Ch 16 Practice test AC402

ELS Corporation reported gross receipts for 2017-2019 for scenarios A, B, and C as follows: YearScenario AScenario BScenario C2017$25,000,000$24,000,000$26,500,0002018 26,000,000 26,000,000 26,000,0002019 26,900,000 28,500,000 25,500,000 a. Is ELS allowed to use the cash method of accounting in 2020 under Scenario A? multiple choiceYesNo

Yes, less than 26 million (26,900,000+26,000,000+25,000,000)/3= 25,966,666

Riverbend Inc. received a $332,500 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,260,000 before deducting the dividends-received deduction (DRD), a $81,000 NOL carryover, and a $128,000 charitable contribution. Use Exhibit 16-6. (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.) e. What is Riverbend's DRD assuming it owns 93 percent of Hobble Corporation (and is part of the same affiliated group)?

e)as the owner ship in receiveing corporation stock is 93% it is coverred in 3rd slab 80<x<100 modified tax limit=2132500*100=2132500 modified drd =332500*100%=332500 as modified drd is entirely below the modified tax limit it is entirely deductible

Ski Inc. owns 30 percent of Snow Inc., both of which are domestic C corporations. Snow pays Ski a dividend of $20,000 in 2020. What is the amount of Ski's dividend's received deduction, assuming the taxable income limitation does not apply?

$13,000 Ski is entitled to a 65% dividends received deduction ($20,000 × 65% = $13,000) because it owns 30% of the stock of Snow Inc.).

Chairs-R-Us Inc. reported a net capital loss of $25,000 in year 4. It reported net capital gains of $10,000 in year 3 (before any capital loss carryback) and $20,000 of net capital gains in year 5 (before any capital loss carryovers). What is the amount and nature of the book-tax difference in year 5 related to the net capital loss carryover?

$15,000 favorable Chairs-R-Us carries back $10,000 of the loss to year 3 and then carries the remaining $15,000 forward to year 5. In year 5 it deducts $15,000 for tax purposes and $0 for book purposes.

Wildcat Corp. uses the annualized income method to determine its quarterly federal income tax payments. It had $50,000, $25,000, and $45,000 of taxable income for the first, second, and third quarters, respectively ($120,000 in total through the first three quarters). What is Wildcat's annual estimated taxable income as of the end of the third quarter?

$150,000 The annual estimated taxable income for the third quarter is determined by annualizing cumulative taxable income for the first half of the year. $150,000 = 2 × ($50,000 first quarter income + $25,000 second quarter income).

Maple Corp. owns several pieces of highly valued paintings that are on display in the corporation's headquarters. This year, it donated one of the paintings valued at $100,000 (adjusted basis of $25,000) to a local museum for the museum to display. a. What is the amount of Maple Corp.'s charitable contribution deduction for the painting (assuming income limitations do not apply)?

100,000

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC's deductible DRD in each of the following situations: e. WC's taxable income (loss) without the dividend income or the DRD is $(500,000).

100,000

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC's deductible DRD in each of the following situations: f. What is WC's book-tax difference associated with its DRD in part (a)? Is the difference favorable or unfavorable? Is it permanent or temporary?

100,000 favorable, permanent

Golf Corp. (GC), a calendar-year accrual-method corporation, held its directors' meeting on December 15 of year 1. During the meeting the board of directors authorized GC to pay a $75,000 charitable contribution to the World Golf Foundation, a qualifying charity. (For all requirements, leave no answer blank. Enter zero if applicable and select "Not applicable" if no effect.) a. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on or before April 15 of year 2, what book-tax difference will it report associated with the contribution in year 1 (assume the 10 percent limitation does not apply)? Is it favorable or unfavorable? Is it permanent or temporary? b. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on or before April 15 of year 2, what book-tax difference will GC report in year 2 (assuming the 10 percent limitation does not apply)? Is it favorable or unfavorable? c. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on May 15 of year 2, what book-tax difference will it report associated with the contribution in year 1 (assume the 10 percent limitation does not apply)? Is it favorable or unfavorable? Is it permanent or temporary d. If GC actually pays $50,000 of this contribution on January 15 of year 2 and the remaining $25,000 on May 15 of year 2, what book-tax difference will GC report in year 2 (assuming the 10 percent limitation does not apply)? Is it favorable or unfavorable?

A. No Book-tax difference. The 75,000 contribution is deductible in year 1 for both book and tax purposes. It is deductible for tax purposes because it paid the accrued contribution by 2 1/2 months after year end. b.No book-tax difference in year 2 because the entire contribution was deducted in year 1 for both book and tax purposes. c.GC will deduct $75,000 in year 1 for book purposes and $50,000 in year 1 for tax purposes. It cannot deduct the remaining $25,000 in year 1 for tax purposes because it did not actually pay the contribution within 2 ½ months after year end. The $25,000 that was not deductible in year 1, is carried over to year 2. The year 1 book-tax difference is a $25,000 unfavorable temporary difference. d.In year 2, GC will report a favorable $25,000 book-tax difference when it is allowed to deduct the $25,000 for tax purposes that it paid on April 15, year 2.

Which of the following does not create a permanent book-tax difference?

Charitable contributions in excess of the 10% of taxable income limitation.

Which of the following does not create a permanent book-tax difference? Assume CARES Act applies.

Charitable contributions in excess of the percentage of taxable income limitation.

In year 1 (the current year), OCC Corp. made a charitable donation of $200,000 to the Jordan Spieth Family Foundation (a qualifying charity). For the year, OCC reported taxable income of $1,500,000 before deducting any charitable contributions, before deducting its $20,000 dividends-received deduction, and before deducting its $40,000 NOL carryover from last year.

OCC taxable income for charitable contribution limitation purposes is $1,460,000 ($1,500,000 - $40,000 NOL carryover). So, its deductible limit on charitable contributions is $146,000 ($1,460,000 x 10%). Explanation:- OCC may deduct up to 10% of taxable income before any charitable contributions, the dividends received deduction, and NOL and capital loss carrybacks. Because net operating loss carryovers are deductible in determining the taxable income limitation.

Boise Corporation has gross receipts according to the following schedule: Year 1$23 million Year 2$22 million Year 3$25 million Year 4$27 million Year 5$29 million Year 6$30 million If Boise began business as a cash-method corporation in Year 1, in which year would it first have been required to use the accrual method?

Year 6 (The three years preceding Year 6 have average annual gross receipts of $27 million.) Corporations with $26 million or less in average annual gross receipts can use the cash method of accounting for tax purposes. Corporations that have not been in existence for at least three years can compute average annual gross receipts over the years they have been in existence. The three years preceding Year 6 have average annual gross receipts of $27 million.

ELS Corporation reported gross receipts for 2017-2019 for scenarios A, B, and C as follows: YearScenario AScenario BScenario C 2017$25,000,000$24,000,000$26,500,000 2018 26,000,000 26,000,000 26,000,000 2019 26,900,000 28,500,000 25,500,000 c. Is ELS allowed to use the cash method of accounting in 2020 under Scenario C?

Yes, equal to 26 million (26,500,000+26,000,000+25,500,000)/3= 26,000,000

June Inc. issued 9,000 nonqualified stock options valued at $27,000. Each option entitles the holder to purchase one share of stock at $5 per share. The options vest over three years - one-third in 2020 (the year of issue), one-third in 2021, and one-third in 2022. Three thousand options are exercised in 2021 at a time when the stock price of the stock was $9. What is the 2021 book-tax difference associated with the stock options?

$3,000 favorable The tax deduction in 2021 is the difference between the $5 exercise price and the $9 valuation of the stock at the exercise date multiplied by the number of options exercised [($9 - $5) × 3,000 = $12,000]. The book deduction is the value of the options over the vesting period in 2021. One-third of the $27,000 of options vests in each period. The value of the options vesting in 2021 = $27,000/3 = $9,000. The $3,000 excess tax deduction is favorable.

In year 1 (the current year), LAA Inc. made a charitable donation of $100,000 to the American Red Cross (a qualifying charity). For the year, LAA reported taxable income of $550,000, which included a $100,000 charitable contribution deduction (before limitation), a $50,000 dividends-received deduction, and a $10,000 net operating loss carryover from year 0.What is LAA Inc.'s charitable contribution deduction for year 1?

($550,000+ $100,000+ $50,000)*10%= 70,000

LNS Corporation reports revenues of $2,900,000. Included in the $2,900,000 is $32,500 of tax-exempt interest income. LNS reports $2,755,000 in ordinary and necessary business expenses. What is LNS Corporation's taxable income for the year?

2,900,000 (32,500) tax-exempt interest income (2,755,000) ordinary and necessary business expenses =112500

Maple Corp. owns several pieces of highly valued paintings that are on display in the corporation's headquarters. This year, it donated one of the paintings valued at $100,000 (adjusted basis of $25,000) to a local museum for the museum to display. b. What would be Maple's deduction if the museum sold the painting one month after it received it from Maple?

25,000

In 2021 (the current year), LAA Inc. made a charitable donation of $158,250 to the American Red Cross (a qualifying charity). For the year, LAA reported taxable income of $612,000, which included a $158,250 charitable contribution deduction (before limitation), a $71,500 dividends-received deduction, and a $11,600 net operating loss carryover from year 0. Assume CARES Act applies.What is LAA Inc.'s charitable contribution deduction for 2021?

84175 ( $158,250+$71,500+ 612,000)*.10

A current year temporary book-tax difference is unfavorable if it causes taxable income to decrease relative to book income.

False

All C corporations are required to file a Schedule M-3 with their tax returns.

False

All-Star Corporation has a net operating loss in 2020. It can carry the loss back to the previous two years, starting with 2018.

False

All-Star Corporation has a net operating loss in 2020. It is not allowed to carry the loss back. Assume CARES Act applies.

False

Federal income tax expense reported on a corporation's financial statement generates an unfavorable temporary book-tax difference.

False

Lansing Inc. incurred a net operating loss of $10,000,000 in 2020. Lansing Inc. reports $10,000,000 of taxable income before the NOL deduction in 2021. Lansing Inc. can offset all of its 2021 taxable income with the 2020 NOL carryover. Group starts

False

Similar to individuals, corporations are not subject to any limitations relating to the carryforward of unused net capital losses.

False

All corporate deductions are deductions from AGI deductions.

False Corporations do not report AGI.

ELS Corporation reported gross receipts for 2017-2019 for scenarios A, B, and C as follows: YearScenario AScenario BScenario C 2017. $25,000,000. $24,000,000. $26,500,000 2018 26,000,000 26,000,000 26,000,000 2019 26,900,000 28,500,000. 25,500,000 b. Is ELS allowed to use the cash method of accounting in 2020 under Scenario B? multiple choiceYesNo

No, More than 26 million (24,000,000+26,000,000+28,500,000)/3= 26,166,666

In year 1 (the current year), OCC Corp. made a charitable donation of $200,000 to the Jordan Spieth Family Foundation (a qualifying charity). For the year, OCC reported taxable income of $1,500,000 before deducting any charitable contributions, before deducting its $20,000 dividends-received deduction, and before deducting its $40,000 NOL carryover from last year. c. In year 2, OCC did not make any charitable contributions. It reported taxable income of $300,000 before any charitable contribution deductions and before a $15,000 dividends-received deduction. In years 3, 4, and 5, OCC reported taxable losses of $50,000. Finally, in year 6 it reported $1,000,000 in taxable income before any charitable contribution deductions. It did not have any dividends-received deduction. OCC did not actually make any charitable donations in year 6. What book-tax difference associated with charitable contributions will OCC report in year 6?

OCC would be allowed to deduct its remaining $24,000 charitable contribution carryover because the taxable income is not limiting. Consequently, it would report a favorable temporary book-tax difference of $24,000. If OCC had not been able to deduct some of the carryover in year 6, the carryover would have expired unused.

In year 1 (the current year), OCC Corp. made a charitable donation of $200,000 to the Jordan Spieth Family Foundation (a qualifying charity). For the year, OCC reported taxable income of $1,500,000 before deducting any charitable contributions, before deducting its $20,000 dividends-received deduction, and before deducting its $40,000 NOL carryover from last year. b. In year 2, OCC did not make any charitable contributions. It reported taxable income of $300,000 before any charitable contribution deductions and before a $15,000 dividends-received deduction. What book-tax difference associated with the charitable contributions will OCC report in year 2? Is the difference favorable or unfavorable? Is it permanent or temporary?

OCC's taxable income limitation in year 2 is $30,000 ($300,000 x 10%). Although OCC did not make any current year contributions, it is allowed to deduct (subject to the 10% limitation) its charitable contribution carryover from year 1 in the amount of $54,000. Because the limitation on the deduction in year 2 is $30,000, it may deduct $30,000 and carry over the remaining $24,000 to year 3. In year 2, OCC will therefor report a $30,000 favorable, temporary book-tax difference.

P Corporation receives a dividend from Q Corporation. P Corporation includes the dividend in its gross income for tax and financial accounting purposes. If P accounted for the dividend as gross income for book and tax purposes, what can we conclude about P's ownership in Q?

P likely owns less than 20 percent of the stock of Q. Corporations usually include dividends from corporations in which they own less than 20 percent in both taxable and financial income. There is no book-tax difference with respect to dividend income (the associated 50% dividends received deduction will create a favorable permanent difference).

Puma Inc. sold equipment at a loss. Puma depreciated the property using the straight-line method for financial accounting purposes and immediately expensed the property for tax purposes. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes on the date of the sale, what is the nature of the book-tax difference associated with the loss on the sale?

Temporary; unfavorable. The loss recognized by Puma is lower 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 in prior years.

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC's deductible DRD in each of the following situations: a. WC's taxable income (loss) without the dividend income or the DRD is $10,000.

Wasatch owns < 20 percent of Tager, therefore the DRD percentage = 50%. Full DRD = 200,000*50% = 100,000 Modified taxable income Taxable income limitation = 200,000+10,000 = $210,000 Taxable income limitation = 210,000*50% = $105,000 Dividend income 200,000 Drd received before limitation 100,000 Drd deductible 100,000 As taxable income limitation > full DRD, there is no scope for Wasatch to be in a loss position. Therefore, WC's deductible DRD = $100,000

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC's deductible DRD in each of the following situations: b. WC's taxable income (loss) without the dividend income or the DRD is $(10,000)

Wasatch owns < 20 percent of Tager, therefore the DRD percentage = 50%. Full DRD = 200,000*50% = 100,000 Modified taxable income Taxable income limitation = 200,000-10,000 = $190,000 Taxable income limitation = 190,000*50% =$95,000 Dividend income 200,000 Drd received before limitation 100,000 Drd deductible 95,000 As taxable income limitation > full DRD, there is no scope for Wasatch to be in a loss position. Therefore, WC's deductible DRD = $95,000

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC's deductible DRD in each of the following situations: d. WC's taxable income (loss) without the dividend income or the DRD is $(101,000).

Wasatch owns < 20 percent of Tager, therefore the DRD percentage = 50%. Full DRD = 200,000*50% = 100,000 Modified taxable income Taxable income limitation = 200,000-101,000 = $99,000 Taxable income limitation = 99,000*50% =$49,500 Dividend income 200,000 Drd received before limitation 100,000 Drd deductible 49,500 As taxable income limitation > full DRD, there is no scope for Wasatch to be in a loss position. Therefore, WC's deductible DRD = $49,500 100,000

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC). WC owns 15 percent of the TC stock. Compute WC's deductible DRD in each of the following situations: c. WC's taxable income (loss) without the dividend income or the DRD is $(99,000)

Wasatch owns < 20 percent of Tager, therefore the DRD percentage = 50%. Full DRD = 200,000*50% = 100,000 Modified taxable income Taxable income limitation = 200,000-99,000 = $101,000 Taxable income limitation = 101,000*50% =$50,500 Dividend income 200,000 Drd received before limitation 100,000 Drd deductible 50,500 As taxable income limitation > full DRD, there is no scope for Wasatch to be in a loss position. Therefore, WC's deductible DRD = $50,500

Riverbend Inc. received a $332,500 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,260,000 before deducting the dividends-received deduction (DRD), a $81,000 NOL carryover, and a $128,000 charitable contribution. Use Exhibit 16-6. (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.)

a) riverbed deductible drd is 10% so drd percentage comes to 50% so taxable income = 22,60,000 charitable contribution= 128000 2132000*50%=1066000 so deductible drd =332000*50%=166250 so drd is less than modified tax limit we can deduct it entirely

Riverbend Inc. received a $332,500 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,260,000 before deducting the dividends-received deduction (DRD), a $81,000 NOL carryover, and a $128,000 charitable contribution. Use Exhibit 16-6. (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.) c. What is Riverbend's DRD assuming it owns 50 percent of Hobble Corporation?

as 50% ownership in receiving corporation stock it is covered in second slab2 20<x<80 modified tax limit=2132000*65%=13858000 modified drd=332500*65%=216125 as modified drd is entirely below the modified tax limit it is entirely deductible