MGT 135 Final CH 11

Donatoni Corporation owns 40% of Market, Inc. voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $21,000 dividends-received deduction.

False

Eagle, Inc. made a contribution to the Boy Scouts of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000.

False

Generally, the corporate income tax is computed on a proportionate rate schedule.

False

Hearth, Inc. reported $30,000 of depreciation expense on its financial statements. For federal income tax purposes, it deducted depreciation of $35,000. This book/tax difference would result in an increase to net income per books on the Schedule M-1 or M-3.

False

If a corporation's depreciation expense for regular tax purposes is $32,000 and its depreciation expense for alternative minimum tax purposes is $28,000, such corporation will have a negative (decrease) depreciation adjustment for alternative minimum taxable income.

False

Rogers, Inc. owns 12% of Lampe Corporation's voting common stock. During the current year, Rogers generated $50,000 operating income and received $8,000 dividends from Lampe. Only $1,600 of the dividend is taxable.

False

The Schedule M-3 reconciliation requires less detailed information than the M-1 reconciliation.

False

The corporate alternative minimum tax rate is 26% of AMTI in excess of the AMT exemption.

False

The corporate characteristic of free transferability exists if the corporate stock is subject to a buy-sell agreement.

False

The dividends-received deduction is equal to 80% of any dividends-received by a corporate taxpayer.

False

The domestic production activities deduction is computed as a percentage of the greater of taxable income or net income from qualified production activities.

False

The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket.

True

The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income.

True

The rate schedule for determining the regular tax liability of a corporation includes rates ranging from 15% to 39%.

True

The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement.

True

The taxable income earned by a personal service corporation is taxed at a flat rate of 35%.

True

Alexus Inc.'s alternative minimum taxable income before any AMT exemption is $210,000. Compute the corporation's AMT exemption: A. $25,000 B. $0 C. $42,500 D. $40,000

A

Assuming that the corporation has a 34% MTR, which of the following statements is true? A. Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $31,680. B. Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100,000. The after-tax cost of the $7,000 dividend paid was $4,620. C. Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100. The after-tax cost of the $7,000 dividend paid was $2,380. D. Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $16,320

A

Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true? A. The income from the collection and distribution of food and the income from grocery store are taxable. B. No income from either of the activities is taxable. C. Only the income from the collection and distribution of food is taxable. D. Only the income from the grocery store is taxable.

D

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. and 90% of the stock of Stock ownership of Bete, Inc. Bete owns 5% of the stock of Pete and 5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? A. Fleet, Zete, Pete, and Bete are an affiliated group. B. Fleet and Zete are an affiliated group. C. Fleet and Pete are an affiliated group. D. Fleet, Pete, and Bete are an affiliated group.

D

Honu, Inc. has book income of $1,200,000. Book income includes $620,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of meals and entertainment expense. Based only on these items, compute Honu's taxable income. A. $1,820,000 B. $1,905,000 C. $1,960,000 D. $1,885,000

D

A corporation that is unable to meet its original filing deadline may obtain an automatic twelve-month extension of the time to file its federal income tax return.

False

A nondeductible charitable contribution is a permanent book/tax difference.

False

AMT adjustments can only increase a corporation's alternative minimum taxable income.

False

Angel Corporation's current-year regular tax liability is $40,000. Angel is eligible for a general business credit of $45,000. The corporation will receive a $5,000 refund of federal income tax.

False

At least three corporations are required to form an affiliated group.

False

Bisou Inc. made a $48,200 contribution to charity this year. Only $39,000 of the contribution was deductible. Bisou can carry the $9,200 nondeductible contribution back three years and forward five years.

False

Corporations are rarely targeted in political debates over taxation.

False

Corporations report their taxable income and calculate the federal income tax on Form 1040.

False

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2013, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its allowable 2013 domestic production activities deduction is: A. $180,000 B. $120,000 C. $189,000 D. $335,000

A

In its first taxable year, Platform, Inc. generated a $200,000 net operating loss and made a $10,000 cash donation to a local charity. In its second year, Platform generated $350,000 operating income and made a $20,000 donation to the same charity. Compute Platform's taxable income for its second year. A. $120,000 B. $135,000 C. $320,000 D. $130,000

A

Joanna has a 35% marginal tax rate and owns 100% of the stock of Loman Corporation. This year, Loman generated $400,000 of taxable income, paid $136,000 of corporate income tax, and paid a $50,000 dividend to Joanna. Suppose that the federal income tax system has been amended to allow shareholders to gross up dividend income by the corporate tax paid with respect to the dividend and credit this tax against their individual tax. Further assume that dividends-received by individuals are not eligible for a preferential tax rate. Calculate Joanna's reported dividend income and her tax due on the dividend. A. Dividend income, $75,758; tax due, $757 B. Dividend income, $67,000; tax due, $5,450 C. Dividend income, $50,000; tax due, $17,500 D. Dividend income, $50,000; tax due, $500

A

John's, Inc. manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000? A. $14,000,000 B. $13,600,000 C. $15,600,000 D. $16,000,000

A

Morton Inc. is a Kansas corporation engaged exclusively in domestic manufacturing. In 2013, it earned $500,000 of qualified production income, which also equals its taxable income before the domestic manufacturing deduction. It paid compensation of $200,000 to its workforce. Calculate Morton's 2013 domestic production activities deduction and taxable income: A. Deduction $45,000; taxable income $455,000 B. Deduction $30,000; taxable income $470,000 C. Deduction $0; taxable income $500,000 D. Deduction $45,000; taxable income $255,000

A

Palm Corporation has book income of $424,000. Book income reflects $200,000 income tax expense and $55,000 depreciation expense. Tax depreciation expense computed under MACRS is $65,000. Palm received $25,000 of prepaid rent not included in book income. Based only on these items, compute Palm's taxable income. A. $639,000 B. $609,000 C. $659,000 D. $589,000

A

Slipper Corporation has book income of $500,000. Book income includes a $50,000 gain on the sale of equipment. The equipment originally cost $110,000 and was sold for $75,000. Accumulated book depreciation was $85,000; accumulated MACRS deprecation was $90,000. Based only on these items, compute Slipper's taxable income. A. $505,000 B. $495,000 C. $555,000 D. $445,000

A

Westside, Inc. owns 15% of Innsbrook's common stock. This year, Westside generated $50,000 operating income and received $20,000 dividends from Innsbrook. Westside's taxable income is: A. $56,000 B. $66,000 C. $50,000 D. $54,000

A

Which of the following is a primary legal characteristic of the corporate form of business? A. The management of the business is centered in a Board of Directors elected by the shareholders. B. A shareholder must seek permission to sell his stock. C. The life of the corporation will terminate when a majority of the shareholders die or cease to exist. D. A shareholder is personally liable for the debts of the corporation.

A

Which of the following statements about the calculation of alternative minimum taxable income is true? A. Excess percentage depletion is a positive adjustment to AMTI. B. The AMT net operating loss can reduce AMTI to zero. C. The AMTI exemption for all corporations is $40,000. D. The minimum tax credit can be carried back two years.

A

Aloha, Inc. had the following results for its first two years of operation: Which of the following statements is true? A. There is no AMT credit carryover from 2008 to 2009. B. There is an AMT credit carryover from 2008 to 2009. C. There is an AMT credit carryover from 2009 to 2010. D. There is an AMT credit carryback from 2009 to 2008.

B

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2013, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its 2013 taxable income is: A. $1,820,000 B. $1,920,000 C. $1,260,000 D. $1,914,000

B

Harmon, Inc. was incorporated and began business on January 1, 2012. Its tax liability for 2012 was $36,000. Its tax liability for 2013 was $50,000. Which of the following is a correct statement concerning the payment of estimated taxes for 2013? A. Harmon must pay $12,500 on the15th day of April, June, September, and December. B. Harmon must pay $9,000 on the 15th day of April, June, September and December. The $14,000 balance is payable by March 15, 2014. C. Harmon may pay the $50,000 tax no later than March 15, 2014. D. None of the above statements is correct.

B

Lexington Associates, Inc. is a personal service corporation. This year, Lexington reported $75,000 of taxable income. Which of the following statements regarding Lexington's regular tax liability is true? A. Regular tax liability will be less than it would have been if Lexington were not a personal service corporation. B. Regular tax liability will be greater than it would have been if Lexington were not a personal service corporation. C. Regular tax liability will be the same as it would have been if Lexington were not a personal service corporation. D. Regular tax liability will be zero.

B

Mandrake, Inc. has book income of $569,300. Its income includes a $50,700 bad debt expense, determined by the allowance method. Actual write offs this year were $48,000. Based only on this information, compute Mandrake's taxable income. A. $569,300 B. $572,000 C. $566,600 D. $528,600

B

Pocahontas, Inc. had the following results for its first two years of operation: Which of the following statements is true? A. There is an AMT credit carryback from 2009 to 2008. B. There is an AMT credit carryover from 2009 to 2010. C. There is an AMT credit carryover from 2008 to 2009. D. There is an AMT credit carryback from 2008 to 2007.

B

Poppy's book income of $739,300 includes a net long-term capital loss of $42,000 and federal income tax expense of $170,000. Based only on these items, Poppy's taxable income is: A. $739,300 B. $951,300 C. $909,300 D. $781,300

B

Silver Bullet Inc. reported the following for its current tax year: Compute Silver Bullet's total income tax liability. A. $22,000. B. $83,250. C. $61,250. D. $141,525.

B

TasteCo, Inc. reported $210,500 of taxable income this year. What is its regular tax liability? A. $82,095 B. $65,345 C. $73,675 D. $71,570

B

Thunder, Inc. has invested in the stock of several corporations and has $500,000 operating income before dividends. Calculate Thunder's dividends-received deduction and taxable income: A. DRD, $203,300; taxable income, $296,700 B. DRD, $169,640; taxable income, $533,660 C. DRD, $183,640; taxable income, $519,660 D. DRD $169,640; taxable income, $330,360

B

Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return: A. $400,000 B. $395,000 C. $410,000 D. $500,000

B

Which of the following could cause a corporation's alternative minimum taxable income to be lower than regular taxable income? A. Current year percentage depletion is smaller than cost depletion. B. ADS depreciation is larger than MACRS depreciation. C. The company is not entitled to an AMT exemption. D. The corporation has adjusted current earnings greater than AMTI before the ACE adjustment.

B

Which of the following statements regarding Schedule M-1 is true? A. The corporate dividends-received deduction is reported on Line 8 of Schedule M-1. B. A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1. C. Line 2 of schedule M-1 should reflect the corporation's actual federal income tax liability for the current year. D. A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would not report that gain on Schedule M-1.

B

Which of the following statements regarding the taxation of corporate profits is true? A. Dividends payments are deductible in computing corporate taxable income. B. The tax treatment of corporate dividends creates a bias in favor of debt financing. C. Corporations cannot deduct interest payments in computing corporate taxable income. D. Corporations with high debt-to-equity ratios have less burdensome cash flow commitments and lower risk of insolvency.

B

New York, Inc. owns 100% of Brooklyn, Inc. and Queens, Inc. Taxable income for the three corporations for their first year was as follows: Which of the following statements is false? A. Consolidated taxable income is $769,000. B. If a consolidated return is filed, Queens, Inc. will receive immediate tax benefit from its operating loss. C. If Brooklyn, Inc. is a foreign corporation, it can be part of a consolidated return. D. The corporations are not required to file a consolidated tax return if they are an affiliated group; however, they may elect to do so.

C

Sonic Corporation has a 35% marginal tax rate and received $10,000 of dividends from Roller, Inc., a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is: A. 35% B. 24.5% C. 10.5% D. None of the above

C

Sunny Vale Co. reported the following for the current tax year: Compute Sunny Vale's total income tax liability. A. $23,250 B. $950 C. $24,200 D. $47,450

C

A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income? A. Schedule M-1 B. Schedule M-2 C. Schedule M-3 D. Schedule M-4

C

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of equipment. Based only on these items, compute Airfreight's taxable income. A. $370,000 B. $395,000 C. $345,000 D. $420,000

C

Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability is $450,000. No estimated tax payments have been made. Which of the following statements is true? A. The corporation should receive a tax refund for the current year. B. The portion of the rehabilitation credit that cannot be used this year will be lost. C. The credit would have been higher if the company had restored a certified historic structure. D. The credit is available for restoration of a building that is at least ten years old.

C

Brace, Inc. owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is: A. $53,000 B. $58.000 C. $50,000 D. $52,000

C

Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct? A. Fleet, Pete, and Zete are an affiliated group. B. Fleet and Zete are an affiliated group. C. Fleet and Pete are an affiliated group. D. There is no affiliated group here.

C

For its current tax year, Volcano, Inc. reported the following: Compute Volcano's alternative minimum tax. A. $136,000 B. $162,400 C. $26,400 D. $298,400

C

Grumond was incorporated on January 1, 2004, and adopted a calendar year for tax purposes. It had the following gross receipts for its first six taxable years: For which of these years is Grumond exempt from AMT? A. 2004 B. 2004, 2005, and 2006 C. 2004, 2005, 2006, and 2007 D. 2004, 2005, 2006, 2007, and 2009

C

Loda Inc. made an $8,300 nondeductible charitable contribution and a $2,000 nondeductible political contribution this year. Which of the following statements is true? A. Both nondeductible contributions are permanent book/tax differences. B. Both nondeductible contributions are temporary book/tax differences. C. The nondeductible charitable contribution is a temporary book/tax difference. The nondeductible political contribution is a permanent book/tax difference. D. The nondeductible charitable contribution is a permanent book/tax difference. The nondeductible political contribution is a temporary book/tax difference.

C

Loraine Manufacturing, Inc. reported the following for the current tax year: What is Loraine Manufacturing's alternative minimum taxable income before any AMT exemption? A. $55,000 B. $135,000 C. $122,000 D. $82,000

C

WEK Inc. is a New York corporation with manufacturing operations in the United States and in 12 foreign countries. This year, its taxable income from domestic manufacturing was $1,239,000, and its taxable income from foreign manufacturing was $1,773,000. WEK had no other sources of taxable income. WEK paid $487,000 compensation to its U.S. workers and $599,200 compensation to its foreign workers. Compute WEK's taxable income. A. $3,012,000 B. $2,852,430 C. $2,900,490 D. $1,127,490

C

In determining the incidence of the corporate income tax: A. Corporations may pass the tax burden onto consumers in the form of higher prices. B. Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investment. C. Corporate employees may bear the burden of the corporate tax in the form of lower compensation. D. All of the above parties may bear the indirect burden of the corporate income tax.

D

The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the outstanding stock of Tire Corporation, a German company. Wheel and Tire each own 50 percent of the outstanding stock of Bumper, Inc., a U.S. company. Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation, a U.S. company. Which of these corporations form an affiliated group eligible to file a consolidated tax return? A. Wheel, Axle, Tire, Bumper, and Trunk are an affiliated group. B. Wheel, Axle, and Tire are an affiliated group. C. Wheel and Axle are an affiliated group. D. Wheel, Axle, and Trunk are an affiliated group.

D

Torquay Inc.'s 2012 taxable income was $9,782,200, and its tax liability was $3,325,948. Torquay's director of tax estimates that the corporation's 2013 taxable income will be $13,350,000. Use the corporate tax rate schedule to compute Torquay's 2013 estimated tax payment due on April 15, 2013. A. $1,134,750 B. $1,028,813 C. $831,487 D. $1,143,125

D

Which of the following is a means to avoid the double taxation burden imposed on the profits of corporations? A. Treat all corporations as pass through entities for federal tax purposes. B. Enact tax legislation that would make dividends nontaxable to all of the corporation's shareholders. C. Allow corporate shareholders a credit on their tax returns for the taxes paid by the corporation on the profits currently distributed to such shareholders as dividends. D. All of the above would avoid double taxation.

D

Which of the following statements regarding Schedule M-3 is false? A. The IRS developed Schedule M-3 with the goal of increasing transparency between reported net income for financial accounting purposes and reported net income for tax purposes. B. Schedule M-3 reports the temporary versus permanent characterization of book-tax differences. C. Part I of Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group. D. Schedule M-3 replaces Schedule M-1 for all tax years beginning after December 31, 2004.

D

Which of the following statements regarding corporate tax filing requirements is false? A. Corporations must file their annual federal income tax returns by the 15th day of the third month following the close of the taxable year. B. Corporations may request an automatic six-month extension of time to file their federal income tax returns. C. An extension of the income tax filing deadline does not extend the payment deadline for any balance of tax due for the taxable year. D. Corporations must file their annual federal income tax returns by 15th day of the fourth month following the close of the taxable year.

D

Which of the following statements regarding the domestic production activities deduction is false? A. The deduction is equivalent to a reduced tax rate on income from any qualified activity. B. The amount of the deduction allowed for any tax year cannot exceed 50% of the total compensation paid to the corporation's U.S. workforce. C. The deduction equals a percentage of the lesser of the corporation's net income from qualified activities or its taxable income before the deduction. D. The deduction is only available for U.S. taxpayers engaged in manufacturing activities.

D

Which of the following statements regarding the tax treatment of corporate dividends is true? A. All shareholders receiving dividend payments from U.S. corporations are entitled to a dividends received deduction. B. Dividends-received from foreign corporations are eligible for the dividends-received deduction. C. Corporations are entitled to deduct dividend payments to shareholders in calculating corporate taxable income. D. Dividend payments between members of an affiliated group of corporations filing a consolidated return are tax exempt.

D

A corporate taxpayer would prefer a $50,000 deduction to a $50,000 credit.

False

A corporation's minimum tax credit can reduce the corporation's future regular tax liability if regular tax liability exceeds tentative minimum tax in that year.

True

A nonprofit corporation may incur a federal income tax if it has unrelated business income.

True

A significant advantage of issuing stock instead of debt is that payment of dividends is discretionary

True

An affiliated group consists of a parent company that directly owns 80% of at least one subsidiary corporation plus all other subsidiaries that are 80% owned within the group.

True

Corporations are required to pay their federal tax liability in four quarterly estimated tax installments.

True

Corporations with more than $1 million taxable income must pay 100% of their current federal income tax liability in the form of quarterly estimate payments to avoid an underpayment penalty.

True

Corporations with taxable incomes in excess of $18,333,333 have a 35% marginal tax rate and a 35% average tax rate.

True

Dividends-received deductions generally are not allowed for dividends from foreign corporations

True

For a consolidated group of corporations, Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.

True

For a corporate taxpayer in the 34% marginal tax bracket, a $20,000 tax credit is equivalent to a $58,824 tax deduction.

True

Frazier, Inc. paid a $150,000 cash dividend to its shareholders. The corporation cannot deduct this payment on its corporate income tax return.

True

In terms of dispersal of ownership, corporations are classified as either closely held or publicly held.

True

Most tax credits for which a corporate taxpayer would be eligible are nonrefundable.

True

The burden of corporate taxation is often borne by corporate shareholders, customers, employees, and suppliers.

True

The corporate alternative minimum tax is designed to insure that corporations with substantial economic income will pay their fair share of the federal tax burden.

True

The corporate characteristic of limited liability is more important to the shareholders than the characteristic of centralized management.

True

The domestic production activities deduction is a permanent book/tax difference.

True