Name: Taxation of Business Entities Brian Spilker 11e - Test Bank
SKU: 25007
Availability: InStock

Complete Test Bank With Answers

Sample Questions Posted Below

Taxation of Business Entities, 11e (Spilker)

Chapter 5 Corporate Operations

1) In general, all C corporations can elect to use either the accrual or cash method of accounting.

Answer: FALSE

Explanation: Corporations with annual average gross receipts of more than $26 million over the

prior three years are required to use the accrual method.

Difficulty: 1 Easy

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

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

Answer: FALSE

Explanation: Corporations do not calculate AGI.

Difficulty: 1 Easy

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

3) Corporations have a larger standard deduction than individual taxpayers because they

generally have higher revenues.

Answer: FALSE

Explanation: Corporations do not have standard deductions.

Difficulty: 1 Easy

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.4) C corporations with annual average gross receipts of $26 million or more are allowed to use

the cash method of accounting for at least the first two years of their existence.

Answer: FALSE

Explanation: A corporation may not use the cash method of accounting in the second year if it

reported more than $26 million in gross receipts in the first year.

Difficulty: 2 Medium

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

5) Although a corporation may report a temporary book–tax difference for an item of income or

deduction for a given year, over the long term the total amount of income or deduction it reports

with respect to that item will be the same for both book and tax purposes.

Answer: TRUE

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

6) An unfavorable temporary book–tax difference is so named because it causes taxable income

to decrease relative to book income.

Answer: FALSE

Explanation: Any book–tax difference that requires an add-back to book income to compute

taxable income is an unfavorable book–tax difference because it requires an adjustment that

increases taxable income relative to book income.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.7) Income that is included in book income, but excluded from taxable income, results in a

favorable, permanent book–tax difference.

Answer: TRUE

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

8) Federal income tax expense reported on a corporation’s books generates a temporary book–tax

difference for Schedule M-3 purposes.

Answer: FALSE

Explanation: Federal income tax expense generates a permanent book–tax difference for

Schedule M-3 purposes.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

9) For a corporation, goodwill created in an asset acquisition generally leads to temporary book–

tax differences.

Answer: TRUE

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.10) For incentive stock options, the value of the options that accrue in a given year always

creates a permanent, unfavorable book–tax difference.

Answer: TRUE

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

11) In a given year, Adams Corporation has goodwill impairment in excess of the allowable

amortization for tax purposes. Adams has a favorable temporary book–tax difference for that

year.

Answer: FALSE

Explanation: Goodwill impairment in excess of tax goodwill creates either a permanent

difference or an unfavorable temporary book–tax difference.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

12) For tax purposes, companies using nonqualified stock options deduct expenses in the year

the options are exercised.

Answer: TRUE

Explanation: The corporation deducts as compensation expense the excess of the fair market

value of the stock acquired over the exercise price on the date the NQO is exercised.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.13) A nonqualified stock option will create a permanent book–tax difference in a given year if it

accrues during the year but is exercised in a later year.

Answer: FALSE

Explanation: A deductible temporary difference (deferred tax asset) is created in the year the

option accrues and is recorded as an expense for book purposes.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

14) For tax purposes, a corporation may deduct the entire amount of a net capital loss in the year

incurred.

Answer: FALSE

Explanation: A corporation can deduct a capital loss only against capital gains.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

15) A corporation may carry a net capital loss forward five years to offset capital gains in future

years but it may not carry a net capital loss back to offset capital gains in previous years.

Answer: FALSE

Explanation: A corporation carries a net capital loss back three years (required) and forward five

years.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.16) A corporation may carry a net capital loss back two years and forward 20 years.

Answer: FALSE

Explanation: A corporation carries a net capital loss back three years and forward five years.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

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

Answer: TRUE

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

18) Corporations may carry a net operating loss sustained in 2019 back two years and forward 20

years.

Answer: FALSE

Explanation: An NOL sustained in 2019 can be carried forward indefinitely with no carryback

permitted.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.19) Bingo Corporation incurred a $10 million net operating loss in 2019. Bingo reported taxable

income of $12 million in 2020. Bingo can offset the entire $10 million NOL carryover against

taxable income in 2020.

Answer: FALSE

Explanation: The NOL can only offset 80 percent of taxable income in the carryover year ($9.6

million). The remaining NOL of $400,000 is carried over to 2021.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

20) Net operating losses generally create permanent book–tax differences.

Answer: FALSE

Explanation: NOLs are treated as deductible temporary differences.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

21) Net capital loss carryovers are deductible against capital gains in determining a corporation’s

net operating loss for the year.

Answer: TRUE

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.22) For 2019, accrual-method corporations cannot deduct charitable contributions until they

actually make payment to the charity.

Answer: FALSE

Explanation: The deduction is allowed in the year authorized by the board of directors provided

the payment is made within three and a half months after year-end.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

23) GenerUs Inc.’s board of directors approved a charitable cash contribution to FoodBank, a

qualified nonprofit organization, in November of 2019. GenerUs made the payment to FoodBank

on February 2, 2020. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the

contribution on its 2019 tax return.

Answer: TRUE

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

24) NOL and capital loss carryovers are deductible in calculating the charitable contribution

limit modified taxable income, while capital loss carrybacks are not.

Answer: TRUE

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.25) Corporations may carry excess charitable contributions forward five years, but they may not

carry them back.

Answer: TRUE

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

26) A corporation generally will report a favorable, temporary book–tax difference when it

deducts a charitable contribution carryover.

Answer: TRUE

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

27) Corporations are not allowed to deduct charitable contributions in excess of 10 percent of the

corporation’s taxable income (before the charitable contribution and certain other deductions).

Answer: TRUE

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.28) The dividends received deduction is designed to mitigate the extent to which corporate

earnings are subject to more than two levels of taxation.

Answer: TRUE

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

29) Corporations compute their dividends received deduction by multiplying the dividend

amount by 10 percent, 50 percent, or 100 percent, depending on their ownership in the

distributing corporation’s stock.

Answer: FALSE

Explanation: The DRD percentages are 50 percent, 65 percent, and 100 percent, depending on

the stock ownership level.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

30) The dividends received deduction cannot create a net operating loss. The deduction can

reduce income to zero but not below zero.

Answer: FALSE

Explanation: A dividends received deduction is limited to 50 percent or 65 percent of taxable

income unless it creates or increases a net operating loss deduction, in which case the full

amount is allowed.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.31) The dividends received deduction is subject to a limitation based on modified taxable

income.

Answer: TRUE

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

32) Taxable income of all C corporations is subject to a flat 21 percent tax rate.

Answer: TRUE

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

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

Answer: FALSE

Explanation: C Corporations report taxable income or loss on Form 1120.

Difficulty: 1 Easy

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.34) Schedule M-1 reconciles from book income to bottom line taxable income (the taxable

income that is applied to the tax rates to determine the corporation’s gross tax liability).

Answer: FALSE

Explanation: Schedule M-1 reconciles net income or loss with taxable income before NOL

carryovers and special deductions (line 28 of Form 1120).

Difficulty: 3 Hard

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

35) Both Schedules M-1 and M-3 require taxpayers to identify book–tax differences as either

temporary or permanent.

Answer: FALSE

Explanation: Schedule M-1 is less detailed than Schedule M-3 and does not require the taxpayer

to distinguish between temporary and permanent differences.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

36) An affiliated group must file a consolidated tax return.

Answer: FALSE

Explanation: An affiliated group must elect to file a consolidated tax return in the first year, after

which filing a consolidated tax return is mandatory on a going-forward basis.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.37) The rules for consolidated reporting for financial statement purposes are the same as the

rules for consolidated reporting for tax purposes.

Answer: FALSE

Explanation: ASC 810 governs consolidated financial reporting while IRC sections 1501–1504

and the accompanying regulations govern income tax consolidation.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

38) Calendar-year C corporations that request an extension for filing their 2019 tax returns will

have a tax return due date of October 15.

Answer: TRUE

Explanation: Calendar-and fiscal-year corporations other than those with a June 30 year-end can

extend their tax returns for five months.

Difficulty: 1 Easy

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

39) Volos Company (a calendar-year corporation) began operations in March of 2017 and was

not profitable through December of 2018. Volos has been profitable for the first quarter of 2019

and is trying to determine its first quarter estimated tax payment. It will have no estimated tax

payment requirement in 2019 because it had no tax liability for the 2018 tax year and has been in

business for at least 12 months.

Answer: FALSE

Explanation: Estimated taxes are due if the corporation expects to incur a tax liability of $500 or

more for the year. A corporation can base its estimated payments on the prior year’s tax liability

only if it is positive, which is not the case here.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.40) Most corporations use the annualized income method to determine their required annual

payment for purposes of making quarterly estimated payments.

Answer: TRUE

Difficulty: 1 Easy

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

41) Large corporations (corporations with more than $1,000,000 in taxable income in any of the

three years prior to the current year) can use their prior tax year liability to determine all required

estimated quarterly payments for the current year.

Answer: FALSE

Explanation: Large corporations can use the prior-year liability to determine the first quarter

estimated tax payment only.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

42) For estimated tax purposes, a “large” corporation is any corporation with average annual

gross receipts of $5,000,000 in the three years prior to the current year.

Answer: FALSE

Explanation: For estimated tax purposes, a “large” corporation is a corporation with more than

$1,000,000 of taxable income in any of the three years prior to the current year.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.43) 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.

Answer: B

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

returns.

Difficulty: 1 Easy

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.44) WFO Corporation has gross receipts according to the following schedule:

Year 1 $22.00 million

Year 2 $24.00 million

Year 3 $26.00 million

Year 4 $26.50 million

Year 5 $27.00 million

Year 6 $28.00 million

If WFO began business as a cash-method corporation in Year 1, in which year would it have first

been required to use the accrual method?

A) Year 3.

B) Year 4.

C) Year 5.

D) Year 6.

E) None of the choices are correct.

Answer: D

Explanation: Corporations with $26 million or less in annual average gross receipts can use the

cash method of accounting for tax purposes. Corporations that have not been in existence for at

least three years can compute average annual gross receipts over the years they have been in

existence. The three years preceding Year 6 have annual average gross receipts of $26.5 million.

Difficulty: 3 Hard

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.45) 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.

Answer: A

Explanation: Organizational and start-up expenses are capitalized and amortized for tax

purposes but immediately deducted for book purposes, so these create a temporary book–tax

difference.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

46) Which of the following does NOT create a temporary book–tax difference?

A) Deferred compensation.

B) Bad-debt expense.

C) Depreciation expense.

D) Dividends received deduction.

Answer: D

Explanation: The dividends received deduction is a tax-only deduction. It creates a favorable

permanent book–tax difference.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.47) 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 the choices are correct.

Answer: B

Explanation: Temporary book–tax differences will eventually reverse; if a difference is

favorable one year, it will be unfavorable in another.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

48) It is important to distinguish between temporary and permanent book–tax differences for

which of the following reasons?

A) Temporary book–tax differences affect the computation of taxable income whereas

permanent differences do not.

B) All 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.

D) Neither temporary nor permanent book–tax differences will reverse in future years.

Answer: C

Explanation: Temporary book–tax differences will reverse in future years whereas permanent

differences will not.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.49) TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees

for which TrendSetter Inc. is the beneficiary. What is the nature of the book–tax difference

created by this expense?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

Answer: B

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

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

50) iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the

nature of the book–tax difference relating to this expense?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

Answer: B

Explanation: Interest expense on loans to acquire investments that produce tax-exempt income

is not deductible under section 265.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.51) AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line

method for financial accounting depreciation and expensing for tax cost recovery. If accumulated

depreciation for financial accounting purposes is less than accumulated depreciation for tax

reporting purposes, what is the nature of the book–tax difference associated with the gain on the

sale?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

Answer: D

Explanation: The gain recognized by AmStore is higher for tax purposes than it is for book

purposes because the tax accumulated depreciation is higher than the book accumulated

depreciation (the basis is higher for book purposes than for tax purposes). This adjustment is the

reversal of the favorable book–tax difference for depreciation on the asset.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

52) Corporation A receives a dividend from Corporation B. Corporation A includes the dividend

in its gross income for tax and financial accounting purposes (no book–tax difference). If A has

accounted for the dividend correctly (following the general rule), how much of B stock does A

own?

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.

Answer: A

Explanation: Corporations generally include dividends from corporations in which they own less

than 20 percent in both taxable and financial income (dividends are not income for book

purposes if Corporation A accounts for its stock ownership under the equity method, which

generally begins with a 20 percent ownership interest).

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.53) Corporation A receives a dividend from Corporation B. It includes the dividend in gross

income for tax purposes but includes a pro-rata portion of B’s earnings in its financial accounting

income. If A has accounted for the dividend correctly (using the general rule), how much of B’s

stock does A own?

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.

Answer: B

Explanation: If a corporation receiving dividends owns at least 20 percent but not more than

50 percent of the stock of a dividend-distributing corporation, it reports a pro rata portion of the

distributing corporation’s earnings in its financial accounting income under the equity method

and it includes the actual amount of the dividend in its taxable income.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

54) Coop Inc. owns 40 percent of Chicken Inc. Both Coop and Chicken are corporations.

Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial

accounting earnings of $20,000 for that year. Assume Coop follows the general rule of

accounting for investment in Chicken. What is the amount and nature of the book–tax difference

to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

A) $2,000 unfavorable.

B) $2,000 favorable.

C) $10,000 unfavorable.

D) $10,000 favorable.

E) None of the choices are correct.

Answer: A

Explanation: Coop recognizes $10,000 in dividend income for tax purposes but only $8,000 of

book income (40 percent of the $20,000 earnings of Chicken). Because taxable income is greater

than book income, the difference is unfavorable.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.55) Over what time period do corporations amortize purchased goodwill for tax purposes?

A) 180 months.

B) 150 months.

C) 60 months.

D) None of the choices are correct.

Answer: A

Explanation: Goodwill is amortized over 15 years (180 months) for tax purposes.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

56) Which of the following statements regarding book–tax differences associated with purchased

goodwill is false?

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.

Answer: C

Explanation: It is possible to have an unfavorable difference in a year when goodwill

impairment exceeds the allowable amortization deduction.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.57) Which of the following describes the correct treatment of incentive stock options (ISOs)?

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.

Answer: C

Explanation: Under ASC 718, option values are expensed over the vesting period, creating an

unfavorable permanent book–tax difference.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

58) Which of the following describes the correct treatment of the exercise of nonqualified stock

options (NQOs)?

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.

Answer: D

Explanation: Under ASC 718, the value of options is expensed over the vesting period for books

and the bargain element is deducted in the year of exercise for tax purposes, creating a temporary

book–tax difference.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.59) Which of the following statements regarding nonqualified stock options (NQOs) is false?

A) Book–tax differences associated with NQOs may be either permanent or temporary.

B) If the value of the options that accrue is greater than the bargain element of options exercised,

the book–tax difference for that year is unfavorable.

C) No expense recognition is required for NQOs for financial accounting purposes.

D) All stock option–related book–tax differences are temporary.

Answer: C

Explanation: ASC 718 requires compensation expense recognition for all stock options.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

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

A) ISO-related compensation expense creates permanent book–tax differences.

B) Book–tax differences related to ISO-related compensation expense are always unfavorable.

C) The ISO-related compensation expense is recorded for book purposes as the ISO vests.

D) Book–tax differences associated with ISO-related compensation expenses can be either

permanent or temporary.

Answer: D

Explanation: Book–tax differences associated with ISOs are permanent because no deductions

can be taken for tax purposes.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.61) Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The

options vest over two years—half in 2019 (the year of issue) and half in 2020. One thousand

options are exercised in 2020 with a bargain element on each option of $6. What is the 2020

book–tax difference associated with the stock options?

A) $14,000 unfavorable.

B) $6,000 favorable.

C) $24,000 unfavorable.

D) $24,000 favorable.

E) None of the choices are correct.

Answer: A

Explanation: The book–tax difference in 2020 is the difference between $20,000 expensed for

book purposes (50% × $40,000) and $6,000 deducted for tax purposes (1,000 options exercised ×

$6 bargain element). It is unfavorable because the book expense exceeds the tax deduction.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

62) In January 2018, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro.

Because the company did not expect Ms. Svaro to leave the company, the options vest at the

time they are granted with a total value of $50,000. In December of 2019, the company

experienced a surge in its stock price, and Ms. Svaro exercised the options. The total bargain

element at the time of exercise was $60,000. For 2019, what is the book–tax difference due to the

options exercised?

A) $10,000 unfavorable.

B) $10,000 favorable.

C) $50,000 unfavorable.

D) $60,000 favorable.

Answer: D

Explanation: For financial purposes, the company deducts the entire $50,000 value of the stock

options in 2018, when the stock option is granted. For tax purposes, the company deducts the

$60,000 bargain element in 2019, when the stock option is exercised. For 2019, the book–tax

difference is favorable in the amount of $60,000.

Difficulty: 3 Hard

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.63) In January 2019, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro.

Because the company does not expect Ms. Svaro to leave the company, the options vest at the

time they are granted with a total value of $50,000. In December of 2019, the company

experienced a surge in its stock price, and Ms. Svaro exercises the options. The total bargain

element at the time of exercise is $40,000. For 2019, what is the nature of the book–tax

difference due to the options exercised?

A) Favorable and temporary.

B) Favorable and permanent.

C) Unfavorable and temporary.

D) Unfavorable and permanent.

E) Not enough information to determine.

Answer: D

Explanation: The adjustment is unfavorable because the book deduction exceeds the tax

deduction. The adjustment is permanent because it will not ever reverse.

Difficulty: 3 Hard

Topic: Corporate Taxable Income Formula

Learning Objective: 05-01 Identify those income and expense items that cause a corporation’s

financial accounting net income to differ from its taxable income.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

64) Which of the following statements regarding capital gains and losses is false?

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.

Answer: B

Explanation: Corporations cannot deduct capital losses against ordinary income.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.65) 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.

Answer: D

Explanation: Net capital losses create an unfavorable book–tax difference in the year they occur

and a favorable book–tax difference in the year they are applied. These book–tax differences are

temporary.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

66) Studios reported a net capital loss of $30,000 in Year 5. It reported net capital gains of

$14,000 in Year 4 and $27,000 in Year 6. What is the amount and nature of the book–tax

difference in Year 6 related to the net capital carryover?

A) $11,000 unfavorable.

B) $11,000 favorable.

C) $16,000 unfavorable.

D) $16,000 favorable.

Answer: D

Explanation: Studios carries back $14,000 of the loss to Year 4, and then carries the remaining

$16,000 forward to Year 6. In Year 6 it deducts $16,000 for tax purposes and $0 for book

purposes.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.67) Tatoo Inc. reported a net capital loss of $13,000 in 2019. The company had a net capital gain

of $4,300 in 2017 and $3,000 in 2016. In 2018, although the company suffered a net operating

loss, it had net capital gains of $1,000. What is the amount of Tatoo’s capital loss carryover

remaining after it applies the carryback?

A) $4,700.

B) $5,700.

C) $8,700.

D) $13,000.

Answer: B

Explanation: The net capital loss is first carried back to 2016 as $3,000 is deducted

against net capital gain. The $4,300 net capital gain in 2017 is offset next. Because Tatoo

reported a net operating loss in 2018, it is not allowed to apply the carryback to that year.

The remaining carryover is $5,700 ($13,000 − $3,000 − $4,300).

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

68) BTW Corporation has taxable income in the current year that can be offset with an NOL

carryover from a previous year. What is the nature of the book–tax difference created by the net

operating loss carryover deduction in the current year?

A) Permanent; favorable.

B) Permanent; unfavorable.

C) Temporary; favorable.

D) Temporary; unfavorable.

Answer: C

Explanation: Book income will exceed taxable income in the current year, so the book–tax

difference is favorable. The book–tax difference is temporary because it is the reversal of an

unfavorable difference in the year the NOL was created.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.69) Which of the following is allowable as a deduction in calculating a corporation’s net

operating loss?

A) Charitable contribution deduction.

B) Net capital loss carryback.

C) Net operating loss carryover from other years.

D) Both charitable contribution deduction and net operating loss carryover from other years are

deductible in computing the current-year NOL.

Answer: A

Explanation: Net capital loss carrybacks and net operating loss carryovers are not deductible in

calculating a current-year net operating loss.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

70) Which of the following statements regarding net operating losses generated in 2020 is true?

A) Corporations can carry NOLs back two years and forward up to 20 years.

B) A corporation can carry over the NOL indefinitely.

C) A corporation can carry NOLs back two years and forward indefinitely.

D) When a corporation applies a net operating loss carryover, it reports a favorable, permanent

book–tax difference in the amount of the applied carryover.

E) None of these is a true statement.

Answer: B

Explanation: A corporation can carry over the NOL indefinitely.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.71) 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 noncash contributions is always the adjusted basis of the property

donated.

Answer: D

Explanation: Depending on the nature of the property, the amount deductible for a contribution

can be the fair market value of the contributed property.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

72) Which of the following is not required to allow an accrual-method corporation to deduct

charitable contributions before actually paying the contribution to charity?

A) Approval of the payment from the board of directors.

B) Approval from the IRS prior to making the contribution.

C) Payment made within three and one-half months of the tax year-end.

D) All of the choices are necessary.

Answer: B

Explanation: Prior IRS approval is not required.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.73) Which of the following is deductible in calculating the charitable contribution limit modified

taxable income?

A) Net capital loss carrybacks.

B) Dividends received deduction.

C) NOL carryovers.

D) Charitable contributions.

Answer: C

Explanation: NOL and net capital loss carryovers are deductible in calculating modified taxable

income for the charitable contribution limit but carrybacks and the DRD are not.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

74) Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable

income of $72,000. Its charitable contributions for the year were $7,500. What is Remsco’s

current-year charitable contribution deduction and contribution carryover?

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.

Answer: D

Explanation: The current-year deduction is limited to 10 percent of the charitable contribution

limit modified taxable income, which is $7,200 ($72,000 × 10%). The carryover is any excess of

the charitable contribution deduction for the year over the allowable current-year deduction.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.75) 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.

Answer: D

Explanation: Because charitable contribution expense exceeds the allowable deduction, the

book–tax difference is unfavorable. The difference will reverse when the carryover deduction is

taken in a future year.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

76) Which of the following statements regarding excess charitable contributions (contributions in

excess of the modified taxable income limitation) by corporations is true?

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.

Answer: C

Explanation: Corporations may carry excess charitable contributions over for up to five years

but they may not carry them back.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.77) 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.

Answer: B

Explanation: The DRD limitation does not apply if the DRD creates or increases a corporation’s

net operating loss.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

78) Which of the following is deductible in calculating DRD modified taxable income?

A) Charitable contribution deduction.

B) Net capital loss carrybacks.

C) NOL carryovers.

D) Dividends received deduction.

Answer: A

Explanation: NOL carryovers, NCL carrybacks, and the DRD itself are not included in the DRD

modified taxable income calculation.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.79) Jazz Corporation owns 50 percent of the Williams Corp. stock. Williams distributed a

$10,000 dividend to Jazz Corporation. Jazz Corp.’s taxable income before the dividend was

$100,000. What is the amount of Jazz’s dividends received deduction on the dividend it received

from Williams Corp.?

A) $0.

B) $5,000.

C) $6,500.

D) $10,000.

Answer: C

Explanation: Because Jazz owns at least 20 percent and less than 80 percent of the Williams

stock, it is entitled to a 65 percent dividends received deduction ($10,000 × 65%).

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

80) Jazz Corporation owns 10 percent of the Williams Corp. stock. Williams distributed a

$10,000 dividend to Jazz Corporation. Jazz Corp.’s taxable income (loss) before the dividend

was ($2,000). What is the amount of Jazz’s dividends received deduction on the dividend it

received from Williams Corp.?

A) $0.

B) $4,000.

C) $5,000.

D) $6,500.

E) None of the choices are correct.

Answer: B

Explanation: Because Jazz owns less than 20 percent of the Williams stock, the DRD

percentage is 50 percent. Further, $4,000 (50% × $8,000 taxable income before the DRD)

is less than the full DRD of $5,000 and the full DRD does not create a net operating loss

($8,000 − $5,000 = $3,000). As a result, the DRD is limited to $4,000.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.81) Jazz Corporation owns 10 percent of the Williams Corp. stock. Williams distributed a

$10,000 dividend to Jazz Corporation. Jazz Corp.’s taxable income (loss) before the dividend

was ($6,000). What is the amount of Jazz’s dividends received deduction on the dividend it

received from Williams Corp.?

A) $0.

B) $2,000.

C) $4,000.

D) $5,000.

E) None of the choices are correct.

Answer: D

Explanation: Because Jazz owns less than 20 percent of the Williams stock, the DRD

percentage is 50 percent. Even though $2,000 (50% × 4,000 taxable income before the

DRD) is less than the full DRD of $5,000, deducting the full DRD creates a net operating

loss for Jazz [$4,000 − $5,000 = ($1,000)] so Jazz may deduct the full $5,000 DRD.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

82) For Corporation P to file a consolidated tax return with Corporation S, P must own what

percentage of P’s voting stock?

A) 100 percent.

B) 80 percent.

C) More than 50 percent.

D) 50 percent or more.

Answer: B

Explanation: P must own at least 80 percent of the voting power and value of S to file a

consolidated tax return with S.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.83) 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.

Answer: C

Explanation: Neither M-1 nor M-3 fully reconciles book income to taxable income. Both

schedules reconcile to taxable income before NOL deductions and before the dividends received

deduction.

Difficulty: 3 Hard

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

84) Which of the following statements is false regarding consolidated tax returns?

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 percent 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.

Answer: B

Explanation: To file a consolidated tax return, one corporation must own at least 80 percent of

the stock of another corporation.

Difficulty: 3 Hard

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.85) What is the unextended due date of the tax return of a calendar-year C corporation for 2019?

A) February 15.

B) March 15.

C) April 15.

D) October 15.

Answer: C

Explanation: The unextended tax return due date for a calendar-year corporation is three and a

half months after year-end.

Difficulty: 1 Easy

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

86) Which of the following is not an acceptable method of determining the required annual

payment of federal income tax for corporations?

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 the choices are acceptable methods of determining the required annual payment of

federal income tax for corporations.

Answer: D

Explanation: All methods are acceptable.

Difficulty: 1 Easy

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.87) 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 three 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.

Answer: B

Explanation: Corporations are required to make quarterly estimated payments if their federal

income tax liability (including alternative minimum tax) is $500 or more.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

88) Omnidata uses the annualized income method to determine its quarterly federal income tax

payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and

third quarters, respectively ($240,000 in total through the first three quarters). What is

Omnidata’s annual estimated taxable income as of the end of the third quarter?

A) $300,000.

B) $320,000.

C) $400,000.

D) $480,000.

Answer: A

Explanation: The annual estimated taxable income for the third quarter is determined by

annualizing cumulative taxable income for the first half of the year. $300,000 = 2 × ($100,000

first quarter income + $50,000 second quarter income).

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.89) Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current

year. It would like to use its prior-year tax liability (which was very low but above zero) to

determine its quarterly estimated payments this year. Which of the following statements is true?

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 the choices are correct.

Answer: B

Explanation: Rapidpro can use its prior-year tax liability to determine only the first quarter

payment. After that, it must use the current year’s liability or the annualized income method to

determine payments. The second quarter payment is based on the annualized tax liability from

the first quarter taxable income.

Difficulty: 3 Hard

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.90) In 2019, AutoUSA Inc. reported $4,600,000 of book income, including $20,000 of interest

income from tax-exempt bonds. AutoUSA reported $3,600,000 of regular business expenses. If it

made $210,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax

due or tax refund when it files its return?

Answer: $4,200 refund

Description

Adjustment

(Favorable)/Unfavorable Explanation

(1) Receipts $ 4,600,000

(2) Income excludable from

income

Deductible business

(3)

expenses (3,600,000)

(20,000) Tax-exempt

interest

(4) Taxable income 980,000

Sum of (1)

through (3)

(5) Tax rate 21%

(6) Tax liability 205,800 (4) × (5)

(7) Prepayments 210,000

Taxes due (refund) $ (4,200) (6) – (7)

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.91) For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in

2018. It also expensed $12,000 of radio station filing fines paid to the FCC the same year. What

is the total book–tax difference associated with these items? Is it favorable or unfavorable? What

amount of the total adjustment is permanent and what amount is temporary?

Answer: $3,000, favorable book–tax difference. Entire difference is permanent book–tax

difference.

Description

(1) Book–tax difference due to

municipal bond income

(2) Book–tax difference due to

disallowed federal fines

Total favorable book–tax

difference $ (3,000)

Adjustment

(Favorable)/ Explanation

Unfavorable

$ (15,000) Municipal bond income is

excludable from

taxable income permanent.

12,000 Government fines are not

deductible for tax purposes

permanent.

(1) + (2). Both differences are

permanent.

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.92) In 2019, US Sys Corporation received $250,000 in death benefits after its CEO (a key

employee) died (it included this amount in book income). For book purposes, US Sys also

expensed life insurance premiums for other key employees in the amount of $20,000. In

addition, for book purposes, it expensed $10,000 of business meals expenditures. What is the

total book–tax difference associated with these items? Is it favorable or unfavorable? What

amount of the book–tax difference is temporary and what amount is permanent?

Answer: $225,000 favorable; all adjustments are permanent book–tax differences

Adjustment

Description

(Favorable)/Unfavorable Explanation

(1) Death benefits $ (250,000) Death benefits for key

employees are excludable from

income for tax purposes.

(2) Life insurance

premiums

20,000 Expenses that produce income

exempt from tax are not

deductible for tax purposes.

(3) Half of meals

expense

5,000 $10,000 is expensed for book

purposes, but only half is

deductible for tax purposes.

Total favorable

book–tax

difference $ (225,000) Sum of (1) through (3)

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.93) In 2019, Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book

purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for

$500,000. The book-adjusted basis of the equipment sold was $350,000, while the adjusted basis

for tax purposes was $210,000. What is the total book–tax difference associated with

depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book–tax

difference is permanent and what amount is temporary?

Answer: $86,000, unfavorable, temporary book–tax difference.

Adjustment

(Favorable)/

Description

Unfavorable Explanation

(1) Book depreciation $ 125,000

(2) Tax cost recovery 179,000

(3) Book–tax difference due

(54,000) to depreciation

(1) – (2); favorable because tax

deductions exceed book expenses.

(4) Sale of equipment 500,000

(5) Adjusted basis—book 350,000

(6) Gain on sale—book 150,000 (4) – (5).

(7) Adjusted basis—tax 210,000

(8) Gain on sale—tax 290,000 (4) – (7).

(9) Book–tax difference due

to gain on

sale of equipment 140,000

(6) – (8); unfavorable because tax

gain exceeds book gain.

Total unfavorable book–

tax difference $ 86,000 (3) + (9).

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.94) Atom Ventures Inc. (AV) owns stock in the Primo and Faraday corporations. The following

summarizes information relating to AV’s investment in Primo and Faraday as follows:

Dividends

distributed to

Corporation’s earnings for

Atom’s

Atom during

Corporation

year

ownership

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?

written consent of McGraw-Hill Education.Answer: $93,750, favorable, temporary book–tax difference, computed as follows:

Description Amounts Explanation

Primo

(1) Dividend received (included in

taxable income but not book

income) $ 125,000

(2) Primo’s net income $ 625,000

(3) Atom’s ownership in Primo 35%

(4) Atom’s book income from Primo

investment

$ 218,750 Because Atom owns

between 20 and 80 percent

of the stock of Primo,

Atom includes the pro rata

portion of Primo’s

earnings in book income.

(5) Favorable book–tax difference

associated with Primo $ 93,750 (4) – (1).

Faraday

(6) Dividend received (included in

taxable income but not book

income) $ 50,000

(7) Atom’s book income from

50,000

Faraday investment

Because Atom owns less

than 20 percent of the

stock of Faraday, Atom

includes the dividend in

book income.

(8) Book–tax difference associated

(7) – (6); there is no book–

with Faraday 0

tax difference.

Favorable book–tax difference

associate with dividend $ 93,750 (5) + (8).

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.95) On January 1, 2017, Credit Inc. recorded goodwill valued at $270,000 when it acquired the

assets of another company. At the end of 2018, the auditors of Credit Inc. determined that the

goodwill had been impaired by $50,000, and Credit Inc. wrote down the book value of the

goodwill by $50,000. During 2019, the goodwill was not further impaired. In 2020, additional

goodwill was impaired and was written down another $18,000 for financial reporting purposes.

What is the temporary book–tax difference associated with the purchased goodwill in 2018,

2019, and 2020? Are the differences favorable or unfavorable? Are the differences permanent or

temporary?

Answer: 2018: $32,000 unfavorable, temporary book–tax difference; 2019: $18,000 favorable,

temporary book–tax difference; 2020: $0 book–tax difference.

Description Amounts Explanation

(1) Goodwill initially recorded

on acquisition in 2017 $ 270,000

Annual goodwill

(2)

amortization expense for tax $ 18,000 (1)/15 years.

Goodwill impairment

(3)

recorded in 2018 50,000

2018 unfavorable book–tax

difference 32,000 (2) – (3).

(4) Goodwill impairment in 2019 0

2019 favorable book–tax

difference (18,000) (2) – (4).

(5) Goodwill impairment in 2020 18,000

2020 book–tax difference 0 (2) – (5) There is no book-tax

difference in 2019 because the

amortization for tax purposes

was equal to impairment

expense.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.96) On January 1, 2018, GrowCo issued 50,000 nonqualified stock options (NQOs) valued at $1

per option. Each option entitles the owner to purchase one share of stock for $4. These options

vest (accrue) at 20 percent per year for five years beginning in 2018. By the end of 2018, 20,000

of the options had vested. At the end of 2019, these options were exercised when the stock price

is $6.25. What is the total book–tax difference associated with the stock options for 2019? Is it

favorable or unfavorable? How much of the adjustment is permanent and how much is

temporary?

Answer: $35,000, favorable. $25,000 of the adjustment is permanent and the remaining $10,000

is temporary.

(1) Number of NQOs (2) Value of options Description Amount Explanation

$ 50,000

$ 50,000 (1) × $1 value per option.

(3) Percentage of options that accrue

in 2019 20%

(4) Value of options that vest in 2019

(amount expensed for book

purposes) (5) Number of options exercised in

$ 10,000 (2) × (3).

20,000

2019

(6) Bargain element per option

$ 2.25

$6.25 stock price – $4

exercise price

(7) Bargain element of all exercised

options

(value deductible for tax

purposes) $ 45,000 (5) × (6).

Favorable book–tax difference $ (35,000) (4) – (7).

The permanent difference is $25,000, which is the difference between the bargain

element per share of $2.25 minus the $1 value per share as estimated for book purposes

multiplied by the number of shares exercised [(2.25 − 1) × 20,000]. The remaining

$10,000 difference is temporary. In 2019, the recording of the vested stock option

expense of $10,000 created a temporary unfavorable book–tax difference.

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.48

written consent of McGraw-Hill Education.97) Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its

employees on January 1, 2018, with an estimated value of $5.50 per option. The options vest

(accrue) at 25 percent per year for four years (beginning in 2019). Each option allows the holder

to purchase one share of stock at $8. On January 1, 2020, employees exercised 12,500 options as

IC’s stock price reached $14.72. What is the amount of the book–tax difference in 2020

associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or

permanent?

Answer: $137,500 unfavorable, permanent book–tax difference.

Description Amount Explanation

(1) Number of ISOs 100,000

(1) × $5.50 value per

(2) Value of options $ 550,000

option.

(3) Percentage of options that accrue

in 2020 25%

(4) Value of options that vest in 2020

(amount expensed for book

purposes) (5) Amount deductible for tax

purposes

$ 137,500 (2) × (3).

0 No deduction is allowed

for ISOs.

Unfavorable book–tax difference $ 137,500 (4) – (5).

Difficulty: 1 Easy

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.98) Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2019 of $(64,000).

It had net capital gains of $21,500 in 2018, $45,000 in 2017, $10,000 in 2016 (but suffered a net

operating loss in 2016), and $8,000 of net capital gain in 2015. What is the net capital gain in

2018 after the carryback is applied?

Answer: $2,500 capital gain, computed as follows:

Description Amount Explanation

(1) Net capital loss in

2019 $ 64,000

(2) Net capital gain

45,000 offset in 2017

(3)

(4)

The net capital loss is not carried back to

2015 because the net capital loss can only

be carried back three years. It cannot be

applied to the net capital gain in 2016

because the corporation suffered a net

operating loss that year.

Remaining capital

loss carryback 19,000 (1) – (2).

Net capital gain in

2018 21,500

Remaining capital

$ 2,500

gain in 2018

(4) – (3).

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.99) During 2019, Hughes Corporation sold a portfolio of stock it had held for five years at a loss

of $200,000. It also sold some investment land and recognized a capital gain of $180,000. In

2017, Hughes reported a net capital gain of $12,000 and in 2018 it recognized a net capital gain

of $6,000. What is the amount of its net capital loss carryover to 2020?

Answer: $2,000, computed as follows:

Description Amount Explanation

(1) 2019 capital loss from sale of stock $ (200,000)

(2) 2019 capital gain from sale of land 180,000

(3) 2019 net capital loss (20,000) (1) + (2).

(4) 2017 net capital gain 12,000

(5) 2018 net capital gain 6,000

Net capital loss carryover $ (2,000) (3) + (4) + (5).

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking; Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.100) In 2019, Webtel Corporation donated $50,000 to a qualifying charity. For the year, it

reported taxable income of $310,000, which included the following: the $50,000 charitable

contribution (before limitation), a $100,000 dividends received deduction, and a $20,000 net

operating loss carryover. What is Webtel Corp.’s charitable contribution deduction?

Answer: $46,000, computed as follows:

Description Amount Explanation

(1) Taxable income $ 310,000

(2) Charitable contribution

50,000 Not deducted in determining

expense

modified taxable income for the

charitable contribution limitation

(3) Dividends received deduction $ 100,000 Not deducted in determining

modified taxable income for the

charitable contribution limitation

(4) Charitable contribution limit

modified taxable income 460,000 (1) + (2) + (3).

Charitable contribution limit $ 46,000 (4) × 10 percent.

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking; Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.101) In 2019, Datasoft Inc. received $350,000 in dividends from CSLabs Inc. Datasoft’s taxable

income before the dividends received deduction and $20,000 charitable contribution deduction is

$300,000. What is Datasoft’s DRD assuming it owns 15 percent of the CSLabs Inc. stock?

Answer: $140,000, computed as follows:

Description Amount Explanation

(1) Taxable income $ 300,000

(2) Charitable contribution

(20,000) deduction

Included in taxable income in

determining modified taxable

income. The DRD and NOL

carryback are excluded.

(3) DRD modified taxable

income 280,000

(4) Dividend income 350,000

(5) Dividends received

deduction percentage based

on ownership 50% §243(c)

(6) Dividends received

deduction before limitation 175,000 (4) × (5).

(7) Dividends received

deduction limitation 140,000 (3) × (5).

Dividends received

$ 140,000 Lesser of (6) or (7) (full DRD

deduction

does not create NOL so taxable

income limitation is binding).

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking; Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.102) AB Inc. received a dividend from CD Corporation and is able to claim a dividends received

deduction without limitation. AB owns 10 percent of CD. What is AB’s marginal tax rate (to the

nearest tenth of a percent) on the dividends received (after taking the DRD into account)?

Answer: 10.5% [21% × (100% – 50%)].

Difficulty: 2 Medium

Topic: Computing Corporate Taxable Income

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking; Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.103) In 2019, LuxAir Inc. (LA) has book income of $160,000. Included in this figure is income

generated from ownership in Jet Repair Corporation (JRC), of which LA owns 30 percent. JRC

has $270,000 in earnings for the year and pays $32,000 in dividends to LA. Assuming

accounting for the investment in JRC (income from JRC and the DRD) are its only book–tax

differences, what is LA’s tax liability for 2019?

Answer: $18,942, computed as follows:

Description Amounts Explanation

(1) Book income $ 160,000

(2) Ownership in Jet Repair Corp. 30%

(3) JRC’s earnings 270,000

(4) LuxAir’s book income from JRC investment 81,000 (2) × (3).

(5) Dividends received (included in taxable

income) 32,000

(6) Favorable book–tax difference due to

dividends (49,000) (5) – (4).

(7) Dividends received deduction percentage

based on ownership 65% §243(c)

(8) DRD modified taxable income 111,000 (1) + (6).

(9) Dividends received deduction before

limitation 20,800 (5) × (7).

(10) Dividends received deduction limitation 72,150 (7) × (8).

(11) Dividends received deduction

Lesser of (9)

20,800

or (10).

Taxable income Tax liability

90,200 (8) – (11).

$90,200 ×

$ 18,942

21%

Difficulty: 3 Hard

Topic: Computing Corporate Taxable Income; Compliance

Learning Objective: 05-02 Compute a corporation’s taxable income and associated income tax

liability using financial statement information.; 05-03 Describe a corporation’s tax return

reporting and estimated tax payment obligations.

Bloom’s: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.104) Netgate Corporation’s gross regular tax liability for 2019 was $189,000. What was its

taxable income?

Answer: $900,000. {$189,000 / 0.21}

Difficulty: 1 Easy

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking; Knowledge Application

AICPA: BB Critical Thinking

105) AR Systems Inc. (AR) had $120,000 of tax liability last year. It anticipates a current-year

tax liability of $500,000. Assuming AR is considered a large corporation for purposes of

estimating tax liability, what are the minimum estimated tax payments it should make to avoid

underpayment penalties? Ignore the annualized income method.

Answer: Q1: $30,000, Q2: $220,000, Q3: $125,000, Q4: $125,000

AR should use last year’s tax liability to determine its quarterly payments. However, because it is

a large corporation, it is allowed to use the prior year’s tax liability to determine the first quarter

payment only. The second quarter payment must catch up the cumulative payments to 50 percent

of the current-year tax liability.

Description Amount Explanation

Quarter 1 $ 30,000 $120,000 prior-year tax liability × 25%.

Quarter 2 $ 220,000 $500,000 × 50% – $30,000 of cumulative payments.

Quarter 3 $ 125,000 $500,000 × 75% – $250,000 of cumulative payments.

Quarter 4 $ 125,000 $500,000 × 100% – $375,000 of cumulative payments.

Difficulty: 2 Medium

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking; Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.106) In the current year, Auto Rent Corporation reported the following taxable income at the end

of its first, second, and third quarters: (Use Exhibit 16-10)

Quarter Cumulative Taxable Income

First $1,500,000

Second $2,800,000

Third $3,600,000

What amount of estimated tax payments would Auto Rent pay each quarter to avoid estimated

tax penalties under the annualized income method of computing estimated tax payments?

Answer: First quarter $315,000; ($1,500,000 × 4 = $6,000,000 × 21% × 25%); Second

quarter $315,000; ($6,000,000 × 21% × 50% − $315,000); Third quarter $252,000;

($2,800,000 × 2 × 21% × 75% = $882,000 − $630,000); Fourth quarter $126,000;

($3,600,000 × 1.3333 × 21% = $1,008,000 − $882,000).

Difficulty: 3 Hard

Topic: Compliance

Learning Objective: 05-03 Describe a corporation’s tax return reporting and estimated tax

payment obligations.

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking; Knowledge Application

AICPA: BB Critical Thinking

written consent of McGraw-Hill Education.

Taxation of Business Entities Brian Spilker 11e – Test Bank

Related

Be the first to review “Taxation of Business Entities Brian Spilker 11e – Test Bank” Cancel reply

Basic and Clinical Pharmacology 14th Edition by Katzung Trevor – Test Bank.

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley – Test Bank

Essentials of Psychiatric Nursing 2nd Edition by Boyd Luebbert – Test Bank

Clinical Guidelines in Family Practice 5th Edition Uphold Graham – Test Bank

Need Help

Explore

Categories

Taxation of Business Entities Brian Spilker 11e – Test Bank

Share this:

Related

Be the first to review “Taxation of Business Entities Brian Spilker 11e – Test Bank” Cancel reply

Related products

Basic and Clinical Pharmacology 14th Edition by Katzung Trevor – Test Bank.

Bates’ Guide To Physical Examination and History Taking 13th Edition by Bickley – Test Bank

Essentials of Psychiatric Nursing 2nd Edition by Boyd Luebbert – Test Bank

Clinical Guidelines in Family Practice 5th Edition Uphold Graham – Test Bank