Taxation of Business Entities 2016 Edition 7th Edition Test Bank – Brian Spilker

Taxation of Business Entities 2016 Edition 7th Edition Test Bank – Brian Spilker

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Title : Taxation of Business Entities 2016 Edition

Author : Brian Spilker-Benjamin Ayers-John Robinson

Edition : 7th Edition

Product Description

Taxation of Business Entities 2016 Edition 7th Edition Test Bank – Brian Spilker

Taxation of Business Entities 2016 Edition 7th Edition Test Bank – Brian Spilker

Sample

Chapter 05

Corporate Operations
True / False Questions

1. In general, a corporation can elect to use either the accrual or cash method of accounting no matter how large the corporation.

True    False

 

2. Corporations calculate adjusted gross income (AGI) in the same way as individuals.

True    False

 

3. Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

True    False

 

4. Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.

True    False

 

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.

True    False

 

6. An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

True    False

 

7. Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

True    False

 

8. Federal income tax expense reported on a corporation’s books generates a temporary book-tax difference for Schedule M-3 purposes.

True    False

 

9. For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.

True    False

 

10. For incentive stock options granted when ASC 718 applies, the value of the options that vest in a given year always creates a permanent, unfavorable book-tax difference.

True    False

 

11. 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

 

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 loss sustained in 2015 back two years and forward 20 years.

True    False

 

19. Bingo Corporation incurred a net operating loss in 2015. If Bingo carries the loss back, it must first carry the loss back to offset its 2014 taxable income and then carry any remaining loss back to offset its 2013 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 cannot 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 non-profit organization, in November of 2015. GenerUs made payment to FoodBank on February 2, 2016. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2015 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%, 50%, or 100% 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 modified taxable 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% of the stock in three corporations. Because no single brother owns more than 50% of a corporation, the tax law would not treat the corporations as a controlled group.

True    False

 

35. A C corporation reports its taxable income or loss on 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. 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 2013 and was not profitable through December of 2014. Volos has been profitable for the first quarter of 2015 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2015 because it had no tax liability for the 2014 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 corporate 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

Multiple Choice Questions

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:

Year 1 $2 million
Year 2 $4 million
Year 3 $6 million
Year 4 $4.5 million
Year 5 $5 million
Year 6 $7 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?

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. Temporary book-tax differences will reverse in future years whereas permanent differences will not, and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.

 

D. Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.

 

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% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2014. 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.

 

B. In 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 applies?

A. Financial accounting—no expense; tax—no deduction

 

B. Financial accounting—no expense; tax—deduct bargain element at exercise

 

C. Financial—expense value over vesting period; tax—no deduction

 

D. Financial—expense 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 does not apply?

A. Financial accounting—no expense; tax—no deduction

 

B. Financial accounting—no expense; tax—deduct bargain element at exercise

 

C. Financial accounting—expense value over vesting period; tax—no deduction

 

D. Financial accounting—expense 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 applies?

A. Financial—no expense; tax—no deduction

 

B. Financial—no expense; tax—deduct bargain element at exercise

 

C. Financial—expense value over vesting period; tax—no deduction

 

D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

 

72. Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 did not apply?

A. Financial—no expense; tax—no deduction

 

B. Financial—no expense; tax—deduct bargain element at exercise

 

C. Financial—expense value over vesting period; tax—no deduction

 

D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

 

73. Which of the following statements regarding nonqualified stock options (NQOs) is false?

A. If ASC 718 applies, book-tax differences associated with NQOs may be either permanent or temporary.

 

B. In 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 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 years – half in 2015 (the year of issue) and half in 2016. One thousand options are exercised in 2016 with a bargain element on each option of $6. What is the 2016 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 2014, 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 2015, 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 2015, 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 2015, 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 2016, 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 2016, 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 2015. It had a net capital gain of $4,300 in 2013 and $3,000 in 2012. In 2014, although 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. $4,700

 

B. $5,700

 

C. $8,700

 

D. $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 2015 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.

 

C. Corporations 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% 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% 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.

 

B. Having 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 Schedule M-1.

 

C. Both Schedules 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 whereas 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.

 

D. For 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.

 

D. Corporations 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% 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 2014. If its 2015 tentative minimum tax is $211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2016?

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%. 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.

Essay Questions

116. In 2015, 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 2015. 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?

 

 

 

 

118. In 2015, 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 2015, 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:

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?

 

 

 

 

121. On January 1, 2013, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2014, 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 2015, the goodwill was not further impaired. In 2016, 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 2014, 2015, and 2016? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

 

 

 

 

122. On January 1, 2014, 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 2014. By the end of 2015, 20,000 of the options had vested. At the end of 2015, 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 2015? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary? (Note that ASC 718 applies to these transactions.)

 

 

 

 

123. On January 1, 2005 [before the adoption of ASC 718], 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, 2015, 300 options are exercised when the stock price is $5. In 2015, 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, 2015 with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning in 2015). Each option allows the holder to purchase one share of stock at $8. On January 1, 2016, employees exercised 12,500 options as IC’s stock price reached $14.72. What is the amount of the book-tax difference in 2016 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 2015 of $64,000. It had net capital gains of $21,500 in 2014, $45,000 in 2013, $10,000 in 2012 (but suffered a net operating loss in 2012), and $8,000 of net capital gain in 2010. What is the net capital gain in 2014 after the carryback is applied?

 

 

 

 

126. In 2012, Smith Traders Inc. reported taxable income of $100,000. In 2013, it reported taxable income of $15,000. In 2014, it reported taxable income of $95,000. In 2015, 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 2015, 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 2013, Hughes reported a net capital gain of $12,000 and in 2014 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2016?

 

 

 

 

128. In 2015, 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 2015, 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% 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 2015, 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%. 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 2015 (see corporate tax schedule)?

 

 

 

 

132. Netgate Corporation’s gross regular tax liability for 2015 was $95,375. What was its taxable income?

 

 

 

 

133. For 2015, 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:

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 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 2014. 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:

Current year items Amount
Interest from tax-exempt bonds funding a public activity $14,000
70 percent dividends received deduction $60,000
80 percent dividends received deduction $40,000

 

What is its ACE adjustment for the year? Is it favorable or unfavorable?

 

 

 

 

138. TerraWise Inc. reported the following information for 2015:

Regular taxable income $5,620,000
Regular depreciation $810,000
ATM depreciation $570,000
Adjusted basis of equipment sold – Regular $100,000
Adjusted basis of equipment sold – AMT $140,000
Income from a private-activity municipal bond issued in 2006 $45,000
Unfavorable ACE adjustment $35,000


What is TerraWise Inc.’s AMTI?

 

 

 

 

139. QDP Corporation’s AMTI is $569,000 for 2015. Its regular tax liability is $110,000. What is its AMT?

 

 

 

 

140. VitalJuice Corporation reports the following schedule of prior year taxes it owed:

Year Regular tax liability Tentative minimum tax
Year 1 $750,000 $700,000
Year 2 $800,000 $900,000
Year 3 $850,000 $900,000
Year 4 $900,000 $700,000


What is VitalJuice’s tax liability for Year 4?

 

 

 

 

Chapter 05 Corporate Operations Answer Key

True / False Questions

1. In general, a corporation can elect to use either the accrual or cash method of accounting no matter how large the corporation.

FALSE

Large corporations (average gross receipts exceeding $5 million over the prior three years) are required to use the accrual method.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
 

 

2. Corporations calculate adjusted gross income (AGI) in the same way as individuals.

FALSE

Corporations do not calculate AGI.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
 

 

3. Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

FALSE

Corporations do not have standard deductions.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
 

 

4. Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.

FALSE

A corporation may not use the cash method of accounting in the second year if it reported more than $5 million in gross receipts in the first year.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 2 Medium
Topic: Corporate Taxable Income Formula
 

 

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.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

6. An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

FALSE

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.

 

AACSB: Reflective Thinking
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Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

7. Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

TRUE

 

AACSB: Reflective Thinking
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Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

8. Federal income tax expense reported on a corporation’s books generates a temporary book-tax difference for Schedule M-3 purposes.

FALSE

Federal income tax expense generates a permanent book-tax difference for Schedule M-3 purposes.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

9. For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.

TRUE

 

AACSB: Reflective Thinking
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Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

10. For incentive stock options granted when ASC 718 applies, the value of the options that vest in a given year always creates a permanent, unfavorable book-tax difference.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

11. 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.

FALSE

Goodwill impairment in excess of tax goodwill creates either a permanent difference or an unfavorable temporary book-tax difference.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

12. For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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.

FALSE

A deductible temporary difference (deferred tax asset) is created in the year the option vests and is recorded as an expense for book purposes.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

14. In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.

FALSE

A corporate capital loss can only be deducted against capital gains.

 

AACSB: Reflective Thinking
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Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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.

FALSE

A corporation carries a net capital loss back 3 years (required) and forward 5 years.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

16. A corporation may carry a net capital loss back two years and forward 20 years.

FALSE

A corporation carries a net capital loss back 3 years and forward 5 years.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
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Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

17. A corporation may carry a net capital loss back three years and forward five years.

TRUE

 

AACSB: Reflective Thinking
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Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

18. Corporations can carry net operating loss sustained in 2015 back two years and forward 20 years.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

19. Bingo Corporation incurred a net operating loss in 2015. If Bingo carries the loss back, it must first carry the loss back to offset its 2014 taxable income and then carry any remaining loss back to offset its 2013 taxable income.

FALSE

The NOL offsets the income in the second previous year (2013) before it offsets income in the first previous year (2014).

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

20. Net operating losses generally create permanent book-tax differences.

FALSE

NOLs are treated as deductible temporary differences.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

22. Accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.

FALSE

The deduction is allowed in the year authorized provided the payment is made within 2 ½ months after year-end.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

23. GenerUs Inc.’s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2015. GenerUs made payment to FoodBank on February 2, 2016. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2015 tax return.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

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

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

25. Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

26. A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

29. Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation’s stock.

FALSE

The percentages are 70%, 80%, and 100%, depending on the stock ownership level.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

30. The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero.

FALSE

A dividends received deduction is limited to 70% or 80% of taxable income unless it creates or increases a net operating loss deduction, in which case the full amount is allowed.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

31. The dividends received deduction is subject to a limitation based on modified taxable income.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

32. Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

34. Three brothers each own 20% of the stock in three corporations. Because no single brother owns more than 50% of a corporation, the tax law would not treat the corporations as a controlled group.

FALSE

Collectively, the brothers will own more than 50% of the stock of each corporation.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

35. A C corporation reports its taxable income or loss on Form 1065.

FALSE

Form 1120

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 1 Easy
Topic: Compliance
 

 

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).

FALSE

Schedule M-1 reconciles net income or loss with taxable income before NOL carryovers and special deductions (line 28 of Form 1120).

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 3 Hard
Topic: Compliance
 

 

37. Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.

FALSE

Schedule M-1 is less detailed than Schedule M-3 and does not require the taxpayer to distinguish between temporary and permanent differences.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

38. An affiliated group must file a consolidated tax return.

FALSE

Filing a consolidated tax return is an election in the first year, after which it is mandatory on a going forward basis.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

39. The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.

FALSE

ASC 810 governs consolidated financial reporting while IRC sections 1501-1504 and the accompanying regulations govern income tax consolidation.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

40. Calendar-year corporations that request an extension for filing their tax returns will have a tax return due date of September 15.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 1 Easy
Topic: Compliance
 

 

41. Volos Company (a calendar-year corporation) began operations in March of 2013 and was not profitable through December of 2014. Volos has been profitable for the first quarter of 2015 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2015 because it had no tax liability for the 2014 tax year and has been in business for at least 12 months.

FALSE

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

42. Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 1 Easy
Topic: Compliance
 

 

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.

FALSE

Large corporations can use the prior year liability to determine the first quarter estimated tax payment only.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

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.

FALSE

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

45. Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

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.

FALSE

Only tax-exempt interest from a private activity bond is a preference item for corporate AMT purposes.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

47. Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

48. The tax rate for the corporate alternative minimum tax is a flat 26%.

FALSE

The corporate AMT rate is a flat 20%.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

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

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

50. Corporations are allowed to deduct at least some AMT exemption regardless of profitability.

FALSE

The AMT exemption is phased-out completely for corporations with AMTI of at least $310,000.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

51. A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

52. Minimum tax credits generated by the corporate AMT can be carried forward indefinitely.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

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

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

54. The amount of a corporation’s AMT is the amount of its tentative minimum tax in excess of its regular tax.

TRUE

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

Multiple Choice Questions

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

Adjusted gross income is calculated for individual returns, but not for corporate returns.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 1 Easy
Topic: Corporate Taxable Income Formula
 

 

56. WFO Corporation has gross receipts according to the following schedule:

Year 1 $2 million
Year 2 $4 million
Year 3 $6 million
Year 4 $4.5 million
Year 5 $5 million
Year 6 $7 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?

A. Year 3

 

B. Year 4

 

C. Year 5

 

D. Year 6

 

E. None of these.

Corporations with less than $5 million in average annual 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 average annual gross receipts of $5.17 million.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 3 Hard
Topic: Corporate Taxable Income Formula
 

 

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

Organizational and start-up expenses are capitalized and amortized for tax purposes, so these create a temporary book-tax difference.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable 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

The domestic production activities deduction is a deduction for tax purposes only. It creates a favorable permanent book-tax difference.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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.

Temporary book-tax differences will eventually reverse; if a difference is favorable one year, it will be unfavorable in another.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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. Temporary book-tax differences will reverse in future years whereas permanent differences will not, and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.

 

D. Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.

Temporary book-tax differences will reverse in future years whereas permanent differences will not, and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns. These are valid reasons why a corporation should distinguish between temporary and permanent book-tax differences.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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

Life insurance premiums for key employees are not deductible for tax purposes.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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

Interest expense on loans to acquire investments that produce tax-exempt income is not deductible under section 265.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

Corporations generally include dividends from corporations in which they own less than 20% 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% ownership interest).

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

If a corporation receiving dividends owns at least 20% but not more than 50% 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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

66. Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2014. 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

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.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

Goodwill is amortized over 15 years (180 months).

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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.

 

B. In 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.

It is possible to have an unfavorable difference in a year when goodwill impairment exceeds the allowable amortization deduction.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

69. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 applies?

A. Financial accounting—no expense; tax—no deduction

 

B. Financial accounting—no expense; tax—deduct bargain element at exercise

 

C. Financial—expense value over vesting period; tax—no deduction

 

D. Financial—expense value over vesting period; tax— deduct bargain element at exercise

Under ASC 718, option values are expensed over the vesting period creating an unfavorable permanent book-tax difference.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

70. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 does not apply?

A. Financial accounting—no expense; tax—no deduction

 

B. Financial accounting—no expense; tax—deduct bargain element at exercise

 

C. Financial accounting—expense value over vesting period; tax—no deduction

 

D. Financial accounting—expense value over vesting period; tax—deduct bargain element at exercise

Before ASC 718, option values were not required to be expensed.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

71. Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs) that were granted when ASC 718 applies?

A. Financial—no expense; tax—no deduction

 

B. Financial—no expense; tax—deduct bargain element at exercise

 

C. Financial—expense value over vesting period; tax—no deduction

 

D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

72. Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 did not apply?

A. Financial—no expense; tax—no deduction

 

B. Financial—no expense; tax—deduct bargain element at exercise

 

C. Financial—expense value over vesting period; tax—no deduction

 

D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

Before ASC 718, option values were not required to be expensed for book purposes.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

73. Which of the following statements regarding nonqualified stock options (NQOs) is false?

A. If ASC 718 applies, book-tax differences associated with NQOs may be either permanent or temporary.

 

B. In 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.

If ASC 718 applies, stock option-related book-tax differences can be temporary or permanent.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

74. Which of the following statements regarding incentive stock options (ISOs) is false?

A. If ASC 718 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.

Book-tax differences associated with ISOs are permanent because no deductions can be taken for tax purposes.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

75. Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years – half in 2015 (the year of issue) and half in 2016. One thousand options are exercised in 2016 with a bargain element on each option of $6. What is the 2016 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

The book-tax difference in 2016 is the difference between $20,000 expensed for book purposes (50% × $40,000) and $6,000 (1,000 options exercised × $6 bargain element). It is unfavorable because book expenses exceed tax deductions.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

76. In January 2014, 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 2015, 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 2015, 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

For financial purposes, the company deducts the entire $50,000 value of the stock options in 2014, when the stock option is granted. For tax purposes, the company deducts the $60,000 bargain element in 2015, when the stock option is exercised. For 2015, the book-tax difference is favorable in the amount of $60,000.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 3 Hard
Topic: Corporate Taxable Income Formula
 

 

77. In January 2015, 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 2016, 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 2016, 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.

The adjustment is unfavorable because the book deduction exceeds the tax deduction. The adjustment is permanent because it will not ever reverse.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-01 Describe the corporate income tax formula, compare and contrast the corporate tax formula to the individual tax formula, and discuss tax considerations relating to corporations’ accounting periods and accounting methods.
Level of Difficulty: 3 Hard
Topic: Corporate Taxable Income Formula
 

 

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.

Corporations cannot deduct capital losses against ordinary income.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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.

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

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

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.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

81. Tatoo Inc. reported a net capital loss of $13,000 in 2015. It had a net capital gain of $4,300 in 2013 and $3,000 in 2012. In 2014, although 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. $4,700

 

B. $5,700

 

C. $8,700

 

D. $13,000

The net capital loss is first carried back to 2012 as $3,000 is deducted against net capital gain. The $4,300 net capital gain in 2013 is offset next. Because Tatoo reported a net operating loss in 2014, it is not allowed to apply the carryback to that year. The remaining carryover is $5,700 ($13,000 – $3,000 – $4,300).

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

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

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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

Net capital loss carrybacks, operating losses, and the domestic production activities deduction are not deductible in calculating a net operating loss.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

84. Which of the following statements regarding net operating losses generated in 2015 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.

A corporation may elect to forgo the net operating loss carryback and only carry the loss forward.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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.

Depending on the nature of the property, the amount deductible for a contribution can be the fair market value of the contributed property.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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.

Prior IRS approval is not required.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

Canny Foods can deduct $6,000 of the stock contribution (the fair market value of long-term capital gain property), $5,000 of the cash, and $3,000 of the inventory contribution (the adjusted basis of ordinary property).

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

NOL and net capital loss carryovers are deductible in calculating modified taxable income for the charitable contribution limit but carrybacks are not.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

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

The current-year deduction is limited to 10% 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.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

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.

Corporations may carry excess charitable contributions over for up to five years but they may not carry them back.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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.

 

C. Corporations 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.

The DRD limitation does not apply if the DRD creates or increases a corporation’s net operating loss.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

NOL carrybacks and carryovers and the DRD itself are not included in the DRD modified taxable income calculation.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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

Because Jazz owns more than 20% and less than 80% of the Williams stock it is entitled to an 80% dividends received deduction ($10,000 × 80%).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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.

Because Jazz owns less than 10% of the Williams stock the DRD percentage is 70%. Further, $5,600 (70% × 8,000 taxable income before the DRD) is less than the full DRD of $7,000 and the full DRD does not create a net operating loss ($8,000 – $7,000 = $1,000), so the DRD is limited to $5,600.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

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.

Because Jazz owns less than 10% of the Williams stock the DRD percentage is 70%. Even though $2,800 (70% × 4,000 taxable income before the DRD) is less than the full DRD of $7,000, deducting the full DRD creates a net operating loss for Jazz [$4,000 – $7,000 = ($3,000)] so Jazz may deduct the full $7,000 DRD.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

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.

Parent-subsidiary; brother-sister; and combined are all types of controlled groups.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

98. TireShop, Inc. owns 85% 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

Related TireShop and Rubber Supply form a Parent-subsidiary controlled group because TireShop owns at least 80% of Rubbers Supply Co.’s stock.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

99. Together, Kurt and Esmeralda own 60% 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.

Because the three owners control all three corporations, the group of corporations forms a brother-sister controlled group.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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.

 

B. Having 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.

All of the entities together in a controlled group can make use of only one 15% tax rate bracket.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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 Schedule M-1.

 

C. Both Schedules 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 whereas Schedule M-3 does.

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 3 Hard
Topic: Compliance
 

 

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.

 

D. For 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.

To file a consolidated tax return, one corporation must own at least 80% of the stock of another corporation.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 3 Hard
Topic: Compliance
 

 

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.

The unextended tax return due date is 2 ½ months after year-end.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 1 Easy
Topic: Compliance
 

 

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

All methods are acceptable.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 1 Easy
Topic: Compliance
 

 

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.

 

D. Corporations 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.

Corporations are required to make quarterly estimated payments if their federal income tax liability (including alternative minimum tax) is $500 or more.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

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

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).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

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.

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.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 3 Hard
Topic: Compliance
 

 

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% 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).

The AMT is calculated by multiplying the AMT base by 20%.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

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

The domestic production activities deduction is not an AMT adjustment.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

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

Because the installment sales gains were included in ACE in the prior year, they are excluded from ACE in the current year. This creates a favorable difference by reducing AMTI by $24,000 ($32,000 gain × 75%).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 3 Hard
Topic: Corporate Alternative Minimum Tax
 

 

111. XPO Corporation has a minimum tax credit of $51,000 from 2014. If its 2015 tentative minimum tax is $211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2016?

A. $51,000

 

B. $39,000

 

C. $12,000

 

D. $0

The minimum tax credit can be used to offset regular tax liability to the level of AMT. In this case, $39,000 of minimum tax credit offsets the excess of AMT over regular tax liability, leaving $12,000 of minimum credit carryover.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

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

Preference items and unfavorable adjustments increase AMTI. Favorable adjustments reduce AMTI. $203 million = $190 + $10 + $5 – $2 million.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

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

The AMT exemption is phased out by 25 cents for every dollar AMTI exceeds the phase-out threshold. Corp. Z’s exemption is $15,000 ($40,000 – [$100,000 ×.25]). The AMT base is then multiplied by 20% to get a tentative minimum tax of $47,000 ([$250,000 – $15,000] × 20%).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 3 Hard
Topic: Corporate Alternative Minimum Tax
 

 

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.

The AMT exemption is phased out for moderately profitable companies. The AMT exemption is phased out $0.25 for every dollar increase in AMTI through the phase-out range. Minimum tax credits are generated when tentative minimum tax exceeds regular tax liability.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

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%. 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.

The marginal tax rate is higher in the current year (35%) than it will be next year (20%). Consequently, the after-tax cost of the contribution will be lower if the contribution is made in the current year.

 

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

Essay Questions

116. In 2015, 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.

$16,800 refund

Description Adjustment (Favorable)/Unfavorable Explanation
(1) Receipts $4,600,000
(2) Income excludable from income (20,000) Municipal bond income is excludable from taxable income.
(3) Deductible business expenses (3,600,000)
(4) Taxable income 980,000 Sum of (1) through (3)
(5) Tax rate 34%
(6) Tax liability 333,200 (4) × (5)
(7) Prepayments 350,000
Taxes due (refund) ($16,800) (6) – (7)

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

117. For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2015. 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?

$3,000, favorable book-tax difference. Entire difference is permanent book-tax difference.

Description Adjustment (Favorable) / Unfavorable Explanation
(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

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

118. In 2015, 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?

$225,000 favorable, permanent book-tax difference

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 and entertainment 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)

 

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

119. In 2015, 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?

$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).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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:

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?

$93,750, favorable, temporary book tax difference, computed as follows:

Description Amount 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) Atoms’s book income from Primo investment 218,750 Since 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 Since 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).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

121. On January 1, 2013, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2014, 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 2015, the goodwill was not further impaired. In 2016, 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 2014, 2015, and 2016? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

2014: $32,000 unfavorable, temporary book tax difference; 2015: $18,000 favorable, temporary book-tax difference; 2016: $0 book-tax difference.

Description Amount Explanation
(1) Goodwill initially recorded on acquisition in 2013 $270,000
(2) Annual goodwill amortization expense for tax $18,000 (1)/15 years.
(3) Goodwill impairment recorded in 2014 50,000
2014 Unfavorable book-tax difference 32,000 (2) – (3).
(4) Goodwill impairment in 2015 0
2015 favorable book-tax difference (18,000) (2) – (4).
(5) Goodwill impairment in 2016 18,000
2016 book-tax difference 0 (2) – (5) There is no book-tax difference in 2016because the amortization for tax purposes was equal to impairment expense.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

122. On January 1, 2014, 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 2014. By the end of 2015, 20,000 of the options had vested. At the end of 2015, 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 2015? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary? (Note that ASC 718 applies to these transactions.)

$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 vest in 2015 20%
(4) Value of options that vest in 2015 (amount expensed for book purposes) $10,000 (2) × (3).
(5) Number of options exercised in 2015 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 2014, the recording of the vested stock option expense of $10,000 created a temporary unfavorable book-tax difference.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

123. On January 1, 2005 [before the adoption of ASC 718], 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, 2015, 300 options are exercised when the stock price is $5. In 2015, what is the book-tax difference associated with the stock options? Is it favorable or unfavorable? Is it permanent or temporary?

$1,200, favorable, permanent book-tax difference

Description Amount Explanation
(1) Number of options exercised in 2015 300
(2) Bargain element per option $4 $5 stock price – $1 exercise price.
(3) Bargain element of all exercised options (value deductible for tax purposes) $1,200 (1) × (2).
Favorable book-tax difference ($1,200) $0 – (3); no expense is recorded on Net Optimizers’ books. The deduction of the bargain element is solely for tax purposes.

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

124. Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2015 with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning in 2015). Each option allows the holder to purchase one share of stock at $8. On January 1, 2016, employees exercised 12,500 options as IC’s stock price reached $14.72. What is the amount of the book-tax difference in 2016 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

$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 vest in 2016 25%
(4) Value of options that vest in 2016 (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).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 1 Easy
Topic: Computing Corporate Regular Taxable Income
 

 

125. Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2015 of $64,000. It had net capital gains of $21,500 in 2014, $45,000 in 2013, $10,000 in 2012 (but suffered a net operating loss in 2012), and $8,000 of net capital gain in 2010. What is the net capital gain in 2014 after the carryback is applied?

$2,500 capital gain, computed as follows:

Description Amount Explanation
(1) Net capital loss in 2015 $64,000
(2) Net capital gain offset in 2013 45,000 The net capital loss is not carried back to 2010 because the net capital loss can only be carried back three years. It cannot be applied to the net capital gain in 2012 either because the corporation suffered a net operating loss that year.
(3) Remaining capital loss carryback 19,000 (1) – (2).
(4) Net capital gain in 2014 21,500
Remaining capital gain in 2014 $2,500 (4) – (3).

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 3 Hard
Topic: Computing Corporate Regular Taxable Income
 

 

126. In 2012, Smith Traders Inc. reported taxable income of $100,000. In 2013, it reported taxable income of $15,000. In 2014, it reported taxable income of $95,000. In 2015, 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)?

$5,650, computed as follows:

Description Amount Explanation
(1) Taxable income offset if NOL is carried back to 2013 $15,000 Can’t carry NOL back to 2012 because NOL’s can only be carried back 2 years
(2) Tax refund from application of NOL to 2013 taxable income $2,250 $15,000 × 15% = $2,250.
(3) Taxable income offset for NOL carried back to 2014 $10,000 Remainder of NOL used in 2014; no carryover
(4) Tax refund from application of NOL to 2014 taxable income $3,400 $10,000 × 34%
Refund available $5,650 (2) + (4)

 

AACSB: Analytical Thinking
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

127. During 2015, 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 2013, Hughes reported a net capital gain of $12,000 and in 2014 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2016?

$2,000, computed as follows:

Description Amount Explanation
(1) 2015 capital loss from sale of stock ($200,000)
(2) 2015 capital gain from sale of land 180,000
(3) 2015 net capital loss (20,000) (1) + (2).
(4) 2013 net capital gain 12,000
(5) 2014 net capital gain 6,000
Net capital loss carryover ($2,000) (3) + (4) + (5).

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

128. In 2015, 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?

$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.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

129. In 2015, 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% of the CSLabs Inc. stock?

$196,000, 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 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 70% §243(c)
(6) Dividends received deduction before limitation 245,000 (4) × (5).
(7) Dividends received deduction limitation 196,000 (3) × (5).
Dividends received deduction $196,000 Lesser of (6) or (7) (full DRD does not create NOL so taxable income limitation is binding.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

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%?

10.2% [34% × (100% – 70%)]

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Level of Difficulty: 2 Medium
Topic: Computing Corporate Regular Taxable Income
 

 

131. In 2015, 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%. 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 2015 (see corporate tax schedule)?

$17,286, computed as follows:

Description Amount 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 80% §243(c)
(8) DRD modified taxable income 111,000 (1) + (6).
(9) Dividends received deduction before limitation 25,600 (5) × (7).
(10) Dividends received deduction limitation 88,800 (7) × (8).
(11) Dividends received deduction 25,600 Lesser of (9) or (10).
Taxable income 85,400 (8) – (11).
Tax liablity $17,286 ($13,750 + 34% × ($85,400 – $75,00)

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-02 Identify common book-tax differences, distinguish between permanent and temporary differences, and compute a corporation’s taxable income and regular tax liability.
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 3 Hard
Topic: Compliance
Topic: Computing Corporate Regular Taxable Income
 

 

132. Netgate Corporation’s gross regular tax liability for 2015 was $95,375. What was its taxable income?

$287,500

Description Amount Explanation
(1) Tax liability $95,375
(2) Taxes at a 15% marginal tax rate 7,500 ($50,000 × 15%)
(3) Taxes at a 25% marginal tax rate 6,250 ($25,000 × 25%)
(4) Taxes at a 34% marginal tax rate 8,500 ($25,000 × 34%)
(5) Taxes at a 39% marginal tax rate 73,125 ($187,500 × 39%) – $187,500 is less than the $235,000 “width” of the 39% bracket, so we know that no income extends into higher brackets.
Taxable income $287,500 $50,000 + $25,000 + $25,000 + $187,500

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 3 Hard
Topic: Compliance
 

 

133. For 2015, 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?

$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)].

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 1 Easy
Topic: Compliance
 

 

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.

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.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 2 Medium
Topic: Compliance
 

 

135. In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters:

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 in order to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

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).

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax payment obligations.
Level of Difficulty: 3 Hard
Topic: Compliance
 

 

136. IndusTree Inc. received $1,800,000 from the sale of a property in 2014. 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?

$90,000 decrease to AMTI
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.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

137. ValuCo gives you the following information:

Current year items Amount
Interest from tax-exempt bonds funding a public activity $14,000
70 percent dividends received deduction $60,000
80 percent dividends received deduction $40,000

 

What is its ACE adjustment for the year? Is it favorable or unfavorable?

$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% to get the ACE adjustment.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

138. TerraWise Inc. reported the following information for 2015:

Regular taxable income $5,620,000
Regular depreciation $810,000
ATM depreciation $570,000
Adjusted basis of equipment sold – Regular $100,000
Adjusted basis of equipment sold – AMT $140,000
Income from a private-activity municipal bond issued in 2006 $45,000
Unfavorable ACE adjustment $35,000


What is TerraWise Inc.’s AMTI?

$5,900,000, computed as follows:

Description Amount Explanation
(1) Taxable income $5,620,000
(2) Income from a private activity municipal bond issued in 2006 45,000 Preference item: added to taxable income
(3) Regular tax depreciation 810,000
(4) AMT depreciation 570,000
(5) Unfavorable AMT adjustment 240,000 (3) – (4).
(6) Adjusted basis of equipment sold – regular tax 100,000
(7) Adjusted basis of equipment sold – AMT 140,000
(8) Favorable AMT adjustment (40,000) (6) – (7); gain on the sale of equipment is higher for regular tax purposes than AMT purposes. If the equipment is sold at a loss, the loss is higher for AMT purposes than regular tax purposes.
(9) Unfavorable ACE adjustment 35,000 Added back to compute AMTI
AMTI $5,900,000 (1) + (2) + (5) + (8) + (9).

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 3 Hard
Topic: Corporate Alternative Minimum Tax
 

 

139. QDP Corporation’s AMTI is $569,000 for 2015. Its regular tax liability is $110,000. What is its AMT?

$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.

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 1 Easy
Topic: Corporate Alternative Minimum Tax
 

 

140. VitalJuice Corporation reports the following schedule of prior year taxes it owed:

Year Regular tax liability Tentative minimum tax
Year 1 $750,000 $700,000
Year 2 $800,000 $900,000
Year 3 $850,000 $900,000
Year 4 $900,000 $700,000


What is VitalJuice’s tax liability for Year 4?

$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).

 

AACSB: Analytical Thinking
AICPA: BB Critical Thinking
Blooms: Analyze
Blooms: Apply
Learning Objective: 05-04 Explain how to calculate a corporation’s alternative minimum tax liability.
Level of Difficulty: 2 Medium
Topic: Corporate Alternative Minimum Tax
 

 

 

Taxation of Business Entities 2016 Edition 7th Edition Test Bank – Brian Spilker

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