ACC 434 Test

Prance reports $600,000 of pretax book net income in 2020. Prance's book depreciation exceeds tax depreciation (+) that year by $20,000. Prance reports no other temporary or permanent book-tax differences. Assuming that the pertinent U.S. tax rate is 21%, compute Prance's current income tax expense for the year.

Pretax book income $600,000 Book > Tax depreciation 20,000 Taxable income $620,000 Tax rate × 21% Current income tax expense $130,200

Prance, Inc., earns pretax book net income of $800,000 in 2019. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation (-)by $80,000. Prance reported no other temporary or permanent book-tax differences. The pertinent U.S. tax rate is 21%, and Prance earns an after-tax rate of return on capital of 8%. Compute Prance's current income tax expense for the year.

Pretax book income $800,000 Tax > Book depreciation (80,000) Taxable income $720,000 Tax rate × 21% Current income tax expense $151,200

Prance reports $600,000 of pretax book net income in 2020. Prance's book depreciation exceeds tax depreciation (+) that year by $20,000. Prance reports no other temporary or permanent book-tax differences. Assuming that the pertinent U.S. tax rate is 21%, compute Prance's current income tax expense for the year. Determine Prance's 2020 deferred tax expense and any deferred tax asset or liability. In net present value terms, what has been the value to Prance of accelerating $20,000 of 2020 book depreciation to 2019

To determine its deferred tax expense, Prance must identify its deferred tax assets and liabilities. Its only temporary book-tax difference relates to its depreciable asset. The accelerated depreciation will cause the asset to have a net book value $60,000 greater than its tax adjusted basis ($80,000 excess cost recovery in 2019 and $20,000 greater book depreciation in 2020), resulting in a deferred tax liability of $12,600 ($60,000 × 21%). To record its deferred tax expense, Prance must reduce its deferred tax liability by $4,200 ($16,800 - $12,600). Prance will record the following journal entry: Deferred tax liability (balance sheet) $ 4,200 Deferred tax benefit (income statement) $ 4,200 As of December 31, 2020, Prance will report the following: Balance Sheet Deferred tax liability $ 12,600 Income Statement Tax expense $126,000 In net present value terms, the acceleration of $20,000 of 2020 book depreciation to 2019 for tax purposes by itself is worth $311 to Prance [$4,200 tax liability deferred one year × (1 − 0.9259 PV factor) = $311]. The total net present value of accelerated depreciation increases as the accelerated deduction of post-2020 book depreciation is considered.

Prance, Inc., earns pretax book net income of $800,000 in 2019. Prance acquires a depreciable asset that year, and first-year tax depreciation exceeds book depreciation (-) by $80,000. Prance reported no other temporary or permanent book-tax differences. The pertinent U.S. tax rate is 21%, and Prance earns an after-tax rate of return on capital of 8%. Compute Prance's current income tax expense for the year. Determine Prance's 2019 deferred tax expense and any deferred tax asset or liability.

To determine its deferred tax expense, Prance must identify its deferred tax assets and liabilities. Its only temporary book-tax difference relates to its depreciable asset. The accelerated depreciation will cause the asset to have a net book value $80,000 greater than its tax adjusted basis, resulting in a deferred tax liability of $16,800 ($80,000 × 21%). Prance will report the following: Balance Sheet Deferred tax liability $ 16,800 Income Statement Deferred tax expense $ 16,800 Prance's total tax expense will consist of the following: Current tax expense $151,200 Deferred tax expense 16,800 Total tax expense $168,000

Mira and Lemma are equal owners of an entity. Each contributed $25,000 cash to the entity. In addition, the entity obtains a loan of $100,000. The profits for the year are $30,000. Determine Mira and Lemma's basis of the ownership interest at the end of the period assuming the entity is: 1. A partnership. 2. A C corporation. 3. An S corporation.

a. $90,000 ($25,000 + $50,000 + $15,000). b. $25,000 (the loan and entity profits do not affect shareholder basis). c. $40,000 (the loan does not affect basis for the S corporation shareholders).

Henry is a 50% partner in HJ Partnership. This year, the tax form he receives from HJ (Schedule K-1 of Form 1065) shows business income of $40,000. During the year, Henry received a $10,000 distribution from HJ. How much must Henry report on his Form 1040 from HJ for the tax year? How would your answer change if HJ were instead an S corporation?

a. Henry must report his share of the income—$40,000, as shown on his Schedule K-1. The distribution reduces his basis in the partnership and is nontaxable. b. The answer would be the same if Henry owned an interest in an S corporation rather than a partnership. Assuming that Henry receives a salary from the S corporation, his share of the income should be lower because his reasonable salary reduces the S corporation's income.

Roscoe contributes to a business entity a personal use asset with an adjusted basis of $15,000 and a fair market value of $28,000 on the contribution date. Determine whether Roscoe recognizes any gain or loss on the contribution, and determine the basis of the asset to the entity under each of the following circumstances. 1. Roscoe contributes the asset to a sole proprietorship. 2. Roscoe contributes the asset to a partnership for 10% interest. 3. Roscoe contributes the asset to a corporation for 25% interest. (Assume that the control requirement is satisfied.)

a. No gain or loss; $15,000. b. No gain or loss; $15,000. c. No gain or loss; $15,000.

Amy, Becky, and Chau form a business entity with each contributing the following. Adjusted Basis Fair Market Value Ownership Percentage Amy: Cash $100,000 $100,000 40% Becky:Land 60,000 120,000 40% Chau: Services 50,000 20% Becky's land has a $20,000 mortgage that is assumed by the entity. Chau, an attorney, receives her ownership interest in exchange for legal services. Determine the recognized gain to the owners, the basis for their ownership interests, and the entity's basis for its assets if the entity is: A partnership. A C corporation. An S corporation.

a. Section 721 provides that no gain or loss is recognized by the partners upon the contribution of property to a partnership. Thus, neither Amy nor Becky has any recognized gain. Since Chau is contributing services rather than property, she has a recognized gain of $50,000. Section 722 provides for a carryover basis for the partners. The $20,000 mortgage assumed by the partnership results in the adjustments indicated below. Thus, the partner's basis for the partnership interest is as follows. Amy ($100,000 + $8,000) = $108,000 Becky ($60,000 - $20,000 + $8,000) = 48,000 Chau ($50,000 + $4,000) = 54,000 Section 723 provides for a carryover basis to the partnership for the assets received. Cash $100,000 Land 60,000 Organization costs 50,000 b. Section 351 provides that no gain or loss is recognized upon the contribution of property to a corporation if the shareholders control (i.e., at least 80%) the corporation immediately after the transfer. Since the combined ownership of Amy and Becky (40% + 40% = 80%) satisfies this requirement, neither records any recognized gain. Since Chau is contributing services rather than property, she has a recognized gain of $50,000. Section 358 provides for a carryover basis for the shareholders. Amy $100,000 Becky ($60,000 - $20,000) 40,000 Chau 50,000 Section 362 provides for a carryover basis to the corporation for the assets received. Cash $100,000 Land 60,000 Organization costs 50,000 c. Same tax consequences as in part b. above, since S status involves a corporation.