The following data are available for the month of December: Required: a. Use account analysis to estimate fixed cost per month and variable cost per tickets sold [i.e., esti
> Reef Office Supplies is interested in estimating the cost involved in hiring new employees. The following information is available regarding the costs of operating the Human Resource department at Reef Office Supplies in May, when there were 60 new hires
> Madrigal Theater Company is interested in estimating fixed and variable costs. The following data are available: Required: a. Use the high-low method to estimate fixed cost per month and variable costs per ticket sold [i.e., estimate a and b in the equ
> Marie Stefano is the group director of customer training for Mayfield Software. In this capacity, she runs a center in Kirkland, Washington, that provides training to employees of companies that use Mayfield’s inventory control, custome
> In 1928, Francis P. Rothmueller, a Northwest railroad magnate, established an endowment to fund the Rothmueller Museum in Minneapolis. The museum currently has a $30 million endowment, but it also has substantial operating costs and continues to add to i
> Peter Takesha, the manager of testing services at a medical diagnostics firm, purchased a new lab testing machine last year for $30,000. This year a new machine, which is faster and more reliable than Peter’s current model, is on the market. In deciding
> John Krog is president, chairman of the board, production supervisor, and majority shareholder of Krog’s Metalfab, Inc. He formed the company in 1991 to manufacture custom-built aluminum storm windows for sale to contractors in the grea
> Why are units often in a different stage of completion with respect to raw materials and conversion costs?
> What is meant by the term transferred-in cost?
> What is meant by the term conversion costs?
> Explain the concept of an “equivalent unit,” including how it is calculated.
> Do transferred-in costs occur in all departments of a manufacturer using a process costing system? Explain.
> What is accomplished by preparing a reconciliation of the physical units as a part of the production cost report?
> What items of production cost make up the “costs to account for” in a production cost report?
> Explain the major differences between job-order and process costing systems.
> What are the four steps involved in the preparation of a production cost report?
> Explain how a cost can be controllable at one administrative level and noncontrollable at another administrative level.
> Identify three types of manufacturing companies for which process costing would be an appropriate product costing system. What characteristic(s) do the products of these companies have that would make process costing a good choice?
> The Wilmont Box Company produces a single box used by AirSpeed, an express shipping company. Wilmont uses a just-in-time system and has almost no inventories of material, work in process, or finished goods. Indeed, the balances are so small that the comp
> Lakeland Solvent produces a single product in two departments. The following costs relate to April: Required: Prepare journal entries to record: a. The issuance of direct material. b. The cost of direct labor (credit wages payable). c. The applicati
> Aussie Yarn is a U.S. producer of woolen yarn made from wool imported from Australia. Raw wool is processed, spun, and finished before being shipped out to knitting and weaving companies. Material is added in the beginning of processing, and conversion c
> Kao Tiles is a specialized producer of ceramic tiles. Its production process involves highly skilled workers and top-quality ceramic crafters. Work in Process is relatively large because each tile is in process for up to 3 weeks because of art, mold work
> Marquita Filters produces an air filter for use in jet aircraft. Parts are added at several points in the production process. In August, production began with 600 filters in Work in Process, 80 percent complete as to materials and 70 percent complete as
> The Plastic Glow Company makes glow sticks. It uses a process costing system and has had a just-in-time inventory policy. The plant has a capacity to produce 500,000,000 units a year but currently operates at 300,000,000 units per year. Direct material a
> Douglas Basket produces a specialty basket used by a gift basket company, Yours Truly Gifts. Douglas uses a just-in-time system and has very little inventories of material, work in process, or finished goods. Since the balances are so small, the company
> The Newberry Company accumulates costs for its product using a process costing system. Direct materials are added at the beginning of the production process, and conversion occurs evenly throughout the production process. Below is information related to
> Lindy Manufacturing uses a process costing system to track the production of the single product it makes in one department. At the start of November, there were 8,000 units in process that were 100 percent complete for direct material and 70 percent comp
> Indicate whether each of the following costs is most likely a fixed cost or a variable cost by writing “fixed” or “variable” in the space provided. a. Assembly labor. b. The cost of material used in production. c. Rent. d. Depreciation. e. Fuel cos
> Sassy Cotton produces fine cotton fabrics. The cotton is processed and finished before being shipped out to clothing companies. Material is added in the beginning of processing, and conversion costs are added evenly throughout processing. At the beginnin
> Hartwell Drug Company produces a supplement to improve bone density. Conversion costs are added evenly throughout the production process. The following information is available for March: Required: a. Compute the number of units completed in March. b.
> The Kioda Corporation assembles various components used in the electronics industry. The company’s major product, a computer chip, is the result of assembling three parts: X1, Y2, and Z3. The following information relates to production in January: • Beg
> Tropical Sun makes suntan lotion in two stages. The lotion is first blended in the Blending Department and then bottled and packed in the Bottling Department. The following information relates to the operations of the Blending Department for May. Requir
> The Carnival Caramel Company makes a high-quality caramel candy. The manufacturing process involves mixing ingredients (Mixing Department) and shaping the processed mixture into 1-pound balls (Shaping Department), which are sold to retail outlets. No add
> Simply Shine Shampoo is manufactured in two departments: Mixing and Packing. Once the shampoo mixture is completed in the Mixing Department, it is sent to Packaging, where a machine fills and seals individual bottles, which are then passed to a machine t
> Marion Chemicals produces a chemical used as a base in paints. In the manufacturing process, all materials are added at the start of the process, whereas labor and overhead are added evenly throughout production. Required: Fill in the missing informatio
> The balance in beginning Work in Process at Bing Rubber Company for direct labor was $140,000. During the month of March, an additional $800,000 of direct labor was incurred, and 35,000 pounds of rubber were produced. At the end of March, 10,000 pounds o
> During August, Wilson Lubricant completed 31,000 gallons of product. At the start of August there were 4,500 gallons in Work in Process, and at the end of August, there were 7,000 gallons in Work in Process. Required: How many gallons of product were s
> What are the four cost items that may enter a processing department?
> Identify each of the following statements with fixed costs or variable costs by writing “fixed” or “variable” in the space provided. a. A cost that varies in total with changes in the activity level. b. A cost that varies on a per-unit basis with chang
> Local 635 represents kitchen workers at hotels in several southern cities. Part of their labor agreement states that workers “shall receive one free meal per shift up to a cost of $12, with any cost over $12 being deducted from wages paid to said employe
> Your client, Hank Goedert, earned $100,000 of salary and received $40,000 of dividends in the current year. His itemized deductions total $37,000. In addition, Hank received $47,000 from a relative who was his former employer. You have researched whether
> You are preparing the tax return of Bold Corporation, which had sales of $60 million. Bold made a $1 million expenditure for which the appropriate tax treatment—deductible or capitalizable—is a gray area. Bold’s director of federal taxes and chief financ
> On his individual return, Al reports salary and exemptions for himself and seven dependents. His itemized deductions consist of mortgage interest, real estate taxes, and a large loss from breeding dogs. On his individual return, Ben reports self-employme
> Name some of the IRS administrative pronouncements.
> Describe how the IRS verifies tax returns at its service centers.
> According to Treasury Department Circular 230, what standard should a CPA meet to properly take a position on a tax return?
> Is the tax return preparer limited to the person who signs the return? Explain.
> Distinguish between the burdens of proof the government must meet to prove civil and criminal fraud.
> The IRS audited Tony’s return, and Tony agreed to pay additional taxes plus the negligence penalty. Is this penalty necessarily imposed on the total additional taxes that Tony owes? Explain.
> A trust owns an asset on which depreciation is claimed. The trust distributes all of its income to its sole income beneficiary. Whose taxable income is reduced by the depreciation?
> In April of the current year, Stan does not have sufficient assets to pay his tax liability for the previous year. However, he expects to pay the tax by August of the current year. He wonders if he should request an extension for filing his return instea
> Provide the following information relating to both individual and corporate taxpayers having a calendar year: a. Due date for an income tax return assuming the taxpayer requests no extension. b. Due date for the return assuming the taxpayer files an au
> The IRS notifies Tom that it will audit his current year return for an interest deduction. The IRS audited Tom’s return two years ago for a charitable contribution deduction. The IRS, however, did not assess a deficiency for the prior year return. Is any
> Your client wants to know whether she must file any documents for an automatic extension to file her tax return. What do you tell her?
> Tracy wants to take advantage of a “terrific business opportunity” by engaging in a transaction with Homer. Homer, domineering and impatient, wants Tracy to conclude the transaction within two weeks and under the terms proposed by Homer. Otherwise, Homer
> On which of the following issues will the IRS likely issue a private letter ruling and why? In your answer, assume that no other IRS pronouncement addresses the issue and that pertinent Treasury Regulations are not forthcoming. a. Whether the taxpayer c
> In what circumstances will the IRS rule on estate tax issues?
> What conditions must the taxpayer meet to shift the burden of proof to the IRS?
> What information should be included in a request for a private letter ruling?
> In what situations is a protest letter necessary?
> Refer to Question C:14-7. Which taxpayer (the trust, Irene, or Beth) pays the tax on the gain? From Question 7: A trust instrument provides that, for life, Irene is entitled to receive distributions of income only and Beth is to receive the remainder in
> Why do taxpayers frequently litigate in the Tax Court?
> List the courts in which a taxpayer can begin tax related litigation.
> What course(s) of action is (are) available to a taxpayer upon receipt of the following notices: a. The 30-day letter? b. The 90-day letter? c. IRS rejection of a claim for a refund?
> The IRS informs Brad that it will audit his current year employee business expenses. Brad just met with a revenue agent who contends that Brad owes $775 of additional taxes. Discuss briefly the procedural alternatives available to Brad.
> a. Through what programs has the IRS gathered data to develop its DIF statistical models? b. How do these programs differ? c. How has the IRS used these programs to select returns for audit?
> Under the AICPA’s Statements on Standards for Tax Services, what is the tax practitioner’s professional duty in each of the following situations? a. Client erroneously deducts $5,000 (instead of $500) on a previous year’s tax return. b. Client refuses
> List five IRC penalties that can be imposed on tax return preparers. Does the IRC require a CPA to verify the information a client furnishes?
> What is the principal purpose of the innocent spouse provisions?
> In general, when does the limitations period for tax returns expire? List four exceptions to the general rule.
> Explain why the government might bring criminal fraud charges against a taxpayer under Sec. 7206 instead of Sec. 7201. Compare the maximum penalties imposed under Secs. 7201, 7203, and 7206.
> A trust instrument provides that, for life, Irene is entitled to receive distributions of income only and Beth is to receive the remainder interest. The trust sells property at a gain. Income and corpus are classified in accordance with the Uniform Act.
> Distinguish between the circumstances that give rise to the civil fraud penalty and those that give rise to the negligence penalty.
> Upon audit, the IRS determines Maria’s tax liability to be $40,000. Maria agrees to pay a $7,000 deficiency. Will she necessarily have to pay a substantial understatement penalty? Explain.
> Assume that a taxpayer owes additional taxes as a result of an audit. Give two reasons why the IRS might not impose a substantial understatement penalty on the additional amount owed.
> This year, Ark Corporation acquired substantially all the voting stock of BioTech Consultants, Inc. for cash. Subsequent to the acquisition, Ark’s chief financial officer, Jonathan Cohen, approached Edith Murphy, Ark’s tax advisor, with a question: Could
> A long-time client, Horace Haney, wishes to avoid currently recognizing revenue in a particular transaction. A recently finalized Treasury Regulation provides that, in such a transaction, revenue should be currently recognized. Horace insists that you re
> Your manager advises you that Sam Skinner, a long-time client, died on February 13 of the current year, survived by his wife Sue Skinner and several adult children. The Skinners are residents of a non-community property state. Earlier in the current year
> A client, Sam Curren, established the Curren Trust earlier this year. In addition to stocks and cash, the trust’s assets include a life insurance policy on the life of Mr. Curren. The trust is both the owner and beneficiary of the policy. The insurance p
> Ernest Jacobson created an irrevocable trust in February of last year and designated his friend Eileen Frazier as trustee. Eileen is empowered, for life, to distribute such income as she deems appropriate to herself each year. Any income not distributed
> Roy Ritter died two years ago. Among the assets he owned were Ritter Ranch, a cattle ranch consisting of 12,220 acres in Texas. In accordance with Roy’s will, the ranch along with stocks producing substantial dividends passed to a testamentary trust (the
> You are in the process of doing income tax projections for the Estate of Esther Simmons, who died January 3, 2017. The Estate has paid appraisal fees for having her real estate holdings appraised for estate tax valuation purposes, probate court fees, and
> A client asks about the relevance of state law in classifying items as principal or income. Explain the relevance.
> You are preparing a current year (Year 2) individual tax return for Robert Lucca, a real estate developer and long-time client. While preparing Robert’s individual tax return you learn that last year (Year 1) he received interest income from a trust his
> Arthur Rich, a widower, is considering setting up an irrevocable trust (or trusts) with a bank as trustee for his three minor children. He will fund the trust at $900,000 (or $300,000 each in the case of three trusts). A friend suggested that he might wa
> At what rate is the penalty for underpaying estimated taxes imposed? How is the penalty amount calculated?
> Briefly explain the rules for determining the interest rate charged on tax underpayments. Is this rate the same as that for overpayments? In which months might the rate(s) change?
> A client believes that obtaining an extension for filing an income tax return would give him additional time to pay the tax at no additional cost. Is the client correct?
> Cate Cole died in 2015, and her will left her entire estate in equal shares to her two adult children, Calvin and Corrine. Both children anticipate being in the top income tax bracket for at least ten years. The Cate Cole Estate is a calendar year taxpay
> Carla plans to create a trust and transfer to it oil and gas properties producing royalty income. She will transfer no other properties. The sole income beneficiary of the trust will be Carla’s son, Marshall, who is in the top marginal income tax bracket
> Glorietta Trust is an irrevocable discretionary trust funded by Grant Glorietta. The discretionary income beneficiary for life is Grant’s son, Gordon Glorietta (single). Gordon is a partner in a partnership in which he materially participates, and he has
> Dana Dodson died October 31, 2016, with a gross estate of $6.7 million, debts of $200,000, and a taxable estate of $6.5 million. Dana made no taxable gifts. All of her property passed under her will to her son, Daniel Dodson. The estate chose a June 30 y
