Chapter 16Student:
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1.
In general, a corporation can choose to use either the accrual
or cash method of accounting no matter how large the corporation.
True False Corporations calculate adjusted gross income (AGI) in
the same way as individuals. True False Corporations have a larger
standard deduction than individual taxpayers because they generally
have higher revenues. True False Large corporations are allowed to
use the cash method of accounting for at least the first two years
of their existence. True False Although a corporation may report a
temporary book-tax difference for an item of income or deduction
for a given year, over the long term the total amount of income or
deduction it reports with respect to that item will be the same for
both book and tax purposes. True False An unfavorable temporary
book-tax difference is so named because it causes taxable income to
decrease relative to book income. True False Income that is
included in book income, but excluded from taxable income, results
in a favorable, permanent book-tax difference. True False Federal
income tax expense reported on a corporation's books generates a
temporary book-tax difference. True False For a corporation,
goodwill created in an asset acquisition generally leads to
temporary book-tax differences. True False
2. 3.
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10. In a given year, Adams Corporation has goodwill impairment
in excess of the allowable amortization for tax purposes. It has a
favorable temporary book-tax difference for that year. True False
11. For incentive stock options granted when ASC 718 (a
codification of FAS 123R) applies, the value of the options that
vest in a given year always creates a permanent, unfavorable
book-tax difference. True False 12. For tax purposes, companies
using nonqualified stock options deduct expenses in the year the
options are exercised. True False 13. A nonqualified stock option
will create a permanent book-tax difference in a given year if it
vests during the year but is exercised in a later year. True False
14. In contrast to an individual, a corporation may deduct the
entire amount of a net capital loss. True False
15. A corporation may carry a net capital loss forward five
years to offset capital gains in future years but it may not carry
a net capital loss back to offset capital gains in previous years.
True False 16. A corporation may carry a net capital loss back two
years and forward 20 years. True False 17. A corporation may carry
a net capital loss back three years and forward five years. True
False 18. Corporations can carry net operating losses (in years
other than 2008 and 2009) back two years and forward 20 years. True
False 19. Bingo Corporation incurred a net operating loss in 2012.
If it carries the loss back, it must first carry the loss back to
offset its 2011 taxable income and then it carries any remaining
loss back to offset its 2010 taxable income. True False 20. Net
operating losses generally create permanent book-tax differences.
True False 21. Net capital loss carryovers but not carrybacks are
deductible against capital gains in determining a corporation's net
operating loss for the year. True False 22. Accrual-method
corporations are never allowed to deduct charitable contributions
until they actually make payment to the charity. True False 23.
GenerUs Inc.'s board of directors approved a charitable cash
contribution to FoodBank, a qualified nonprofit organization, in
November of 2012. GenerUs made payment to FoodBank on February 2,
2013. GenerUs Inc. (a calendar-year corporation) may claim a
deduction for the contribution on its 2012 tax return. True False
24. NOL and capital loss carryovers are deductible in calculating
the charitable contribution limit modified taxable income, while
NOL and capital loss carrybacks are not. True False 25.
Corporations may carry excess charitable contributions forward five
years, but they may not carry them back. True False 26. A
corporation generally will report a favorable, temporary book-tax
difference when it deducts a charitable contribution carryover.
True False 27. Corporations are not allowed to deduct charitable
contributions in excess of 10% of the corporation's taxable income
(before the charitable contribution and certain other deductions).
True False 28. The dividends received deduction is designed to
mitigate the extent to which corporate earnings are subject to more
than two levels of taxation. True False 29. Corporations compute
their dividends received deduction by multiplying the dividend
amount by 10 percent, 50 percent, or 100 percent depending on their
ownership in the distributing corporation's stock. True False
30. The dividends received deduction cannot cause a net
operating loss. The deduction can reduce income to zero but not
below zero. True False 31. The dividends received deduction is
subject to a limitation based on income. True False 32. Taxable
income of the most profitable corporations is subject to a flat 35%
tax rate. True False 33. Controlled group provisions in the tax law
prevent taxpayers from splitting a corporation into several smaller
corporations to take advantage of low marginal corporate tax rates
at low levels of income. True False 34. Three brothers each own 20
percent of the stock in three corporations. Because no single
brother owns more than 50 percent of a corporation, the tax law
would not treat the corporations as a controlled group. True False
35. The corporate tax form is Form 1065. True False 36. Schedule
M-1 reconciles from book income to bottom line taxable income (the
taxable income that is applied to the tax rates to determine the
corporation's gross tax liability). True False 37. Both Schedules
M-1 and M-3 require taxpayers to identify book-tax differences as
either temporary or permanent. True False 38. By default, an
affiliated group must file a consolidated tax return. True False
39. The rules for consolidated reporting for financial statement
purposes are the same as the rules for consolidated reporting for
tax purposes. True False 40. Calendar-year corporations that
request an extension for filing their tax returns will have a tax
return due date of September 15. True False 41. Volos Company (a
calendar-year corporation) began operations in March of 2010 and
was not profitable through December of 2011. Volos has been
profitable for the first quarter of 2012 and is trying to determine
its first quarter estimated tax payment. It will have no estimated
tax payment requirement in 2012 because it had no tax liability for
the 2011 tax year and has been in business for at least 12 months.
True False 42. Most corporations use the annualized income method
to determine their required annual payment for purposes of making
quarterly estimated payments. True False 43. Large corporations
(corporations with over $1,000,000 in taxable income in any of the
three years prior to the current year) can use their prior tax year
liability to determine all required estimated quarterly payments
for the current year. True False 44. For estimated tax purposes, a
"large" corporation is any corporation with average annual gross
receipts of $5,000,000 in the three years prior to the current
year. True False
45. Small corporations (in terms of average annual gross
receipts) are exempt from the alternative minimum tax. True False
46. Urban Corporation receives tax-exempt income from Denver
municipal bonds. All the proceeds from the bonds were used to fund
public projects. In computing its AMT base, Urban must add back the
interest income from its municipal bonds to taxable income. True
False 47. Depreciation adjustments can increase or decrease the AMT
base relative to taxable income. True False 48. The tax rate for
the corporate alternative minimum tax is a flat 26%. True False 49.
The adjusted current earnings (ACE) adjustment is 75% of the
difference between a corporation's alternative minimum taxable
income before the ACE adjustment and its ACE. True False 50.
Corporations are allowed to deduct at least some AMT exemption
regardless of profitability. True False 51. A corporation with an
AMTI of $400,000 will have all of its AMT exemption phased-out.
True False 52. Minimum tax credits generated by the AMT can be
carried forward indefinitely. True False 53. A corporation with a
minimum tax credit carryover may reduce regular tax down to the
amount of its tentative minimum tax when its regular tax exceeds
its tentative minimum tax. True False 54. The amount of a
corporation's AMT is the amount of its tentative minimum tax in
excess of its regular tax. True False 55. Which of the following is
not calculated in the corporate income tax formula? A. Gross income
B. Adjusted gross income C. Taxable income D. Regular tax liability
56. WFO Corporation has gross receipts according to the following
schedule:
If WFO began business as a cash-method corporation in Year 1, in
which year would it have first been required to use the accrual
method? A. Year 3. B. Year 4. C. Year 5. D. Year 6. E. None of
these.
57. Which of the following does NOT create a permanent book-tax
difference? A. Organizational and start-up expenses B. Key employee
death benefit income C. Fines and penalties expenses D. Municipal
bond interest income 58. Which of the following does NOT create a
temporary book-tax difference? A. Deferred compensation B. Bad-debt
expense C. Depreciation expense D. Domestic production activities
deduction 59. Which of the following statements regarding book-tax
differences is true? A. Corporations are not required to report
book-tax differences on their income tax returns. B Corporations
will eventually recognize the same amount of income for book and
tax purposes for . income-related temporary book-tax differences.
C. Income excludable for tax purposes usually creates a temporary
book-tax difference. D. None of these is true. 60. It is important
to distinguish between temporary and permanent book-tax differences
for which of the following reasons? A. Temporary book-tax
differences will reverse in future years whereas permanent
differences will not. B. Certain corporations are required to
disclose book-tax differences as permanent or temporary on their
tax returns. C. Both A and B. D. Neither A nor B. 61. TrendSetter
Inc. paid $50,000 in premiums for life insurance coverage for its
key employees. What is the nature of the book-tax difference
created by this expense? A. Permanent; favorable B. Permanent;
unfavorable C. Temporary; favorable D. Temporary; unfavorable 62.
iScope Inc. paid $3,000 in interest on a loan it used to purchase
municipal bonds. What is the nature of the book-tax difference
relating to this expense? A. Permanent; favorable B. Permanent;
unfavorable C. Temporary; favorable D. Temporary; unfavorable 63.
AmStore Inc. sold some of its heavy machinery at a gain. AmStore
used the straight-line method for financial accounting depreciation
and MACRS for tax cost-recovery. If accumulated depreciation for
financial accounting purposes is less than accumulated depreciation
for tax reporting purposes, what is the nature of the book-tax
difference associated with the gain on the sale? A. Permanent;
favorable B. Permanent; unfavorable C. Temporary; favorable D.
Temporary; unfavorable 64. Corporation A receives a dividend from
Corporation B. Corporation A includes the dividend in its gross
income for tax and financial accounting purposes (no book-tax
difference). If A has accounted for the dividend correctly
(following the general rule), how much of B stock does A own? A. A
owns less than 20 percent of the stock of B B. A owns at least 20
but not more than 50 percent of the stock of B C. A owns more than
50 percent of the stock of B D. Cannot be determined
65. Corporation A receives a dividend from Corporation B. It
includes the dividend in gross income for tax purposes but includes
a pro-rata portion of B's earnings in its financial accounting
income. If A has accounted for the dividend correctly (using the
general rule), how much of B's stock does A own? A. A owns less
than 20 percent of the stock of B B. A owns at least 20 but not
more than 50 percent of the stock of B C. A owns more than 50
percent of the stock of B D. Cannot be determined 66. Coop Inc.
owns 40 percent of Chicken Inc., both Coop and Chicken are
corporations. Chicken pays Coop a dividend of $10,000 in 2012.
Chicken also reports financial accounting earnings of $20,000 for
that year. Assume that Coop follows the general rule of accounting
for investment in Chicken. What is the amount and nature of the
book-tax difference to Coop associated with the dividend
distribution (ignoring the dividends received deduction)? A. $2,000
unfavorable B. $2,000 favorable C. $10,000 unfavorable D. $10,000
favorable E. None of these 67. Over what time period do
corporations amortize purchased goodwill for tax purposes? A. 180
months B. 150 months C. 60 months D. None of these 68. Which of the
following statements regarding book-tax differences associated with
purchased goodwill is false? A. It is possible to have no book-tax
difference in a year when there is no goodwill amortization for tax
purposes. BIn a year when goodwill is impaired and yet fully
amortized for tax purposes (so no tax amortization of . the
goodwill for that year), the book-tax difference will be
unfavorable. C. Temporary book-tax differences associated with
goodwill are always favorable. D If goodwill has been fully
amortized for tax purposes in a previous year, the book-tax
difference is . equal to the amount of impairment recognized. 69.
Which of the following describes the correct treatment of incentive
stock options (ISOs) granted when ASC 718 (a codification of FAS
123R) applies? A. Financial accountingno expense; taxno deduction
B. Financial accountingno expense; taxdeduct bargain element at
exercise C. Financialexpense value over vesting period; taxno
deduction D. Financialexpense value over vesting period; tax deduct
bargain element at exercise 70. Which of the following describes
the correct treatment of incentive stock options (ISOs) granted
when ASC 718 (a codification of FAS 123R) does not apply? A.
Financial accountingno expense; taxno deduction B. Financial
accountingno expense; taxdeduct bargain element at exercise C.
Financial accountingexpense value over vesting period; taxno
deduction D. Financial accountingexpense value over vesting period;
tax deduct bargain element at exercise 71. Which of the following
describes the correct treatment of the exercise of nonqualified
stock options (NQOs) that were granted when ASC 718 (a codification
of FAS 123R) applies? A. Financialno expense; taxno deduction B.
Financialno expense; taxdeduct bargain element at exercise C.
Financialexpense value over vesting period; taxno deduction D.
Financialexpense value over vesting period; taxdeduct bargain
element at exercise
72. Which of the following describes the correct treatment of
nonqualified stock options (NQOs) granted when ASC 718 (a
codification of FAS 123R) did not apply? A. Financialno expense;
taxno deduction B. Financialno expense; taxdeduct bargain element
at exercise C. Financialexpense value over vesting period; taxno
deduction D. Financialexpense value over vesting period; taxdeduct
bargain element at exercise 73. Which of the following statements
regarding nonqualified stock options (NQOs) is false? A If ASC 718
(a codification of FAS 123R) applies, book-tax differences
associated with NQOs may be . either permanent or temporary. BIn a
given year when ASC 718 applies, if the value of the options that
vest is greater than the bargain . element of options exercised,
the book-tax difference for that year is unfavorable. C. Before ASC
718 applied, no expense recognition was required for NQOs for
financial accounting purposes. D. If ASC 718 does not apply, all
stock option-related book-tax differences are temporary. 74. Which
of the following statements regarding incentive stock options
(ISOs) is false? A. If ASC 718 (a codification of FAS 123R) does
not apply, ISOs do not create book-tax differences. B. For ISOs
granted when ASC 718 applies, book-tax differences are always
unfavorable. C. If ASC 718 applies, the value expensed for book
purposes in a given year is the value of the options that vest. D.
If ASC 718 applies, book-tax differences associated with ISOs may
be either permanent or temporary. 75. Orange Inc. issued 20,000
nonqualified stock options valued at $40,000 (in total). The
options vest over two yearshalf in 2012 (the year of issue) and
half in 2013. One thousand options are exercised in 2013 with a
bargain element on each option of $6. What is the 2013 book-tax
difference associated with the stock options? A. $14,000
unfavorable B. $14,000 favorable C. $20,000 unfavorable D. $20,000
favorable E. None of these 76. In January 2011, Khors Company
issues nonqualified stock options to its CEO, Jenny Svaro. Because
the company does not expect Ms. Svaro to leave the company, the
options vest at the time they are granted with a total value of
$50,000. In December of 2012, the company experiences a surge in
its stock price, and Ms. Svaro exercises the options. The total
bargain element at the time of exercise is $60,000. For 2012, what
is the book-tax difference due to the options exercised? A. 10,000
unfavorable B. 10,000 favorable C. 50,000 unfavorable D. 60,000
favorable 77. In January 2012, Khors Company issues nonqualified
stock options to its CEO, Jenny Svaro. Because the company does not
expect Ms. Svaro to leave the company, the options vest at the time
they are granted with a total value of $50,000. In December of
2013, the company experiences a surge in its stock price, and Ms.
Svaro exercises the options. The total bargain element at the time
of exercise is $40,000. For 2013, what is the nature of the
book-tax difference due to the options exercised? A. Favorable and
temporary. B. Favorable and permanent. C. Unfavorable and
temporary. D. Unfavorable and permanent. E. Not enough information
to determine.
78. Which of the following statements regarding capital gains
and losses is false? A. In terms of tax treatment, corporations
generally prefer capital gains to ordinary income. B. Like
individuals, corporations can deduct $3,000 of net capital losses
against ordinary income in a given year. C. C corporations can
carry back net capital losses three years and they can carry them
forward for five years. D. Corporations must apply capital loss
carrybacks and carryovers in a particular order. 79. For
corporations, which of the following regarding net capital losses
is true? A. A corporation that experiences a net capital loss has a
favorable book-tax difference in the year of the loss. B A
corporation that experiences a net capital loss in year 4 first
carries the loss back to year 3, then year . 2, and then year 1
before carrying it forward. C. Net capital loss carrybacks are
deductible in determining a corporation's net operating loss. D.
Net capital loss carrybacks and carryovers create temporary
book-tax differences if they are used before they expire. 80.
Studios reported a net capital loss of $30,000 in year 5. It
reported net capital gains of $14,000 in year 4 and $27,000 in year
6. What is the amount and nature of the book-tax difference in year
6 related to the net capital carryover? A. $11,000 unfavorable B.
$11,000 favorable C. $16,000 unfavorable D. $16,000 favorable 81.
Tatoo Inc. reported a net capital loss of $13,000 in 2012. It had a
net capital gain of $4,300 in 2010 and $3,000 in 2009. In 2011,
though the company suffered a net operating loss, it had net
capital gains of $1,000. What is the amount of the Tatoo's capital
loss carryover remaining after it applies the carryback? A. B. C.
D. $4,700 $5,700 $8,700 $13,000
82. BTW Corporation has taxable income in the current year that
can be offset with an NOL from a previous year. What is the nature
of the book-tax difference created by the net operating loss
carryover deduction in the current year? A. Permanent; favorable B.
Permanent; unfavorable C. Temporary; favorable D. Temporary;
unfavorable 83. Which of the following is allowable as a deduction
in calculating a corporation's net operating loss? A. Charitable
contribution deduction B. Domestic production activities deduction
C. Net capital loss carryback D. Net operating losses from other
years 84. Which of the following statements regarding net operating
losses generated in 2012 is true? A. Corporations can carry net
operating losses back two years and forward up to 15 years. B. A
corporation may elect to forgo carrying a net operating loss back
and instead carry it over to future years. C When a corporation
applies a net operating loss carryover, it reports a favorable,
permanent book-tax . difference in the amount of the applied
carryover. D. Marginal tax rates are irrelevant in determining the
tax benefit of applying a net operating loss carryback or
carryover. E. None of these is a true statement.
85. Which of the following statements regarding charitable
contributions is false? A. Only contributions made to qualified
charitable organizations are deductible. B.Charitable contribution
deductions are subject to a limitation based on the corporation's
taxable income (before certain deductions). C. Corporations can
qualify to deduct a contribution before actually paying the
contribution to the charity. D. The amount deductible for non-cash
contributions is always the adjusted basis of the property donated.
86. Which of the following is unnecessary to allow an
accrual-method corporation to deduct charitable contributions
before actually paying the contribution to charity? A. Approval of
the payment from the board of directors. B. Approval from the IRS
prior to making the contribution. C. Payment made within two and
one-half months of the tax year end. D. All of these are necessary.
87. Canny Foods Co. is considering three ways it could contribute
to a local, qualified charity. First, it could give $5,000 in cash.
Second, it could give stock it initially purchased two years ago
for $4,000 but is now worth $6,000. Third, it could give items of
inventory with a fair market value of $7,000 but with an adjusted
basis of $3,000. Which of the following correctly describes the
relation among possible charitable contributions in terms of amount
deductible for tax purposes? A. Cash > Stock > Inventory B.
Stock > Cash > Inventory C. Inventory > Stock > Cash D.
Inventory > Cash > Stock 88. Which of the following is
deductible in calculating the charitable contribution limit
modified taxable income? A. Net capital loss carrybacks B. NOL
carrybacks C. NOL carryovers D. Charitable contributions 89. Remsco
has taxable income of $60,000 and a charitable contribution limit
modified taxable income of $72,000. Its charitable contributions
for the year were $7,500. What is Remsco's current-year charitable
contribution deduction and contribution carryover? A. $6,000
current-year deduction; $1,500 carryover B. $7,500 current-year
deduction; $0 carryover C. $1,200 current-year deduction; $6,300
carryover D. $7,200 current-year deduction; $300 carryover 90. If a
corporation's cash charitable contributions exceed the charitable
contribution deduction limit, what kind of book-tax difference is
created? A. Permanent; favorable B. Permanent; unfavorable C.
Temporary; favorable D. Temporary; unfavorable 91. Which of the
following statements regarding excess charitable contributions
(contributions in excess of the modified taxable income limitation)
by corporations is true? A. Corporations may not carry over or
carry back excess charitable contributions. B. Corporations can
carry excess charitable contributions over to a future year or back
to a prior year. C. Corporations can carry excess charitable
contributions over to a future year but not back to a prior year.
D. Corporations can carry excess charitable contributions back to a
prior year but not over to a future year.
92. Which of the following statements regarding the dividends
and/or the dividends received deduction (DRD) is true? A. Dividends
are taxed at preferential rates for corporations as well as for
individuals. B. The DRD can increase the net operating loss of a
corporation. CCorporations are allowed to deduct from a dividend
received the product of the dividend and the . percentage of the
receiving corporation's ownership in the distributing corporation's
stock. D. The DRD allows corporations to deduct the amount of
dividends that they distribute. 93. Which of the following is
deductible in calculating DRD modified taxable income? A.
Charitable contribution deduction B. NOL carrybacks C. NOL
carryovers D. Dividends received deduction 94. Jazz Corporation
owns 50% of the Williams Corp. stock. Williams distributed a
$10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income
before the dividend was $100,000. What is the amount of Jazz's
dividends received deduction on the dividend it received from
Williams Corp.? A. $0 B. $7,000 C. $8,000 D. $10,000 95. Jazz
Corporation owns 10% of the Williams Corp. stock. Williams
distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s
taxable income (loss) before the dividend was ($2,000). What is the
amount of Jazz's dividends received deduction on the dividend it
received from Williams Corp.? A. $0. B. $5,600. C. $7,000. D.
$8,000. E. None of these. 96. Jazz Corporation owns 10% of the
Williams Corp. stock. Williams distributed a $10,000 dividend to
Jazz Corporation. Jazz Corp.'s taxable income (loss) before the
dividend was ($6,000). What is the amount of Jazz's dividends
received deduction on the dividend it received from Williams Corp.?
A. $0. B. $2,800. C. $4,200. D. $7,000. E. None of these. 97. Which
of the following is not a type of controlled group as defined in
the Internal Revenue Code? A. Parent-subsidiary. B. Brother-sister.
C. Combined. D. All of these are types of controlled groups. 98.
TireShop, Inc. owns 85 percent of Rubber Supply Co.'s voting stock
throughout the tax year. TireShop and Rubber Supply would be
considered as what kind of controlled group? A. Parent-subsidiary
B. Brother-sister C. Combined D. None of these 99. Together, Kurt
and Esmeralda own 60 percent of three corporations: RAZ, DVA, and
TRE. The three corporations would be considered as what kind of
controlled group for tax purposes? A. Parent-subsidiary. B.
Brother-sister. C. Combined. D. The three corporations would not be
considered to be a controlled group for tax purposes.
100.Which of the following statements regarding controlled
groups is false? A The purpose of the controlled group rules is to
essentially treat the group as though it were one entity . for
purposes of determining certain tax benefits. BHaving several
entities treated as a controlled group is advantageous for tax
purposes because each . corporation in the group is allowed to use
the 15% tax bracket in the corporate tax rate schedule in computing
its regular income tax liability. C Lauren owns 100% of Corporation
A stock and 100% of Corporation B stock. Corporation A and .
Corporation B form a controlled group. D. Corporation A owns 100%
of Corporation B. Corporation A and Corporation B form a controlled
group. 101.Which of the following regarding Schedule M-1 and
Schedule M-3 of Form 1120 is false? A In general, smaller
corporations are required to complete Schedule M-1 while larger
corporations are . required to complete Schedule M-3. B. Schedule
M-3 lists more book-tax differences than M-1. C. Both Schedule M-1
and M-3 reconcile to a corporation's bottom line taxable income. D.
Schedule M-1 does not distinguish between temporary and permanent
book-tax differences while Schedule M-3 does. 102.Which of the
following statements is false regarding consolidated tax returns?
A. An affiliated group can file a consolidated tax return only if
it elects to do so. B. To file a consolidated tax return, one
corporation must own at least 50% of the stock of another
corporation. C For a group of corporations filing a consolidated
tax return, an advantage is that losses of one group . member may
offset gains of another group member. DFor a group of corporations
filing a consolidated tax return, losses from certain intercompany
. transactions are deferred until realized through a transaction
outside of the group. 103.What is the unextended due date of the
tax return of a calendar-year corporation? A. February 15. B. March
15. C. April 15. D. September 15. 104.Which of the following is not
an acceptable method of determining the required annual payment of
federal income tax for corporations? A. 100 percent of the prior
year's tax liability (with a few exceptions) B. 100 percent of the
current year's tax liability C. 100 percent of the estimated
current year tax liability using the annualized income method D.
All of these are acceptable methods of determining the required
annual payment of federal income tax for corporations 105.Which of
the following statements is false regarding corporate estimated tax
payments? A. The due dates for estimated tax payments are the 15th
day of the 4th, 6th, 9th, and 12th months of the corporation's tax
year. B Corporations must pay estimated taxes only if they have a
federal income tax liability greater than . $10,000 (including the
alternative minimum tax). C Even though a corporation extends its
tax return it still must pay its tax liability for the year by two
and . one half months after year end. DCorporations using the
annualized income method for determining estimated tax payments
project their . tax liability for the year based on income from the
first, second, and third quarters.
106.Omnidata uses the annualized income method to determine its
quarterly federal income tax payments. It had $100,000, $50,000,
and $90,000 of taxable income for the first, second, and third
quarters, respectively ($240,000 in total through the first three
quarters). What is Omnidata's annual estimated taxable income as of
the end of the third quarter? A. $300,000 B. $320,000 C. $400,000
D. $480,000 107.Rapidpro Inc. had more than $1,000,000 of taxable
income two years prior to the current year. It would like to use
its prior year tax liability (which was very low but above zero) to
determine its quarterly estimated payments this year. Which of the
following statements is true? A Rapidpro may use the prior year tax
liability to determine its first and second quarter estimated tax .
payments only since it is a large corporation. B To avoid penalty,
the second quarter estimated payment must be large enough to cover
50 percent of its . estimated annual tax liability annualized from
its first quarter estimated taxable income (assume it does not rely
on its current year actual tax liability to determine its estimated
tax payment). C To avoid penalty, the third quarter estimated
payment must be large enough to cover 50 percent of its . estimated
annual tax liability annualized from its third quarter estimated
taxable income (assume it does not rely on its current year actual
tax liability to determine its estimated tax payment). D. None of
these is true. 108.Which of the following statements regarding the
alternative minimum tax is false? A. Corporations compute the AMT
by multiplying their AMT base by 35 percent and subtracting their
regular tax liability. B. Small corporations are exempt from the
AMT. C. All first-year corporations are exempt from the AMT. D.
None of these is false (choose if you believe All of these are
true). 109.Which of the following is not an AMT adjustment? A.
Adjustment for depreciation B. Adjustment of gain or loss on sale
of depreciable assets C. Adjustment for adjusted current earnings
(ACE) D. Adjustment for domestic production activities deduction
110.In the current year, FurnitureKing Corporation recognized
$32,000 of income from an installment sale it made in a previous
tax year. If installment sales are the only difference between ACE
and alternative minimum taxable income (before the ACE adjustment),
what is the amount and nature of the ACE adjustment for the current
tax year? A. $24,000 favorable B. $24,000 unfavorable C. $32,000
favorable D. $32,000 unfavorable 111.XPO Corporation has a minimum
tax credit of $51,000 from 2011. If its 2012 tentative minimum tax
is $211,000 and its regular tax liability is $250,000, what is its
minimum tax credit carryover to 2013? A. $51,000 B. $39,000 C.
$12,000 D. $0 112.Flywest Airlines, Inc. has regular taxable income
of $190 million. It also has $10 million of AMT preference items, a
$5 million unfavorable depreciation adjustment, and a $2 million
favorable ACE adjustment. What is Flywest's alternative minimum tax
income (AMTI)? A. $177 million B. $183 million C. $197 million D.
$203 million
113.Z Corporation has AMTI of $250,000, which exceeds the AMT
exemption phase-out threshold by $100,000. What is Z's tentative
minimum tax? A. $47,000 B. $45,000 C. $40,000 D. $30,000 114.Which
of the following statements regarding AMT is true? A. Only very
profitable companies (AMTI greater than $1 million) have their AMT
exemption phased out. B. The AMT exemption is phased out dollar for
dollar as AMTI increases. C. Minimum tax credits are generated
whenever regular tax liability exceeds tentative minimum tax. D.
Minimum tax credits can be carried forward indefinitely. 115.Assume
a corporation is not required to pay AMT in the current year but
will pay AMT next year. Also assume the corporation's regular
marginal tax rate is 35 percent. Which tax planning strategy would
minimize its after-tax cost of a charitable contribution it is
considering paying to a qualified charity? A. Pay the contribution
this year. B. Wait until next year to pay the contribution. C. The
after-tax cost of the contribution will be the same no matter which
year it makes the contribution. D. None of these. 116.In 2012,
AutoUSA Inc. received $4,600,000 of book income, including $20,000
of interest income from tax-exempt municipal bonds. AutoUSA
reported $3,600,000 of regular business expenses. If it made
$350,000 of estimated tax payments (prepayments) throughout the tax
year, what is its tax due or tax refund when it files its return?
Assume AutoUSA pays taxes at a flat 34 percent rate and disregard
the alternative minimum tax.
117.For book purposes, RadioAircast Inc. reported $15,000 of
income from municipal bonds in 2012. It also expensed $12,000 of
radio station filing fines paid to the FCC the same year. What is
the total booktax difference associated with these items? Is it
favorable or unfavorable? What amount of the total adjustment is
permanent and what amount is temporary?
118.In 2012, US Sys Corporation received $250,000 in death
benefits after its CEO (a key employee) died (it included this
amount in book income). For book purposes, US Sys also expensed
life insurance premiums for other key employees in the amount of
$20,000. In addition, for book purposes, it expensed $10,000 of
meals and entertainment expenditures. What is the total book-tax
difference associated with these items? Is it favorable or
unfavorable? What amount of the book-tax difference is temporary
and what amount is permanent?
119.In 2012, Carbonfab Manufacturers Inc. expensed $125,000 of
depreciation for book purposes, but for tax purposes, it deducted
$179,000. Carbonfab also sold equipment for $500,000. The book
adjusted basis of the equipment sold was $350,000, while the
adjusted basis for tax purposes was $210,000. What is the total
book-tax difference associated with depreciation and the gain on
sale? Is it favorable or unfavorable? What amount of the book-tax
difference is permanent and what amount is temporary?
120.Atom Ventures Inc. (AV) owns stock in the Primo and Faraday
corporations. The following summarizes information relating to AV's
investment in Primo and Faraday as follows:
Assuming that AV follows the general rules for reporting its
income from these investments, what is the amount of AV's book-tax
difference associated with the investment in these corporations
(disregarding the dividends received deduction)? Is it favorable or
unfavorable? Is it permanent or temporary?
121.On January 1, 2010, Credit Inc. recorded goodwill valued at
$270,000 when it acquired the assets of another company. At the end
of 2011, the auditors of Credit Inc. determined that the goodwill
had been impaired by $50,000 and Credit Inc. wrote down the book
value of the goodwill by $50,000. During 2012, the goodwill was not
impaired. In 2013, goodwill was impaired and was written down
another $18,000 for financial reporting purposes. What is the
temporary book-tax difference associated with the purchased
goodwill 2011, 2012, and 2013? Are the differences favorable or
unfavorable? Are the differences permanent or temporary?
122.On January 1, 2011, GrowCo issued 50,000 nonqualified stock
options (NQOs) valued at $1 per option. Each option entitles the
owner to purchase one share of stock for $4. These options vest at
20 percent per year for five years beginning in 2011. By the end of
2012, 20,000 of the options had vested. At the end of 2012, these
options were exercised when the stock price is $6.25. What is the
total value of the book-tax difference associated with the stock
options for 2012? Is it favorable or unfavorable? How much of the
adjustment is permanent and how much is temporary? (Note that ASC
718 (a codification of FAS 123R) applies to these
transactions.)
123.On January 1, 2004 [before the adoption of ASC 718 (a
codification of FAS 123R)], Net Optimizers Inc. granted 1,000
nonqualified stock options (NQOs) valued at $.05 per option. Each
option entitles the owner to purchase one share of stock for $1.
These options vest at 10 percent per year for ten years. On
December 31, 2012, 300 options are exercised when the stock price
is $5. In 2012, what is the book-tax difference associated with the
stock options? Is it favorable or unfavorable? Is it permanent or
temporary?
124.Imperial Construction Inc. (IC) issued 100,000 incentive
stock options (ISOs) to its employees on January 1, 2012 with an
estimated value of $5.50 per option. The options vest at 25 percent
per year for four years (beginning in 2012). Each option allows the
holder to purchase one share of stock at $8. On January 1, 2013,
employees exercised 12,500 options as IC's stock price reached
$14.72. What is the amount of the book-tax difference in 2013
associated with the incentive stock options? Is it favorable or
unfavorable? Is it temporary or permanent?
125.Pure Action Cycles Inc., a bicycle manufacturer, has a net
capital loss in 2012 of $64,000. It had net capital gains of
$21,500 in 2011, $45,000 in 2010, $10,000 in 2009 (but suffered a
net operating loss in 2009), and $8,000 of net capital gain in
2008. What is the net capital gain in 2011 after the carryback is
applied?
126.In 2009, Smith Traders Inc. reported taxable income of
$100,000. In 2010, it reported taxable income of $15,000. In 2011,
it reported taxable income of $95,000. In 2012, Smith Traders
experienced a net operating loss of $25,000. What amount of refund
can Smith Traders receive if it does not elect to forgo the carry
back (see the corporate income tax schedule)?
127.During 2012, Hughes Corporation sold a portfolio of stock it
had held for five years at a loss of $200,000. It also sold some
investment land and recognized a capital gain of $180,000. In 2010,
Hughes reported a net capital gain of $12,000 and in 2011 it
recognized a net capital gain of $6,000. What is the amount of its
net capital loss carryover to 2013?
128.In 2012, Webtel Corporation donated $50,000 to a qualifying
charity. For the year, it reported taxable income of $310,000,
which included the following: the $50,000 charitable contribution
(before limitation), a $100,000 dividends received deduction, and a
$20,000 net operating loss carryover. What is Webtel Corp's
charitable contribution deduction?
129.In 2012, Datasoft Inc. received $350,000 in dividends from
CSLabs Inc. Datasoft's taxable income before the dividends received
deduction and $20,000 charitable contribution deduction is
$300,000. What is Datasoft's DRD assuming it owns 15 percent of the
CSLabs Inc. stock?
130.AB Inc. received a dividend from CD Corporation and is able
to claim a dividends received deduction without limitation. AB owns
10 percent of CD. What is AB's marginal tax rate (to the nearest
tenth of a percent) on the dividends received (after taking the DRD
into account) assuming its ordinary marginal tax rate is 34%?
131.In 2012, LuxAir Inc. (LA) has book income of $160,000.
Included in this figure is income generated from ownership in Jet
Repair Corporation (JRC), of which LA owns 30 percent. JRC has
$270,000 in earnings for the year and pays $32,000 in dividends to
LA. Assuming accounting for the investment in JRC (income from JRC
and the DRD) are its only book-tax differences, what is LA's tax
liability for 2012 (see corporate tax schedule)?
132.Netgate Corporation's gross regular tax liability for 2012
was $95,375. What was its taxable income?
133.For 2012, SRH's taxable income is $35,000 and JHH's taxable
income is $45,000. Together, Scott and Jackson Howard own 100
percent of both corporations. What is the combined tax liability of
the two corporations?
134.AR Systems Inc. (AR) had $120,000 of tax liability last
year. It anticipates a current-year tax liability of $500,000.
Assuming AR is considered a large corporation for purposes of
estimating tax liability, what are the minimum estimated tax
payments it should make to avoid underpayment penalties? Ignore the
annualized income method.
135.In the current year, Auto Rent Corporation reported the
following taxable income at the end of its first, second, and third
quarters:
What amount of estimated tax payments would Auto Rent pay each
quarter in order to avoid estimated tax penalties under the
annualized income method of computing estimated tax payments?
136.IndusTree Inc. received $1,800,000 from the sale of a
property in 2012. The property's adjusted basis for regular tax
purposes was $200,000 at the time of the sale. The property's
adjusted basis for AMT purposes was $290,000. What is the amount of
the AMT adjustment due to the sale of the asset? Does it increase
or decrease AMTI?
137.ValuCo gives you the following information:
What is its ACE adjustment for the year? Is it favorable or
unfavorable?
138.TerraWise Inc. reported the following information for
2012:
What is TerraWise Inc.'s AMTI?
139.QDP Corporation's AMTI is $569,000 for 2012. Its regular tax
liability is $110,000. What is its AMT?
140.VitalJuice Corporation reports the following schedule of
prior year taxes it owed:
What is VitalJuice's tax liability for Year 4?
Chapter 16 Key1. FALSE 2. FALSE 3. FALSE 4. FALSE 5. TRUE 6.
FALSE 7. TRUE 8. FALSE 9. TRUE 10. FALSE 11. TRUE 12. TRUE 13.
FALSE 14. FALSE 15. FALSE 16. FALSE 17. TRUE 18. TRUE 19. FALSE 20.
FALSE 21. TRUE 22. FALSE 23. TRUE 24. TRUE 25. TRUE 26. TRUE 27.
TRUE 28. TRUE 29. FALSE 30. FALSE 31. TRUE 32. TRUE 33. TRUE 34.
FALSE 35. FALSE 36. FALSE
37. FALSE 38. FALSE 39. FALSE 40. TRUE 41. FALSE 42. TRUE 43.
FALSE 44. FALSE 45. TRUE 46. FALSE 47. TRUE 48. FALSE 49. TRUE 50.
FALSE 51. TRUE 52. TRUE 53. TRUE 54. TRUE 55. B 56. D 57. A 58. D
59. B 60. C 61. B 62. B 63. D 64. A 65. B 66. A 67. A 68. C 69. C
70. A 71. D 72. B 73. D 74. D
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D 86. B 87. B 88. C 89. D 90. D 91. C 92. B 93. A 94. C 95. B 96. D
97. D 98. A 99. B 100. B 101. C 102. B 103. B 104. D 105. B 106. A
107. B 108. A 109. D 110. A 111. C 112. D
113. A 114. D 115. A
116. $16,800 refund.
117. $3,000, favorable book-tax difference. Entire difference is
permanent book-tax difference.
118. $225,000 favorable, permanent book-tax difference.
119. $86,000, unfavorable, temporary book-tax difference.
120. $93,750, favorable, temporary book tax difference, computed
as follows:
121. 2011: $32,000 unfavorable, temporary book tax difference;
2012: $18,000 favorable, temporary book-tax difference; 2013: $0
book-tax difference.
The permanent difference is $25,000 which is the difference
between the bargain element per share of $2.25 minus the $1 value
per share as estimated for book purposes multiplied by the number
of shares exercised [(2.25 - 1) 20,000]. The remaining $10,000
difference is temporary. In 2011, the recording of the vested stock
option expense of $10,000 created a temporary unfavorable book-tax
difference.
122. $35,000, favorable. $25,000 of the adjustment is permanent
and the remaining $10,000 is temporary.
123. $1,200, favorable, permanent book-tax difference.
124. $137,500 unfavorable, permanent book-tax difference.
125. $2,500 capital gain, computed as follows:
126. $5,650, computed as follows:
127. $2,000, computed as follows:
128. $46,000, computed as follows:
129. $196,000, computed as follows:
130. 10. 2 percent [34% (100% - 70%)].
131. $17,286, computed as follows:
132. $287,500.
133. $15,450; SRC and JHH are a brother-sister control group.
Both are more than 50-percent owned by five or fewer persons.
Consequently, their incomes must be combined when applying the tax
rate schedule. $15,450 = $13,750 + [34% ($80,000 - $75,000)].
134. Q1: $30,000, Q2: $220,000, Q3: $125,000, Q4: $125,000; AR
should use last year's tax liability to determine its quarterly
payments. However, because it is a large corporation, it is allowed
to use the prior year's tax liability to determine the first
quarter payment only. The second quarter payment must catch up the
cumulative payments to 50 percent of the current year tax
liability.
135. First quarter $510,000; ($1,500,000 4 = $6,000,000 34%
25%); Second quarter $510,000 ($6,000,000 34% 50% - $510,000);
Third quarter $408,000 ($2,800,000 2 34% 75% - $1,020,000); Fourth
quarter $204,000 ($3,600,000 1.33333 34% - $1,428,000). 136.
$90,000; the gain recognized for regular tax purposes is $1,600,000
($1,800,000 amount realized - $200,000 adjusted basis). The gain
recognized for AMT purposes is $1,510,000 ($1,800,000 amount
realized - $290,000 adjusted basis). The difference of $90,000 is
favorable and decreases AMTI because less gain is recognized under
AMT rules than regular tax rules. 137. $55,500, unfavorable; two of
the three items given are included in the ACE adjustment: interest
from tax-exempt bonds funding a public activity and the 70 percent
dividends received deduction. The eighty percent dividends received
deduction is not included in the ACE adjustment. The sum of the
$14,000 interest and the $60,000 seventy-percent DRD is multiplied
by 75 percent to get the ACE adjustment.
138. $5,900,000, computed as follows:
139. $3,800. QDP's AMT exemption is completely phased-out, so
its tentative minimum tax is $113,800 ($569,000 20 percent). The
difference between tentative minimum tax and regular tax liability
is AMT: $3,800 = $113,800 - $110,000. 140. $750,000. VitalJuice
generates a minimum tax credit in Year 2 of $100,000 ($900,000 -
$800,000). It generates a $50,000 minimum tax credit in Year 3. In
Year 4, the $150,000 minimum tax credit carryover can be applied to
reduce regular tax liability to $750,000 ($900,000 - $150,000).
Chapter 16 SummaryCategory # of Questions AACSB: Analytic 37
AACSB: Reflective thinking 126 AICPA BB: Critical thinking 140
Blooms: Analyze 63 Blooms: Apply 51 Blooms: Remember 35 Learning
Objective: 168 01 Describe the corporate income tax formula;
compare and contrast the corporate to the individual tax formula;
and discuss tax co nsiderations relating to corporations accounting
periods and accounting methods. Learning Objective: 16-02 Identify
common book88 tax differences; distinguish between permanent and
temporary differences; and compute a corporations taxable income
and regular tax liability. Learning Objective: 16-03 Describe a
corporations tax return reporting and estimated tax payment
obligations. 22 Learning Objective: 16-04 Explain how to calculate
a corporations alternative minimum tax liability. 23 Level of
Difficulty: 1 Easy 44 Level of Difficulty: 2 Medium 70 Level of
Difficulty: 3 Hard 26 Spilker - Chapter 16 140