Chapter 16-17 (Tax)

Question 1

The corporate tax formula differs from the individual tax formula because the corporate tax formula ____.

Answer 1

Does not separate deductions into those before AGI and those after AGI like the individual formula does (The individual tax formula includes adjusted gross income (AGI); whereas the corporate tax formula does not)

Question 2

A difference between book income and tax income that increases/decreases taxable income in the current year but will reduce/increase taxable income in a future year is a(n) ___ book-tax difference

Answer 2

Temporary

Question 3

The federal income tax deduction that a corporation takes under ASC 740 is ___ book-tax difference

Answer 3

Permanent (Federal income taxes are NOT deductible for tax purposes, making them a permanent book-tax difference)

Question 4

For GAAP purposes, if a dividend receiving corporation owns less than ___ percent of the stock of the distributing corporation, the receiving corporation includes the dividend in income (same as tax; no book-tax differences)

Answer 4

20%

Question 5

Which of the following concerning the amortization of goodwill for tax purposes is incorrect?

Answer 5

Goodwill acquired by a corporation in a stock purchase transaction is recovered over 180 months for tax purposes

Question 6

Like individuals, corporations can claim a deduction for qualified business income.

Answer 6

False (Corporations do not itemize deductions, receive a standard deduction or claim a deduction for qualified business income)

Question 7

The excess of the fair market value of the stock when a stock option is exercised over the exercise price of the option is the ___ ___.

Answer 7

Bargain
Element

Question 8

Permanent book-tax differences:

Answer 8

include items of income for book purposes that will never be items of income for tax purposes (Permanent book-tax differences are income or deductions for either book or tax, but NOT both.

Question 9

A corporation can carry back a net capital loss to a previous year to offset previous net capital gains UNLESS:

Answer 9

by carrying back the loss, a net operating loss is created or increased

Question 10

Permanent book-tax differences include ____.

Answer 10

$50,000 of interest expense associated with the generation of tax-exempt income (This is deductible for book, not for tax)

Question 11

Fast Rocket, Inc. generated a net loss of $5,000 in its first year (20x1) and taxable income of $15,000 in its second year of operations (20x2). Assuming a tax rate of 21%, what is Fast Rocket’s total tax for both years?

Answer 11

$2,100 (A corporation can carry forward its net operating losses to offset 80% of income in a future period. Since 80% x 15,000 > the NOL of $5,000, Fast Rocket can use the whole NOL carryforward. ($15,000 - $5,000 = $10,000 x 21% = $2,100)

Question 12

Corporations receiving dividends from other corporations account for such dividends for GAAP purposes the following ways at the various ownership percentages.

Answer 12

Owns less than 20 percent - Includes the dividend in income (same as tax; no book-tax differences)

Owns at least 20 percent but not more than 50 percent - Includes a pro-rata portion of the distributing corporation’s earnings in its book income under the “equity method of accounting”

Owns more than 50 percent - Consolidates their financial reporting books and the intercompany dividend is eliminated

Question 13

Goodwill recovery differs between GAAP and tax rules in that GAAP requires corporations to ___ (amortize/impair) goodwill whereas tax law requires corporations to ___ (amortize/impair) goodwill

Answer 13

Impair
Amortize

Question 14

A book-tax difference at the time of vesting of non qualified employee stock options (post ASC 718) but before they are exercised can be:

Answer 14

Temporary and Favorable (Vesting of employee stock options before exercise always result in an unfavorable adjustment)

Question 15

Newt, Inc. incurs capital losses of $500 and capital gains of $100 in the current year. For tax purposes, Newt will recognize a net capital gain or loss of ____.

Answer 15

$0 (Corporations can only offset capital losses against capital gains in the year of a net capital loss ($100 losses offset against $100 gains))

Question 16

Test Pilot, Inc. reported a net operating loss of $25,000 for its tax year ended December 31, 20x1 and net income of $20,000 in 20x2. After considering the NOL carryforward, Test Pilot will report 20x2 taxable income of ___.

Answer 16

$4,000 and carryforward $9,000 indefinitely (Test Pilot may reduce taxable income in 20x2 by $16,000 (80% x $20,000) for taxable income of $4,000, leaving $9,000 available to apply in 20x3 and beyond)

Question 17

A Net Operating Loss arising in tax years beginning after December 31, 2017 can only be carried forward 20 years.

Answer 17

False (NOLs arising in tax years beginning after 12/31/17 can be carried forward indefinitely)

Question 18

Which of the following concerning the amortization of goodwill for tax purposes is incorrect?

Answer 18

Goodwill acquired by a corporation in a stock purchase transaction is recovered over 180 months for tax purposes.

Question 19

Corporations may deduct charitable contributions to ___ charitable organizations

Answer 19

Qualified

Question 20

In 2023, a electing corporation’s charitable contribution is limited to ___ % of its charitable contribution limit modified taxable income

Answer 20

10%

Question 21

Which of the following dividends is NOT eligible for a dividends received deduction (DRD), if received by a US corporation?

Answer 21

A dividend from a wholly owned subsidiary corporation established under the Russian corporations laws (Dividends from domestic corporations are eligible for DRD)

Question 22

Net operating losses arising in tax years beginning after December 31, 2021 can offset only ___ % of taxable income in future years.

Answer 22

80%

Question 23

When does the DRD modified taxable income limitation NOT apply?

Answer 23

When, after deducting the DRD, the corporation would report a net operating loss (If after the DRD, the corporation reports taxable income, the DRD is limited)

Question 24

Match the type of corporate charitable donation with the allowed deduction amount.

Answer 24

Cash - Amount of cash contributed
Capital Gain Property - Fair Market Value
Inventory - Adjusted Basis

Question 25

Aruba, Inc. has a properly calculated charitable contribution limit of $12,000 for the current year. Aruba deducted a DRD of $6,000 and is also including a capital loss carryforward from the prior year of $13,000. If Aruba’s actual charitable contributions for the year are $4,000, the company’s taxable income is ____.

Answer 25

$110,000 (A charitable contribution limit of $12,000 ÷ 10% = $120,000 of modified taxable income - $6,000 DRD -$4,000 CCD = $110,000. The capital loss carryforward from the prior year is permitted, and thus already in modified taxable income)

Question 26

Joshua, Inc. has taxable income of $1,000,000 in the current year. Using the corporate tax tables, Joshua Inc.’s federal tax liability is ____.

Answer 26

$210,000 (1,000,000 x 21%)

Question 27

The dividends received deduction ______ the tax paid on dividends by corporations

Answer 27

Decrease (By reducing the amount of dividends that are taxed, the DRD serves to reduce the tax paid)

Question 28

Which of the following book-tax differences is not reported on Schedule M-1?

Answer 28

The dividends received deduction

Question 29

DRD modified taxable income is ______

Answer 29

taxable income before the DRD, capital loss carrybacks, and any NOL carryforward

Question 30

Pear, Inc. generates a $100,000 net operating loss in 2023. Plum, Inc. generates $500,000 of taxable income. Compute the 2023 tax if Pear and Plum do/do not file a consolidated return.

Answer 30

84,000 if consolidated; $105,000 if not consolidated. (If consolidated, taxable income is $400,000: ($500,000 - $100,000) x 21% = $84,000. If not consolidated, Plum pays $500,000 x 21% = $105,000, and Pear will carryback or carryforward the loss if possible)

Question 31

A C-corporation with a calendar year-end has an income tax return due on ___ 15th

Answer 31

April

Question 32

Corporation ABC had taxable income of $50,000 for its tax year ended December 31, 2023. Corporation ABC owes $____ in corporate income taxes for 2023.

Answer 32

$10,500

Question 33

The two primary objectives of ASC 740 are to:

Answer 33

recognize the amount of deferred taxes payable or refundable in a future period due to timing differences.

recognize the amount of current taxes payable or refundable.

Question 34

A reconciliation of the corporation’s beginning and ending balance in its unappropriated retained earnings account is reported on Schedule ____.

Answer 34

M-2

Question 35

Advantages of filing a consolidated tax return include ______

Answer 35

the losses of one group company can be offset against the income of another

income from intercompany transactions can be deferred until sold to an outside party

Question 36

A calendar year corporate tax return extension will extend the due date:

Answer 36

for six months after the original due date

Question 37

FASB determined that the best method to report income taxes on financial statements is:

Answer 37

The asset and liability approach

Question 38

Corporations are taxed on dividends received at the ___.

Answer 38

ordinary corporate tax rate

Question 39

Corporate taxpayers reconcile ___ income with ___ income on Form 1120 Schedule M-1 or M-3.

Answer 39

Book
Taxable

Question 40

Select the permanent differences

Answer 40

Business entertainment expenses

Tax-exempt income

Dividends received deduction

Fines, illegal kickbacks, and bribes

Question 41

The current income tax expense can differ from the actual tax expense paid on the current Form 1120 due to:

Answer 41

carryback of a capital loss.

IRS audit adjustments.

changes in uncertain tax positions.

Question 42

Corporate estimated tax payments are due on the 15th of which of the following months of the tax year?

Answer 42

9th (September)

6th (June)

4th (April)

12th (December)

Question 43

Corporate shareholders are entitled to a ___ received ___ to offset additional layers of tax and distributions.

Answer 43

Dividends

Deductions

Question 44

Deferred tax assets and liabilities are calculated using the ______ tax rate that is expected to apply when the temporary difference is received or settled.

Answer 44

Enacted

Question 45

Topham, Inc. has pretax income of $100,000 for the current year. Included in that amount is $3,000 of tax-exempt income, $8,000 of meals expenses (not provided by a restaurant), and $10,000 of depreciation expense (depreciation is $15,000 under tax rules). Topham also paid $21,000 in estimated income tax payments during the year. After adjusting for permanent items (only), Topham’s taxable income is:

Answer 45

$101,000 (Pretax income $100,000 - $3,000 (tax-exempt income included for book) + $4,000 (50% add-back of non-deductible meals) = $101,000.

Question 46

The application of enacted tax law against the taxable income for the year is the:

Answer 46

Current income tax expense

Question 47

The tax provision:

Answer 47

includes the current year taxes payable and the changes to future income taxes payable as a result of differences between book and tax accounting.

is the income tax expense associated with pretax income reported on the income statement.

Question 48

Accelerated, Inc. recorded depreciation of $40,000 for each year in years 1, 2 and 3. However, for tax purposes, Accelerated deducted $60,000, $70,000 and $30,000 for years 1, 2 and 3, respectively. Describe the cumulative and current year 3 temporary differences on this item.

Answer 48

$40,000 cumulative favorable and $10,000 unfavorable for year 3 (Total depreciation for books is $40,000 x 3 = $120,000. Accumulated tax depreciation is $60,000 + $70,000 + $30,000 or $160,000, creating a cumulative difference of $40,000. Book depreciation in current year 3 of $40,000 exceeds tax depreciation of $30,000, creating a $10,000 unfavorable difference)

Question 49

A company ______ consider permanent differences when computing balance sheet deferred tax accounts.

Answer 49

Should not

Question 50

Select the definition of a temporary difference.

Answer 50

A difference between the tax basis and book basis of an asset or liability that will result in taxable or deductible amounts in a future year

Question 51

Sundancer created a cumulative temporary favorable difference of $40,000 in the current year when the enacted rate is 30%. Sundancer anticipates the difference will reverse about 10 years from now when the rate (per current law) is decreased to 25%. Using Sundancer’s discount rate of 7% for 10 years, the present value of $40,000, $12,000 and $10,000 is $20,334, $6,100 and $5,083, respectively. Select the correct journal entry.

Answer 51

DR Deferred income tax expense $10,000, CR Deferred tax liability $10,000

Question 52

Which of the following items is a permanent difference?

Answer 52

Dividends received deduction

Question 53

ASC 740 requires a ___ -step process for evaluating uncertain tax positions.

Answer 53

Two

Question 54

Joshuantic, Inc. has cumulative unfavorable temporary differences of $80,000 and, thus, records a $16,800 deferred tax asset. However, Joshuantic believes that it may NOT be able to realize that asset. As a result, Joshuantic will

Answer 54

record a gross deferred tax asset and a valuation allowance as a contra account

Question 55

In order to recognize the benefit of a tax position, the probability of the position being sustained on its technical merits must be:

Answer 55

more likely than not

Question 56

Once the more-likely-than-not recognition threshold has been met, ASC 740 requires that the tax position benefit be measured as the:

Answer 56

amount of tax benefit greater than 50% likely to be realized

Question 57

ASC requires a two-step process to evaluate tax positions. Select the first of those two steps.

Answer 57

Determine if it is more likely than not as to whether the position will be sustained

Question 58

ASC 740 applies to which of the following tax positions?

Answer 58

A tax position taken with regards to the deductibility of 50% of meals

A position taken on a current tax return

A position taken on a previous tax return

Question 59

Flip Flop, Inc. treated interest on uncertain tax liabilities as interest expense and penalties as part of selling, general and administrative expenses in the prior year. How should Flip Flop treat interest and penalties this year?

Answer 59

Interest must be treated as interest expense and penalties as S,G and A.

Question 60

The income tax provision is reported on the:

Answer 60

income statement

Question 61

Before measurement of the recognizable tax benefit occurs, ASC 740 requires that the:

Answer 61

more-likely-than-not recognition threshold has been met.

Question 62

When determining whether a tax position will be sustained upon examination, a company ______ consider the likelihood that the taxing jurisdiction will examine the position.

Answer 62

Can not

Question 63

Which of the following are acceptable methods of classifying interest and penalties on uncertain tax liabilities?

Answer 63

Include interest and penalties as income tax expense

Classify interest and penalties separately from income tax expense

Question 64

Lower Texas, Inc. (LTI) took a tax position to treat $100,000 of income as tax-exempt. However, LTI is not certain that the treatment will be sustained. After analyzing the position, LTI determines that the there is a 40% chance that $80,000 will be treated as tax-exempt and a 75% chance that $40,000 will be treated as tax-exempt. Assuming a 21% tax rate, and if the more likely than not threshold is met, what is the uncertain tax liability associated with this position?

Answer 64

$12,600

Question 65

A corporation will be required to file Schedule UTP if assets exceed

Answer 65

$10 million.

Question 66

Which of the following items is not a significant component of an income tax provision?

Answer 66

Three year statutory rate reconciliation

Question 67

ASC 740 requires ____ _ (private/public) traded companies to disclose the significant components of their income tax provision attributable to continuing operations in either the financial statements or a note thereto.

Answer 67

Public