Acct 312 SmartBook Chapter 6

Which of the following does not result in a permanent book/tax difference? 1. The purchase of machinery 2. Business entertainment costs 3. Municipal bond interest 4. Bribes paid to a government

1

Which of the following is not an example of a payment liability? 1. Liabilities associated with purchases of inventory 2. Liabilities for awards or prizes 3. Liabilities related to breach of contract 4. Liabilities for taxes imposed by a government authority

1

Which of the following statements about methods of accounting is false? 1. Taxpayers must use the same method of accounting to compute tax as they use to compute financial statement income. 2. A taxpayer engaged in more than one business can use a different method of accounting for each business. 3. The IRS has the right to determine if a taxpayer's method of accounting clearly reflects the taxpayer's income.

1

Which of the following statements about the accrual method of accounting is false? 1. If the accrual method is used for both tax and financial reporting purposes, taxable income and financial reporting net income will be identical. 2. The accrual method may result in reporting taxable income from a transaction earlier than when the related payment is received. 3. Under GAAP, the accrual method is required for financial statement purposes for publicly traded companies.

1

Which of the following statements about the recurring item exception election is false?1 1. It requires that economic performance occur before a deduction is permitted. 2. It allows taxpayers to accelerate a deduction before general rules for accrual accounting would permit. 3. It applies to liabilities that are regularly incurred.

1

Which of the following statements is true regarding an NOL deduction? 1. In tax years after 2020, the deduction allowed for a post-TCJA NOL carryforward is limited to 80 percent of taxable income before such deduction. 2. An NOL carryforward results in an immediate tax refund in the year the loss was generated. 3. The tax law provides for a twenty year NOL carryback.

1

The IRS ___. (Select all that apply.) 1. under Section 482, has the right to reallocate income and deductions between related parties 2. more closely scrutinizes income recognition of related party transactions relative to unrelated parties 3. dictates that the cash method be used in transactions between related parties

1 and 2

Which of the following statements about municipal bond interest are correct? (Select all that apply.) 1. Municipal bond interest is recognized as income for financial reporting purposes. 2. Municipal bond interest is a tax preference. 3. Interest associated with a loan to acquire municipal bonds is deductible. 4. Municipal bond interest is taxable.

1 and 2

Which of the following statements is true regarding transactions between related parties? (Select all that apply.) 1. When transacting parties use different accounting methods, the two sides of the transaction (income/deduction) may not be reported in the same year. 2. A taxpayer may be required to defer a deduction in a related party transaction until income is recognized by the other party to the transaction. 3. The tax law requires that related parties adopt the same method of accounting (cash/accrual) for tax purposes.

1 and 2

Sky Inc. is an accrual basis, calendar year taxpayer. Sky contracts with Guardian Company to provide their security services and pays $6,000 every 6 months. Full payment of $6,000 was made on November 15, 2021 to cover the 6-month period beginning December 1, 2021. Which of the following statements is true? (Select all that apply.) 1. Under general rules for accrual accounting, Sky may deduct $1,000 in 2021. 2. Sky is only eligible to deduct an amount equal to that which is recognized under GAAP. 3. If the recurring items election is adopted, Sky may deduct the full $6,000 in 2021.

1 and 3

Which of the following statements are true with respect to the deductibility of the following business expenditures? (Select all that apply.) 1. A penalty paid to the bank for a late payment on a loan is deductible. 2. The costs to settle a civil lawsuit is not deductible. 3. Business meals not provided by a restaurant are not deductible. 4. A bribe paid to a government is deductible if it is a customary business practice in the country of the transaction. 5. The cost of a business lunch at a local restaurant during 2021 is fully deductible.

1, 2, and 5

Which of the following taxpayers is subject to the excess business loss limitation (choose all that apply)? 1. Shareholder in an S corporation operating a business 2. Regular corporation operating a business 3. Partner in partnership operating a business 4. Individual operating a business as a sole proprietorship

1, 3, and 4

On October 1, 2021, Turkey Corporation prepaid $5,000 of interest on a loan secured to purchase equipment ($1,500 related to 2021 and $3,500 related to 2022). Related to this transaction, Turkey reports $___ deductible expense in 2021 and $___ in 2022.

1,500; 3,500

Granite Corporation incurred $3.5 million of net interest expense in 2021. Granite had gross receipts of over $27 million for the past thee years. If Granite's adjusted taxable income is $7 million, Granite is permitted a current interest deduction of what amount? 1. $3.5 million 2. $0 3. $2.1 million

3

Clunky Company has used a calendar year since incorporation. Clunky received permission to change to a May 31 fiscal year. Clunky must file a(n) ___ period tax return that covers the ___-month period, ___ 1 to ___ 31.

short; 5; January; May

A ___ difference between book income and taxable income results when an item of income is reflected on the books in a different period than when included in taxable income.

temporary

An NOL results in a(n) ___ book/tax difference and generates a deferred tax ___.

temporary; asset

When excess business losses are not currently deductible __​_. 1. such losses carry forward and are treated as net operating losses in subsequent years 2. such losses are deductible in future years, subject to the same limitations as net business interest expense 3. no future deduction is permitted

1

Which of the following businesses cannot use the cash method of accounting for tax purposes? 1. A corporation with $35 million average annual cash receipts 2. A personal service corporation with $30 million average annual cash receipts 3. A sole proprietorship with $8 million average annual cash receipts

1

On November 1, 2021, TriBeca Corporation prepaid $12,000 of rent that covers the 12-month period beginning March 1, 2022. Related to this transaction, TriBeca deducts $___ in 2021, $___ in 2022, and $___ in 2023.

0; 10,000; 2,000

For financial reporting purposes, Gilley's Corporation accrued a $200,000 liability for the estimated expense associated with settlement of a negligence lawsuit. Which of the following statements is true? 1. Gilley's will only be permitted a deduction in the year that the liability is paid. 2. Gilley's will be allowed a deduction once the liability for the settlement is fixed and the amount can be determined with reasonable accuracy. 3. If a written disclosure of the contingent liability is submitted to the IRS, Gilley's may deduct $200,000 when the settlement is agreed upon.

1

If a taxpayer is involved in multiple businesses, for post-2020 tax years the excess business loss limitation __​_. 1. applies to the aggregate of deductions from all businesses over income and gains from all businesses 2. is applied individually only to those businesses with losses 3. applies only to those businesses whose individual loss exceed a threshold amount.

1

Linguistic Specialists, an accrual basis taxpayer, offers language lessons for $40 per lesson. In 2021, they contracted to provide 50 Spanish lessons over the next 24 months. The lessons were provided as follows: 10 lessons in 2021, 25 in 2022, and 15 in 2023. Select the option that represents income recognition in 2021, 2022, and 2023 for tax purposes. 1. $400 in 2021; $1,600 in 2022; $0 in 2023 2. $2,000 in 2021; $0 in 2022; $0 in 2023 3. $400 in 2021; $1,000 in 2022; $600 in 2023

1

Lyster and Mister Corporation enter into a business transaction. The two companies are considered related parties for tax purposes. Which of the following statements is true? 1. The IRS has the right to reallocate income from the transaction to prevent distortion of taxable income among the related parties. 2. Lyster and Mister must obtain IRS approval to engage in transactions with each other. 3. Lyster and Mister must adopt the same method of accounting unless they receive permission from the IRS.

1

Maxwell Corporation uses the accrual method of accounting under GAAP. Below is a reconciliation of Maxwell's allowance for bad debts for the current year: Beginning allowance for bad debt $75,000 Actual write-offs during the year (62,000) Additions to the allowance account 65,000 Ending allowance for bad debt $78,000 Which of the following statements is true? 1. Bad debt per books is $65,000 and the deduction for bad debt is $62,000. 2. Bad debt per books is $78,000 and the deduction for bad debt is $62,000. 3. Bad debt per books is $62,000 and the deduction for bad debt is $62,000. 4. Bad debt per books is $65,000 and the deduction for bad debt is $65,000.

1

The cash method of accounting __​_. 1. may not be used by corporations that average more than $26 million in annual gross receipts 2. is less likely to allow opportunities to manipulate income by deferring income or accelerating deductions 3. is never permitted for personal service corporations

1

The tax benefit rule associated with bad debts __​_. 1. requires that income be reported if an amount deducted in a previous year as an uncollectible account is later collected 2. requires separate reporting of any deferred tax asset related to bad debt expense 3. applies for both GAAP and tax purposes

1

A permanent book/tax difference ___. 1. always implies an aggressive tax position 2. can relate to both the deductibility of expenses and the recognition of income 3. is a result of differences between book and tax in the timing of income recognition

2

Consider the following transaction between Acme Corp. (accrual basis) and Charlie Corp. (cash basis). On November 15, 2021, Acme hired Charlie to perform services. Below are the key dates: November 2021 - Charlie performs services and bills Acme. January 2022 - Acme pays Charlie $10,000. If the parties are unrelated, Acme deducts $10,000 in 2021 and Charlie reports income in 2022. Assuming Acme and Charlie are related parties, which of the following statements is false? 1. Charlie accelerates income recognition to 2021 to match the timing of Acme's deduction. 2. Acme defers the deduction until 2022 when Charlie reports income. 3. Acme is not permitted a deduction. Charlie must recognize the income.

2

Elite Company has used a calendar year since incorporation. The company has a strong business reason to support changing to a March 31 fiscal year-end. Which of the following statements is true? 1. Because the decision to change is supported by a strong business purpose, Elite may change without obtaining prior permission. 2. If Elite changes to a fiscal year-end, it must file a short-period return in the year of the change for the 3-month period, January 1 to March 31. 3. If Elite changes to a fiscal year-end, it must file a short-period return in the year of the change for the 9-month period, April 1 - December 31.

2

Froggie Corp. reported $1,500,000 book income this year. Froggie reported $50,000 of unfavorable permanent differences and $200,000 of favorable temporary differences. Assume a 21% tax rate, which of the following statements is false? 1. The temporary differences result in a deferred tax asset of $42,000. 2. The permanent differences result in a deferred tax liability of $10,500. 3. Froggie's tax expense per books is $325,500.

2

Plato Corporation operates a business with a natural annual operating cycle ending February 28. Which of the following best describes Plato's options for adopting a taxable year? 1. Plato may only adopt a fiscal year ending February 28. 2. Plato is permitted to adopt a calendar year or any fiscal year. 3. Plato may only adopt a year that coincides with the day Plato began business. 4. Plato may only adopt a calendar year.

2

Which of the following statements about accounting methods is false? 1. The adopted accounting method must generally reflect the income generation of the business. 2. The same accounting method must be adopted for all related entities. 3. The accounting method dictates when items of income are recognized for tax purposes.

2

Which of the following statements about the net operating loss (NOL) deduction is true? 1. The purpose of the provision is to allow small businesses to compete on a global basis, so it is not available to publicly traded corporations. 2. The NOL deduction reflects the idea that since a business pays taxes when profitable, they should also have some tax relief when they are not. 3. The NOL deduction results in a structure that focuses on single year assessment of tax rather than considering income generation over multiple years.

2

Which of the following statements is false regarding NOLs? 1. An NOL carryforward has value only if the company generates future taxable income. 2. An NOL carryforward results in a deferred tax liability. 3. An NOL can be carried forward indefinitely.

2

Which of the following statements is true about the principle of conservatism? 1. For GAAP purposes, it implies mitigating the tendency to under-report income. 2. For tax purposes, it implies mitigating the tendency to under-report taxable income. 3. It has the same implication for both tax and financial reporting purposes.

2

Which of the following statements regarding accrual basis accounting for compensation is false? 1. The general rule requires that compensation expense be recognized on a cash basis. 2. The 2.5 month rule applies only to employees' base salaries and not commissions or bonuses. 3. The 2.5 month rule allows taxpayers limited opportunity to deduct compensation before payment is made.

2

In order for an expense to be deductible, the all-events test requires that _blank​_. (Select all that apply.) 1. recognition for tax purposes matches that for financial reporting 2. economic performance has occurred 3. the amount of the liability is fixed 4. the amount of the liability can be determined with reasonable accuracy

2, 3, and 4

Temporary differences __​_. (Select all that apply.) 1. result from differences in the total amount of income or deductions recognized for book and tax purposes, regardless of the year in which reported 2. can cause taxable income to exceed book income in a given year 3. result from differences in the timing for recognition of income or deductions for book and tax purposes 4. can cause book income to exceed taxable income in a given year

2, 3, and 4

Trent Technologies is a calendar year, accrual basis taxpayer. At the end of 2020, Trent reports the following: Salaries earned in December, 2020, to be paid on January 5, 2021: $25,000 2020 bonuses to be paid on April 15, 2021: $20,000 Trent will deduct $___ in 2020 and $____ in 2021.

25,000; 20,000

Last year, Tech-to-Go, an accrual basis taxpayer, wrote-off $10,000 in accounts as uncollectible. This year, Tech-to-Go received a check for $1,000 on one of these accounts. Which of the following statements is false? 1. The receipt has no affect on book income. 2. Tech-to-Go must recognize $1,000 of taxable income under the tax benefit rule. 3. The receipt has no affect on taxable income.

3

Political contributions and expenses associated with lobbying activities are not ___. 1. reported as an expense for financial reporting purposes 2. permitted expenditures for publicly traded corporations 3. deductible for federal tax purposes

3

Proceeds paid to the beneficiary of a key-person life insurance policy are ___. As a result, the premiums paid are ___. 1. tax-exempt; deductible 2. taxable; non-deductible 3. tax-exempt; non-deductible 4. taxable; deductible

3

Tax expense per books is based on __​_. 1. before-tax book income 2. before-tax book income adjusted for temporary differences 3. before-tax book income adjusted for permanent differences 4. before-tax book income adjusted for both permanent and temporary book/tax differences

3

The firm's choice of a calendar or fiscal year is usually dictated __​_. 1. to coincide with the day the firm begins operations 2. by the personal schedules of the executive team 3. by the operating cycle of the firm

3

When excess business losses are not currently deductible ___. 1. such losses are deductible in future years, subject to the same limitations as net business interest expense 2. no future deduction is permitted 3. such losses carry forward and are treated as net operating losses in subsequent years

3

Which of the following statements about the all-events test is false? 1. The liability for an accrued expense must be fixed in order to be deductible. 2. The amount of an accrued expense must be determinable with reasonable accuracy in order to be deductible. 3. An accrued expense is not deductible unless economic performance with respect to the liability will occur within 12 months.

3

Which of the following statements about the cash method of accounting is true? 1. A cash basis taxpayer does not recognize income upon receipt of consideration unless that consideration is in the form of cash. 2. A cash basis taxpayer always deducts expenses when the cash is disbursed. 3. A cash basis taxpayer who is in constructive receipt of an income item must recognize that income currently.

3

Which of the following statements is inconsistent with the federal tax definition of gross income? 1. Gross income is defined broadly to include income from whatever sources derived. 2. Royalties from intangible properties are included in gross income. 3. Gross income does not include increases in wealth unless it is accompanied by the receipt of cash.

3

Which of the following statements best describes a permanent book/tax difference? (Select all that apply.) 1. An expense reported on the current year income statement but deducted on next year's tax return 2. An income item that is included on the current year income statement but not included in income until an indefinite future year 3. An expenditure that is reported on the current income statement but for tax purposes is only 50% deductible 4. An income item reported on the income statement but never included as taxable income on the tax return

3 and 4

Kolepp Corporation, an accrual basis taxpayer, performs consulting services. On November 1, 2021, Kolepp billed a client for $3,000 of services performed. Payment was received on January 5, 2022. Kolepp recognizes $___ of taxable income in 2021.

3,000

Which of the following statements regarding the accounting for inventory is false? 1. For tax purposes, the general rule is to deduct inventory cost in the year sold rather than the year inventory is purchased. 2. All merchandising firms must use the accrual method for tax purposes to account for inventory. 3. Service companies that have limited inventory sales must always use the accrual method for tax purposes to account for inventory.

3.

A deferred tax asset is created when __​_ differences create excess __​_ income over ___ income. 1. permanent; taxable; book 2. permanent; book; taxable 3. temporary; book; taxable 4. temporary; taxable; book

4

Richard's Rentals is an accrual basis taxpayer. On October 15, 2021, Richard's Rentals received a $24,000 rent check to cover the 12-month period November 1, 2021 to October 31, 2022. In 2021, Richards must report $___ of book income and $___ of taxable income.

4,000; 24,000

Copy Art Inc. computes taxable income as: Book income before-tax $3,000,000 Net permanent differences (300,000) Net temporary difference (100,000) Taxable Income $2,600,000 Assuming a 21% marginal tax rate, Copy Art 's tax expense per books is $___ and taxes payable per books is $___.

567,000; 546,000

The tax law provides taxpayers with excess deductions over income a carryforward deduction. For tax years after 2020 and losses incurred after 2017, the deduction is limited to ___ percent of pre-loss taxable income in each carryforward year.

80

Martha's Mufflers is a cash basis taxpayer with the following sales and collections information for the current year: Cash received in 2022 for 2021 sales $15,000 Sales in 2022 $75,000 Accounts Receivables at 2022 year-end* $10,000 All Accounts Receivable reported at 2022 year-end were attributable to 2022 sales. Martha should report revenues of $___ on the 2022 tax return.

80,000

The ___ method is used to account for bad debt under GAAP, whereas the ___ ___-___ method is used for tax purposes.

allowance; direct write-off

Under the general rules for the ___ method of accounting, income is recognized when payment is received.

cash

On December 27, 2021, Happy Holiday Company received a $2,500 check in the mail for services performed in December. The office closed December 24, 2021 for two weeks for the holiday break. Because of the ___ ___ doctrine, Holiday will report $___ income related to these services on its 2021 tax return.

constructive receipt; 2,500

True or false: The business interest expense limitation only applies to firms with average gross receipts of $27 million or less over the three preceding tax years.

false

Taxable income is defined as ___ income minus allowable ___.

gross; deductions

An excess of deductible expenses over gross income is termed a(n) ___ ___ ___.

net operating loss

Bribes paid to a government result in a(n) ___ book/tax difference.

permanent

In applying the excess business loss limitation, a taxpayer involved in multiple businesses is allowed to net losses from one business against profits from another. 1. true 2. false

true

True or false: Contrasting principles of conservatism between tax law and GAAP lead to many book/tax differences.

true

True or false: Smaller taxpayers may choose to treat inventory as nonincidental materials and supplies, deducting the related cost as the items are used or consumed.

true