Accounting 113 - Corporation

Which of the following statements regarding incentive stock options (ISOs) is false? The ISO-related compensation expense is recorded for book purposes as the ISO vests. Book-tax differences related to ISO-related compensation expense are always unfavorable. Book-tax differences associated with ISO-related compensation expenses can be either permanent or temporary. None of these choices is false.

Book-tax differences associated with ISO-related compensation expenses can be either permanent or temporary. Book-tax differences associated with ISOs are permanent because no deductions can be taken for tax purposes.

Which of the following is allowable as a deduction in calculating a corporation's net operating loss? Charitable contribution deduction. Net capital loss carryback. Net operating loss carryover from other years. Both charitable contribution deduction and net operating loss carryover from other years are deductible in computing the current-year NOL.

Charitable contribution deduction. Net capital loss carrybacks and net operating loss carryovers are not deductible in calculating a current-year net operating loss.

Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true? Corporations may not carry over or carry back excess charitable contributions. Corporations can carry excess charitable contributions over to a future year or back to a prior year. Corporations can carry excess charitable contributions over to a future year but not back to a prior year. Corporations can carry excess charitable contributions back to a prior year but not over to a future year.

Corporations can carry excess charitable contributions over to a future year but not back to a prior year. Corporations may carry excess charitable contributions over for up to five years but they may not carry them back.

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)? Financial—no expense; tax—no deduction. Financial—no expense; tax—deduct bargain element at exercise. Financial—expense value over vesting period; tax—no deduction. Financial—expense value over vesting period; tax—deduct bargain element at exercise.

Financial—expense value over vesting period; tax—deduct bargain element at exercise. 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.

Which of the following describes the correct treatment of incentive stock options (ISOs)? Financial accounting—no expense; tax—no deduction. Financial accounting—no expense; tax—deduct bargain element at exercise. Financial—expense value over vesting period; tax—no deduction. Financial—expense value over vesting period; tax—deduct bargain element at exercise.

Financial—expense value over vesting period; tax—no deduction. Under ASC 718, option values are expensed over the vesting period, creating an unfavorable permanent book-tax difference.

Which of the following statements regarding nonqualified stock options (NQOs) is false? If the value of the options that vest is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable. All stock option-related book-tax differences are temporary. Book-tax differences associated with NQOs may be either permanent or temporary. No expense recognition is required for NQOs for financial accounting purposes.

If the value of the options that vest is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable.

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons? Temporary book-tax differences affect the computation of taxable income whereas permanent differences do not. All corporations are required to disclose book-tax differences as permanent or temporary on their tax returns. Temporary book-tax differences will reverse in future years whereas permanent differences will not. Neither temporary nor permanent book-tax differences will reverse in future years.

Temporary book-tax differences will reverse in future years whereas permanent differences will not. Temporary book-tax differences will reverse in future years whereas permanent differences will not.

AmStore Incorporated sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and immediate 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? Permanent; unfavorable. Temporary; favorable. Temporary; unfavorable. Permanent; favorable.

Temporary; unfavorable.

If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book-tax difference is created? Permanent; favorable. Permanent; unfavorable. Temporary; favorable. Temporary; unfavorable.

Temporary; unfavorable. 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.

Which of the following statements regarding book-tax differences associated with purchased goodwill is false? It is possible to have no book-tax difference in a year. 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. Temporary book-tax differences associated with goodwill are always favorable. 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.

Temporary book-tax differences associated with goodwill are always favorable.

Coop Incorporated owns 10 percent of Chicken Incorporated. At the end of the year, Coop has $100,000 in invested Chicken stock and Coop's Chicken stock is worth $115,000. 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)? $1000 unfavorable. $10,000 favorable. $15,000 unfavorable. $15,000 favorable. None of the choices is correct.

$15,000 favorable. Coop recognizes $10,000 in dividend income for both book and tax purposes. However, Coop must recognize the $15,000 unrealized gain in its Chicken stock for book purposes. Coop does not recognize the unrealized gain for tax purposes. Because taxable income is less than book income, the difference is favorable.

Studios reported a net capital loss of $31,000 in Year 5. It reported net capital gains of $16,000 in Year 4 and $29,000 in Year 6. What is the amount and nature of the book-tax difference in Year 6 related to the net capital carryover? $14,000 unfavorable. $14,000 favorable. $15,000 unfavorable. $15,000 favorable.

$15,000 favorable. Studios carries back $16,000 of the loss to Year 4, and then carries the remaining $15,000 forward to Year 6. In Year 6 it deducts $15,000 for tax purposes and $0 for book purposes.

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? $16,000 unfavorable. $11,000 unfavorable. $16,000 favorable. $11,000 favorable.

$16,000 favorable.

Jazz Corporation owns 50 percent of the Mitchell Corporation stock. Mitchell distributed a $30,000 dividend to Jazz Corporation. Jazz Corporations taxable income before the dividend was $102,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation? $30,000. $19,500. $0. $15,000.

$19500

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? $6,000 current-year deduction; $1,500 carryover. $7,500 current-year deduction; $0 carryover. $1,200 current-year deduction; $6,300 carryover. $7,200 current-year deduction; $300 carryover.

$7,200 current-year deduction; $300 carryover. 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.

Remsco has taxable income of $66,000 and a charitable contribution limit modified taxable income of $75,000. Its charitable contributions for the year were $7,740. What is Remsco's current-year charitable contribution deduction and contribution carryover? $6,600 current-year deduction; $1,140 carryover. $7,740 current-year deduction; $0 carryover. $900 current-year deduction; $6840 carryover. $7,500 current-year deduction; $240 carryover.

$7,500 current-year deduction; $240 carryover. The current-year deduction is limited to 10 percent of the charitable contribution limit modified taxable income, which is $7,500 ($75,000 × 10%). The carryover is any excess of the charitable contribution deduction for the year over the allowable current-year deduction.

Jazz Corporation owns 50 percent of the Mitchell Corporation stock. Mitchell distributed a $14,000 dividend to Jazz Corporation. Jazz Corporations taxable income before the dividend was $100,400. What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation? $0. $7,000. $9,100. $14,000

$9,100 Because Jazz owns at least 20 percent and less than 80 percent of the Mitchell stock, it is entitled to a 65 percent dividends received deduction ($14,000 × 65%).

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 owns less than 20 percent of the stock of B. A owns at least 20 but not more than 50 percent of the stock of B. A owns more than 50 percent of the stock of B. Cannot be determined.

A owns at least 20 but not more than 50 percent of the stock of B. 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.

Which of the following statements regarding capital gains and losses is false? Like individuals, corporations can deduct $3,000 of net capital losses in a given year. In terms of tax treatment, corporations generally prefer capital gains to ordinary income. Corporations must apply capital loss carrybacks and carryovers in a particular order. C corporations can carry back net capital losses three years and they can carry them forward for five years.

Like individuals, corporations can deduct $3,000 of net capital losses in a given year.

Which of the following does NOT create a permanent book-tax difference? Organizational and start-up expenses. Key employee death benefit income. Fines and penalties expenses. Municipal bond interest income.

Organizational and start-up expenses. 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.

Which of the following statements regarding charitable contributions is false? Only contributions made to qualified charitable organizations are deductible. Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions). Corporations can qualify to deduct a contribution before actually paying the contribution to the charity. The amount deductible for noncash contributions is always the adjusted basis of the property donated.

The amount deductible for noncash contributions is always the adjusted basis of the property donated. Depending on the nature of the property, the amount deductible for a contribution can be the fair market value of the contributed property.