Taxation of Business Entities Brian Spilker 11e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Taxation of Business Entities, 11e (Spilker) Chapter 5 Corporate Operations 1) In general, all C corporations can elect to use either the accrual or cash method of …
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Taxation of Business Entities Brian Spilker 11e – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Taxation of Business Entities, 11e (Spilker)
Chapter 5 Corporate Operations
1) In general, all C corporations can elect to use either the accrual or cash method of accounting.
Answer: FALSE
Explanation: Corporations with annual average gross receipts of more than $26 million over the prior three years are required to use the accrual method.
Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
2) Corporations calculate adjusted gross income (AGI) in the same way as individuals.
Answer: FALSE
Explanation: Corporations do not calculate AGI.
Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
3) Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.
Answer: FALSE
Explanation: Corporations do not have standard deductions.
Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
4) C corporations with annual average gross receipts of $26 million or more are allowed to use the cash method of accounting for at least the first two years of their existence.
Answer: FALSE
Explanation: A corporation may not use the cash method of accounting in the second year if it reported more than $26 million in gross receipts in the first year.
Difficulty: 2 Medium
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
5) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
6) An unfavorable temporary book–tax difference is so named because it causes taxable income to decrease relative to book income.
Answer: FALSE
Explanation: Any book–tax difference that requires an add-back to book income to compute taxable income is an unfavorable book–tax difference because it requires an adjustment that increases taxable income relative to book income.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
7) Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book–tax difference.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
8) Federal income tax expense reported on a corporation’s books generates a temporary book–tax difference for Schedule M-3 purposes.
Answer: FALSE
Explanation: Federal income tax expense generates a permanent book–tax difference for Schedule M-3 purposes.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
9) For a corporation, goodwill created in an asset acquisition generally leads to temporary book–tax differences.
Answer: TRUE
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
10) For incentive stock options, the value of the options that accrue in a given year always creates a permanent, unfavorable book–tax difference.
Answer: TRUE
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
11) In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. Adams has a favorable temporary book–tax difference for that year.
Answer: FALSE
Explanation: Goodwill impairment in excess of tax goodwill creates either a permanent difference or an unfavorable temporary book–tax difference.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
12) For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.
Answer: TRUE
Explanation: The corporation deducts as compensation expense the excess of the fair market value of the stock acquired over the exercise price on the date the NQO is exercised.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
13) A nonqualified stock option will create a permanent book–tax difference in a given year if it accrues during the year but is exercised in a later year.
Answer: FALSE
Explanation: A deductible temporary difference (deferred tax asset) is created in the year the option accrues and is recorded as an expense for book purposes.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
14) For tax purposes, a corporation may deduct the entire amount of a net capital loss in the year incurred.
Answer: FALSE
Explanation: A corporation can deduct a capital loss only against capital gains.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
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.
Answer: FALSE
Explanation: A corporation carries a net capital loss back three years (required) and forward five years.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
16) A corporation may carry a net capital loss back two years and forward 20 years.
Answer: FALSE
Explanation: A corporation carries a net capital loss back three years and forward five years.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
17) A corporation may carry a net capital loss back three years and forward five years.
Answer: TRUE
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
18) Corporations may carry a net operating loss sustained in 2019 back two years and forward 20 years.
Answer: FALSE
Explanation: An NOL sustained in 2019 can be carried forward indefinitely with no carryback permitted.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
19) Bingo Corporation incurred a $10 million net operating loss in 2019. Bingo reported taxable income of $12 million in 2020. Bingo can offset the entire $10 million NOL carryover against taxable income in 2020.
Answer: FALSE
Explanation: The NOL can only offset 80 percent of taxable income in the carryover year ($9.6 million). The remaining NOL of $400,000 is carried over to 2021.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
20) Net operating losses generally create permanent book–tax differences.
Answer: FALSE
Explanation: NOLs are treated as deductible temporary differences.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
21) Net capital loss carryovers are deductible against capital gains in determining a corporation’s net operating loss for the year.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
22) For 2019, accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.
Answer: FALSE
Explanation: The deduction is allowed in the year authorized by the board of directors provided the payment is made within three and a half months after year-end.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
23) GenerUs Inc.’s board of directors approved a charitable cash contribution to FoodBank, a qualified nonprofit organization, in November of 2019. GenerUs made the payment to FoodBank on February 2, 2020. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2019 tax return.
Answer: TRUE
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
24) NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while capital loss carrybacks are not.
Answer: TRUE
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
25) Corporations may carry excess charitable contributions forward five years, but they may not carry them back.
Answer: TRUE
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
26) A corporation generally will report a favorable, temporary book–tax difference when it deducts a charitable contribution carryover.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
27) Corporations are not allowed to deduct charitable contributions in excess of 10 percent of the corporation’s taxable income (before the charitable contribution and certain other deductions).
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
28) The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
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.
Answer: FALSE
Explanation: The DRD percentages are 50 percent, 65 percent, and 100 percent, depending on the stock ownership level.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
30) The dividends received deduction cannot create a net operating loss. The deduction can reduce income to zero but not below zero.
Answer: FALSE
Explanation: A dividends received deduction is limited to 50 percent or 65 percent of taxable income unless it creates or increases a net operating loss deduction, in which case the full amount is allowed.
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
31) The dividends received deduction is subject to a limitation based on modified taxable income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
32) Taxable income of all C corporations is subject to a flat 21 percent tax rate.
Answer: TRUE
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
33) A C corporation reports its taxable income or loss on Form 1065.
Answer: FALSE
Explanation: C Corporations report taxable income or loss on Form 1120.
Difficulty: 1 Easy
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
34) 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).
Answer: FALSE
Explanation: Schedule M-1 reconciles net income or loss with taxable income before NOL carryovers and special deductions (line 28 of Form 1120).
Difficulty: 3 Hard
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
35) Both Schedules M-1 and M-3 require taxpayers to identify book–tax differences as either temporary or permanent.
Answer: FALSE
Explanation: Schedule M-1 is less detailed than Schedule M-3 and does not require the taxpayer to distinguish between temporary and permanent differences.
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
36) An affiliated group must file a consolidated tax return.
Answer: FALSE
Explanation: An affiliated group must elect to file a consolidated tax return in the first year, after which filing a consolidated tax return is mandatory on a going-forward basis.
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
37) The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.
Answer: FALSE
Explanation: ASC 810 governs consolidated financial reporting while IRC sections 1501–1504 and the accompanying regulations govern income tax consolidation.
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
38) Calendar-year C corporations that request an extension for filing their 2019 tax returns will have a tax return due date of October 15.
Answer: TRUE
Explanation: Calendar-and fiscal-year corporations other than those with a June 30 year-end can extend their tax returns for five months.
Difficulty: 1 Easy
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
39) Volos Company (a calendar-year corporation) began operations in March of 2017 and was not profitable through December of 2018. Volos has been profitable for the first quarter of 2019 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2019 because it had no tax liability for the 2018 tax year and has been in business for at least 12 months.
Answer: FALSE
Explanation: Estimated taxes are due if the corporation expects to incur a tax liability of $500 or more for the year. A corporation can base its estimated payments on the prior year’s tax liability only if it is positive, which is not the case here.
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
40) Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.
Answer: TRUE
Difficulty: 1 Easy
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
41) Large corporations (corporations with more than $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.
Answer: FALSE
Explanation: Large corporations can use the prior-year liability to determine the first quarter estimated tax payment only.
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
42) 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.
Answer: FALSE
Explanation: For estimated tax purposes, a “large” corporation is a corporation with more than $1,000,000 of taxable income in any of the three years prior to the current year.
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
43) Which of the following is not calculated in the corporate income tax formula?
Answer: B
Explanation: Adjusted gross income is calculated for individual returns, but not for corporate returns.
Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
44) WFO Corporation has gross receipts according to the following schedule:
| Year 1 | $22.00 million |
| Year 2 | $24.00 million |
| Year 3 | $26.00 million |
| Year 4 | $26.50 million |
| Year 5 | $27.00 million |
| Year 6 | $28.00 million |
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?
Answer: D
Explanation: Corporations with $26 million or less in annual average gross receipts can use the cash method of accounting for tax purposes. Corporations that have not been in existence for at least three years can compute average annual gross receipts over the years they have been in existence. The three years preceding Year 6 have annual average gross receipts of $26.5 million.
Difficulty: 3 Hard
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
45) Which of the following does NOT create a permanent book–tax difference?
Answer: A
Explanation: Organizational and start-up expenses are capitalized and amortized for tax purposes but immediately deducted for book purposes, so these create a temporary book–tax difference.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
46) Which of the following does NOT create a temporary book–tax difference?
Answer: D
Explanation: The dividends received deduction is a tax-only deduction. It creates a favorable permanent book–tax difference.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
47) Which of the following statements regarding book–tax differences is true?
Answer: B
Explanation: Temporary book–tax differences will eventually reverse; if a difference is favorable one year, it will be unfavorable in another.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
48) It is important to distinguish between temporary and permanent book–tax differences for which of the following reasons?
Answer: C
Explanation: Temporary book–tax differences will reverse in future years whereas permanent differences will not.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
49) TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Inc. is the beneficiary. What is the nature of the book–tax difference created by this expense?
Answer: B
Explanation: Life insurance premiums for key employees are not deductible for tax purposes.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
50) 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?
Answer: B
Explanation: Interest expense on loans to acquire investments that produce tax-exempt income is not deductible under section 265.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
51) AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and expensing 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?
Answer: D
Explanation: The gain recognized by AmStore is higher for tax purposes than it is for book purposes because the tax accumulated depreciation is higher than the book accumulated depreciation (the basis is higher for book purposes than for tax purposes). This adjustment is the reversal of the favorable book–tax difference for depreciation on the asset.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
52) 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?
Answer: A
Explanation: Corporations generally include dividends from corporations in which they own less than 20 percent in both taxable and financial income (dividends are not income for book purposes if Corporation A accounts for its stock ownership under the equity method, which generally begins with a 20 percent ownership interest).
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
53) 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?
Answer: B
Explanation: If a corporation receiving dividends owns at least 20 percent but not more than 50 percent of the stock of a dividend-distributing corporation, it reports a pro rata portion of the distributing corporation’s earnings in its financial accounting income under the equity method and it includes the actual amount of the dividend in its taxable income.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
54) Coop Inc. owns 40 percent of Chicken Inc. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume 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)?
Answer: A
Explanation: Coop recognizes $10,000 in dividend income for tax purposes but only $8,000 of book income (40 percent of the $20,000 earnings of Chicken). Because taxable income is greater than book income, the difference is unfavorable.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
55) Over what time period do corporations amortize purchased goodwill for tax purposes?
Answer: A
Explanation: Goodwill is amortized over 15 years (180 months) for tax purposes.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
56) Which of the following statements regarding book–tax differences associated with purchased goodwill is false?
Answer: C
Explanation: It is possible to have an unfavorable difference in a year when goodwill impairment exceeds the allowable amortization deduction.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
57) Which of the following describes the correct treatment of incentive stock options (ISOs)?
Answer: C
Explanation: Under ASC 718, option values are expensed over the vesting period, creating an unfavorable permanent book–tax difference.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
58) Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)?
Answer: D
Explanation: Under ASC 718, the value of options is expensed over the vesting period for books and the bargain element is deducted in the year of exercise for tax purposes, creating a temporary book–tax difference.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
59) Which of the following statements regarding nonqualified stock options (NQOs) is false?
Answer: C
Explanation: ASC 718 requires compensation expense recognition for all stock options.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
60) Which of the following statements regarding incentive stock options (ISOs) is false?
Answer: D
Explanation: Book–tax differences associated with ISOs are permanent because no deductions can be taken for tax purposes.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
61) Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years—half in 2019 (the year of issue) and half in 2020. One thousand options are exercised in 2020 with a bargain element on each option of $6. What is the 2020 book–tax difference associated with the stock options?
Answer: A
Explanation: The book–tax difference in 2020 is the difference between $20,000 expensed for book purposes (50% × $40,000) and $6,000 deducted for tax purposes (1,000 options exercised × $6 bargain element). It is unfavorable because the book expense exceeds the tax deduction.
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
62) In January 2018, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company did 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 2019, the company experienced a surge in its stock price, and Ms. Svaro exercised the options. The total bargain element at the time of exercise was $60,000. For 2019, what is the book–tax difference due to the options exercised?
Answer: D
Explanation: For financial purposes, the company deducts the entire $50,000 value of the stock options in 2018, when the stock option is granted. For tax purposes, the company deducts the $60,000 bargain element in 2019, when the stock option is exercised. For 2019, the book–tax difference is favorable in the amount of $60,000.
Difficulty: 3 Hard
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
63) In January 2019, Khors Company issued 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 2019, the company experienced 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 2019, what is the nature of the book–tax difference due to the options exercised?
Answer: D
Explanation: The adjustment is unfavorable because the book deduction exceeds the tax deduction. The adjustment is permanent because it will not ever reverse.
Difficulty: 3 Hard
Topic: Corporate Taxable Income Formula
Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s financial accounting net income to differ from its taxable income.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
64) Which of the following statements regarding capital gains and losses is false?
Answer: B
Explanation: Corporations cannot deduct capital losses against ordinary income.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
65) For corporations, which of the following regarding net capital losses is true?
Answer: D
Explanation: Net capital losses create an unfavorable book–tax difference in the year they occur and a favorable book–tax difference in the year they are applied. These book–tax differences are temporary.
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
66) 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?
Answer: D
Explanation: Studios carries back $14,000 of the loss to Year 4, and then carries the remaining $16,000 forward to Year 6. In Year 6 it deducts $16,000 for tax purposes and $0 for book purposes.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
67) Tatoo Inc. reported a net capital loss of $13,000 in 2019. The company had a net capital gain of $4,300 in 2017 and $3,000 in 2016. In 2018, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo’s capital loss carryover remaining after it applies the carryback?
Answer: B
Explanation: The net capital loss is first carried back to 2016 as $3,000 is deducted against net capital gain. The $4,300 net capital gain in 2017 is offset next. Because Tatoo reported a net operating loss in 2018, it is not allowed to apply the carryback to that year. The remaining carryover is $5,700 ($13,000 − $3,000 − $4,300).
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
68) BTW Corporation has taxable income in the current year that can be offset with an NOL carryover 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?
Answer: C
Explanation: Book income will exceed taxable income in the current year, so the book–tax difference is favorable. The book–tax difference is temporary because it is the reversal of an unfavorable difference in the year the NOL was created.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
69) Which of the following is allowable as a deduction in calculating a corporation’s net operating loss?
Answer: A
Explanation: Net capital loss carrybacks and net operating loss carryovers are not deductible in calculating a current-year net operating loss.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
70) Which of the following statements regarding net operating losses generated in 2020 is true?
Answer: B
Explanation: A corporation can carry over the NOL indefinitely.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
71) Which of the following statements regarding charitable contributions is false?
Answer: D
Explanation: Depending on the nature of the property, the amount deductible for a contribution can be the fair market value of the contributed property.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
72) Which of the following is not required to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity?
Answer: B
Explanation: Prior IRS approval is not required.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
73) Which of the following is deductible in calculating the charitable contribution limit modified taxable income?
Answer: C
Explanation: NOL and net capital loss carryovers are deductible in calculating modified taxable income for the charitable contribution limit but carrybacks and the DRD are not.
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
74) 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?
Answer: D
Explanation: The current-year deduction is limited to 10 percent of the charitable contribution limit modified taxable income, which is $7,200 ($72,000 × 10%). The carryover is any excess of the charitable contribution deduction for the year over the allowable current-year deduction.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
75) If a corporation’s cash charitable contributions exceed the charitable contribution deduction limit, what kind of book–tax difference is created?
Answer: D
Explanation: Because charitable contribution expense exceeds the allowable deduction, the book–tax difference is unfavorable. The difference will reverse when the carryover deduction is taken in a future year.
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
76) Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true?
Answer: C
Explanation: Corporations may carry excess charitable contributions over for up to five years but they may not carry them back.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
77) Which of the following statements regarding the dividends and/or the dividends received deduction (DRD) is true?
Answer: B
Explanation: The DRD limitation does not apply if the DRD creates or increases a corporation’s net operating loss.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
78) Which of the following is deductible in calculating DRD modified taxable income?
Answer: A
Explanation: NOL carryovers, NCL carrybacks, and the DRD itself are not included in the DRD modified taxable income calculation.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
79) Jazz Corporation owns 50 percent 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.?
Answer: C
Explanation: Because Jazz owns at least 20 percent and less than 80 percent of the Williams stock, it is entitled to a 65 percent dividends received deduction ($10,000 × 65%).
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
80) Jazz Corporation owns 10 percent 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.?
Answer: B
Explanation: Because Jazz owns less than 20 percent of the Williams stock, the DRD percentage is 50 percent. Further, $4,000 (50% × $8,000 taxable income before the DRD) is less than the full DRD of $5,000 and the full DRD does not create a net operating loss ($8,000 − $5,000 = $3,000). As a result, the DRD is limited to $4,000.
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
81) Jazz Corporation owns 10 percent 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.?
Answer: D
Explanation: Because Jazz owns less than 20 percent of the Williams stock, the DRD percentage is 50 percent. Even though $2,000 (50% × 4,000 taxable income before the DRD) is less than the full DRD of $5,000, deducting the full DRD creates a net operating loss for Jazz [$4,000 − $5,000 = ($1,000)] so Jazz may deduct the full $5,000 DRD.
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
82) For Corporation P to file a consolidated tax return with Corporation S, P must own what percentage of P’s voting stock?
Answer: B
Explanation: P must own at least 80 percent of the voting power and value of S to file a consolidated tax return with S.
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
83) Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?
Answer: C
Explanation: Neither M-1 nor M-3 fully reconciles book income to taxable income. Both schedules reconcile to taxable income before NOL deductions and before the dividends received deduction.
Difficulty: 3 Hard
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
84) Which of the following statements is false regarding consolidated tax returns?
Answer: B
Explanation: To file a consolidated tax return, one corporation must own at least 80 percent of the stock of another corporation.
Difficulty: 3 Hard
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
85) What is the unextended due date of the tax return of a calendar-year C corporation for 2019?
Answer: C
Explanation: The unextended tax return due date for a calendar-year corporation is three and a half months after year-end.
Difficulty: 1 Easy
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
86) Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations?
Answer: D
Explanation: All methods are acceptable.
Difficulty: 1 Easy
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
87) Which of the following statements is false regarding corporate estimated tax payments?
Answer: B
Explanation: Corporations are required to make quarterly estimated payments if their federal income tax liability (including alternative minimum tax) is $500 or more.
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
88) 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?
Answer: A
Explanation: The annual estimated taxable income for the third quarter is determined by annualizing cumulative taxable income for the first half of the year. $300,000 = 2 × ($100,000 first quarter income + $50,000 second quarter income).
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
89) 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?
Answer: B
Explanation: Rapidpro can use its prior-year tax liability to determine only the first quarter payment. After that, it must use the current year’s liability or the annualized income method to determine payments. The second quarter payment is based on the annualized tax liability from the first quarter taxable income.
Difficulty: 3 Hard
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
90) In 2019, AutoUSA Inc. reported $4,600,000 of book income, including $20,000 of interest income from tax-exempt bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $210,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return?
Answer: $4,200 refund
| Description | Adjustment (Favorable)/Unfavorable | Explanation | ||||
| (1) | Receipts | $ | 4,600,000 | |||
| (2) | Income excludable from income | (20,000 | ) | Tax-exempt interest | ||
| (3) | Deductible business expenses | (3,600,000 | ) | |||
| (4) | Taxable income | 980,000 | Sum of (1) through (3) | |||
| (5) | Tax rate | 21 | % | |||
| (6) | Tax liability | 205,800 | (4) × (5) | |||
| (7) | Prepayments | 210,000 | ||||
| Taxes due (refund) | $ | (4,200 | ) | (6) – (7) | ||
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
91) For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2018. It also expensed $12,000 of radio station filing fines paid to the FCC the same year. What is the total book–tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?
Answer: $3,000, favorable book–tax difference. Entire difference is permanent book–tax difference.
| Description | Adjustment (Favorable)/ | Explanation | |||
| Unfavorable | |||||
| (1) | Book–tax difference due to municipal bond income | $ | (15,000 | ) | Municipal bond income is excludable from
taxable income permanent. |
| (2) | Book–tax difference due to disallowed federal fines | 12,000 | Government fines are not deductible for tax purposes permanent. | ||
| Total favorable book–tax difference | $ | (3,000 | ) | (1) + (2). Both differences are permanent. | |
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
92) In 2019, 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 business meals 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?
Answer: $225,000 favorable; all adjustments are permanent book–tax differences
| Description | Adjustment (Favorable)/Unfavorable | Explanation | |||||
| (1) | Death benefits | $ | (250,000 | ) | Death benefits for key employees are excludable from income for tax purposes. | ||
| (2) | Life insurance premiums | 20,000 | Expenses that produce income exempt from tax are not deductible for tax purposes. | ||||
| (3) | Half of meals expense | 5,000 | $10,000 is expensed for book purposes, but only half is deductible for tax purposes. | ||||
| Total favorable book–tax difference | $ | (225,000 | ) | Sum of (1) through (3) | |||
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
93) In 2019, 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?
Answer: $86,000, unfavorable, temporary book–tax difference.
| Description | Adjustment (Favorable)/
Unfavorable |
Explanation | |||
| (1) | Book depreciation | $ | 125,000 | ||
| (2) | Tax cost recovery | 179,000 | |||
| (3) | Book–tax difference due
to depreciation |
(54,000 | ) | (1) – (2); favorable because tax
deductions exceed book expenses. |
|
| (4) | Sale of equipment | 500,000 | |||
| (5) | Adjusted basis—book | 350,000 | |||
| (6) | Gain on sale—book | 150,000 | (4) – (5). | ||
| (7) | Adjusted basis—tax | 210,000 | |||
| (8) | Gain on sale—tax | 290,000 | (4) – (7). | ||
| (9) | Book–tax difference due to gain on
sale of equipment |
140,000 | (6) – (8); unfavorable because tax gain exceeds book gain. | ||
| Total unfavorable book–tax difference | $ | 86,000 | (3) + (9). | ||
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
94) 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:
| Corporation | Corporation’s earnings for
year |
Atom’s
ownership |
Dividends distributed to
Atom during year |
|
| Primo | $625,000 | 35% | $ | 125,000 |
| Faraday | $940,000 | 10% | $ | 50,000 |
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?
Answer: $93,750, favorable, temporary book–tax difference, computed as follows:
| Description | Amounts | Explanation | ||||
| Primo | ||||||
| (1) | Dividend received (included in taxable income but not book income) | $ | 125,000 | |||
| (2) | Primo’s net income | $ | 625,000 | |||
| (3) | Atom’s ownership in Primo | 35 | % | |||
| (4) | Atom’s book income from Primo investment | $ | 218,750 | Because Atom owns between 20 and 80 percent of the stock of Primo, Atom includes the pro rata portion of Primo’s earnings in book income. | ||
| (5) | Favorable book–tax difference associated with Primo | $ | 93,750 | (4) – (1). | ||
| Faraday | ||||||
| (6) | Dividend received (included in taxable income but not book income) | $ | 50,000 | |||
| (7) | Atom’s book income from Faraday investment | 50,000 | Because Atom owns less than 20 percent of the stock of Faraday, Atom includes the dividend in book income. | |||
| (8) | Book–tax difference associated with Faraday | 0 | (7) – (6); there is no book–tax difference. | |||
| Favorable book–tax difference associate with dividend | $ | 93,750 | (5) + (8). | |||
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
95) On January 1, 2017, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2018, 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 2019, the goodwill was not further impaired. In 2020, additional 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 in 2018, 2019, and 2020? Are the differences favorable or unfavorable? Are the differences permanent or temporary?
Answer: 2018: $32,000 unfavorable, temporary book–tax difference; 2019: $18,000 favorable, temporary book–tax difference; 2020: $0 book–tax difference.
| Description | Amounts | Explanation | |||||
| (1) | Goodwill initially recorded on acquisition in 2017 | $ | 270,000 | ||||
| (2) | Annual goodwill amortization expense for tax | $ | 18,000 | (1)/15 years. | |||
| (3) | Goodwill impairment recorded in 2018 | 50,000 | |||||
| 2018 unfavorable book–tax difference | 32,000 | (2) – (3). | |||||
| (4) | Goodwill impairment in 2019 | 0 | |||||
| 2019 favorable book–tax difference | (18,000 | ) | (2) – (4). | ||||
| (5) | Goodwill impairment in 2020 | 18,000 | |||||
| 2020 book–tax difference | 0 | (2) – (5) There is no book-tax difference in 2019 because the amortization for tax purposes was equal to impairment expense. | |||||
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
96) On January 1, 2018, 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 (accrue) at 20 percent per year for five years beginning in 2018. By the end of 2018, 20,000 of the options had vested. At the end of 2019, these options were exercised when the stock price is $6.25. What is the total book–tax difference associated with the stock options for 2019? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary?
Answer: $35,000, favorable. $25,000 of the adjustment is permanent and the remaining $10,000 is temporary.
| Description | Amount | Explanation | |||||
| (1) | Number of NQOs | $ | 50,000 | ||||
| (2) | Value of options | $ | 50,000 | (1) × $1 value per option. | |||
| (3) | Percentage of options that accrue in 2019 | 20 | % | ||||
| (4) | Value of options that vest in 2019
(amount expensed for book purposes) |
$ | 10,000 | (2) × (3). | |||
| (5) | Number of options exercised in 2019 | 20,000 | |||||
| (6) | Bargain element per option | $ | 2.25 | $6.25 stock price – $4 exercise price | |||
| (7) | Bargain element of all exercised options
(value deductible for tax purposes) |
$ | 45,000 | (5) × (6). | |||
| Favorable book–tax difference | $ | (35,000 | ) | (4) – (7). | |||
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 2019, the recording of the vested stock option expense of $10,000 created a temporary unfavorable book–tax difference.
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
97) Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2018, with an estimated value of $5.50 per option. The options vest (accrue) at 25 percent per year for four years (beginning in 2019). Each option allows the holder to purchase one share of stock at $8. On January 1, 2020, employees exercised 12,500 options as IC’s stock price reached $14.72. What is the amount of the book–tax difference in 2020 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?
Answer: $137,500 unfavorable, permanent book–tax difference.
| Description | Amount | Explanation | |||
| (1) | Number of ISOs | 100,000 | |||
| (2) | Value of options | $ | 550,000 | (1) × $5.50 value per option. | |
| (3) | Percentage of options that accrue in 2020 | 25 | % | ||
| (4) | Value of options that vest in 2020
(amount expensed for book purposes) |
$ | 137,500 | (2) × (3). | |
| (5) | Amount deductible for tax purposes | 0 | No deduction is allowed for ISOs. | ||
| Unfavorable book–tax difference | $ | 137,500 | (4) – (5). | ||
Difficulty: 1 Easy
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
98) Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2019 of $(64,000). It had net capital gains of $21,500 in 2018, $45,000 in 2017, $10,000 in 2016 (but suffered a net operating loss in 2016), and $8,000 of net capital gain in 2015. What is the net capital gain in 2018 after the carryback is applied?
Answer: $2,500 capital gain, computed as follows:
| Description | Amount | Explanation | ||||
| (1) | Net capital loss in 2019 | $ | 64,000 | |||
| (2) | Net capital gain offset in 2017 | 45,000 | The net capital loss is not carried back to 2015 because the net capital loss can only be carried back three years. It cannot be applied to the net capital gain in 2016 because the corporation suffered a net operating loss that year. | |||
| (3) | Remaining capital loss carryback | 19,000 | (1) – (2). | |||
| (4) | Net capital gain in 2018 | 21,500 | ||||
| Remaining capital gain in 2018 | $ | 2,500 | (4) – (3). | |||
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
99) During 2019, 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 2017, Hughes reported a net capital gain of $12,000 and in 2018 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2020?
Answer: $2,000, computed as follows:
| Description | Amount | Explanation | |||
| (1) | 2019 capital loss from sale of stock | $ | (200,000 | ) | |
| (2) | 2019 capital gain from sale of land | 180,000 | |||
| (3) | 2019 net capital loss | (20,000 | ) | (1) + (2). | |
| (4) | 2017 net capital gain | 12,000 | |||
| (5) | 2018 net capital gain | 6,000 | |||
| Net capital loss carryover | $ | (2,000 | ) | (3) + (4) + (5). | |
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: BB Critical Thinking
100) In 2019, 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?
Answer: $46,000, computed as follows:
| Description | Amount | Explanation | |||
| (1) | Taxable income | $ | 310,000 | ||
| (2) | Charitable contribution expense | 50,000 | Not deducted in determining modified taxable income for the charitable contribution limitation | ||
| (3) | Dividends received deduction | $ | 100,000 | Not deducted in determining modified taxable income for the charitable contribution limitation | |
| (4) | Charitable contribution limit modified taxable income | 460,000 | (1) + (2) + (3). | ||
| Charitable contribution limit | $ | 46,000 | (4) × 10 percent. | ||
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: BB Critical Thinking
101) In 2019, 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?
Answer: $140,000, computed as follows:
| Description | Amount | Explanation | |||||
| (1) | Taxable income | $ | 300,000 | ||||
| (2) | Charitable contribution deduction | (20,000 | ) | Included in taxable income in determining modified taxable income. The DRD and NOL carryback are excluded. | |||
| (3) | DRD modified taxable income | 280,000 | |||||
| (4) | Dividend income | 350,000 | |||||
| (5) | Dividends received deduction percentage based on ownership | 50 | % | §243(c) | |||
| (6) | Dividends received deduction before limitation | 175,000 | (4) × (5). | ||||
| (7) | Dividends received deduction limitation | 140,000 | (3) × (5). | ||||
| Dividends received deduction | $ | 140,000 | Lesser of (6) or (7) (full DRD does not create NOL so taxable income limitation is binding). | ||||
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: BB Critical Thinking
102) 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)?
Answer: 10.5% [21% × (100% – 50%)].
Difficulty: 2 Medium
Topic: Computing Corporate Taxable Income
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: BB Critical Thinking
103) In 2019, 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 2019?
Answer: $18,942, computed as follows:
| Description | Amounts | Explanation | |||
| (1) | Book income | $ | 160,000 | ||
| (2) | Ownership in Jet Repair Corp. | 30 | % | ||
| (3) | JRC’s earnings | 270,000 | |||
| (4) | LuxAir’s book income from JRC investment | 81,000 | (2) × (3). | ||
| (5) | Dividends received (included in taxable income) | 32,000 | |||
| (6) | Favorable book–tax difference due to dividends | (49,000 | ) | (5) – (4). | |
| (7) | Dividends received deduction percentage based on ownership | 65 | % | §243(c) | |
| (8) | DRD modified taxable income | 111,000 | (1) + (6). | ||
| (9) | Dividends received deduction before limitation | 20,800 | (5) × (7). | ||
| (10) | Dividends received deduction limitation | 72,150 | (7) × (8). | ||
| (11) | Dividends received deduction | 20,800 | Lesser of (9) or (10). | ||
| Taxable income | 90,200 | (8) – (11). | |||
| Tax liability | $ | 18,942 | $90,200 × 21% | ||
Difficulty: 3 Hard
Topic: Computing Corporate Taxable Income; Compliance
Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax liability using financial statement information.; 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
104) Netgate Corporation’s gross regular tax liability for 2019 was $189,000. What was its taxable income?
Answer: $900,000. {$189,000 / 0.21}
Difficulty: 1 Easy
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: BB Critical Thinking
105) 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.
Answer: 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.
| Description | Amount | Explanation | |||
| Quarter 1 | $ | 30,000 | $120,000 prior-year tax liability × 25%. | ||
| Quarter 2 | $ | 220,000 | $500,000 × 50% – $30,000 of cumulative payments. | ||
| Quarter 3 | $ | 125,000 | $500,000 × 75% – $250,000 of cumulative payments. | ||
| Quarter 4 | $ | 125,000 | $500,000 × 100% – $375,000 of cumulative payments. | ||
Difficulty: 2 Medium
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: BB Critical Thinking
106) In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters: (Use Exhibit 16-10)
| Quarter | Cumulative Taxable Income |
| First | $1,500,000 |
| Second | $2,800,000 |
| Third | $3,600,000 |
What amount of estimated tax payments would Auto Rent pay each quarter to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?
Answer: First quarter $315,000; ($1,500,000 × 4 = $6,000,000 × 21% × 25%); Second quarter $315,000; ($6,000,000 × 21% × 50% − $315,000); Third quarter $252,000; ($2,800,000 × 2 × 21% × 75% = $882,000 − $630,000); Fourth quarter $126,000; ($3,600,000 × 1.3333 × 21% = $1,008,000 − $882,000).
Difficulty: 3 Hard
Topic: Compliance
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Bloom’s: Analyze; Apply
AACSB: Analytical Thinking; Knowledge Application
AICPA: BB Critical Thinking
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