Tax Ch 16
70) Which of the following statements regarding net operating losses generated in 2020 is true? A) Corporations can carry NOLs back two years and forward up to 20 years. B) A corporation can carry over the NOL indefinitely. C) A corporation can carry NOLs back two years and forward indefinitely. D) When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover. E) None of these is a true statement.
B Explanation: A corporation can carry over the NOL indefinitely.
43) Which of the following is not calculated in the corporate income tax formula? A) Gross income. B) Adjusted gross income. C) Taxable income. D) Regular tax liability.
B Explanation: Adjusted gross income is calculated for individual returns, but not for corporate returns.
80) Jazz Corporation owns 10 percent of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A) $0. B) $4,000. C) $5,000. D) $6,500. E) None of the choices are correct.
B Explanation: Because Jazz owns less than 20 percent of the Williams stock, the DRD percentage is 50 percent. Further, $4,000 (50% × $8,000 taxable income before the DRD) is less than the full DRD of $5,000 and the full DRD does not create a net operating loss ($8,000 − $5,000 = $3,000). As a result, the DRD is limited to $4,000.
67) Tatoo Inc. reported a net capital loss of $13,000 in 2019. The company had a net capital gain of $4,300 in 2017 and $3,000 in 2016. In 2018, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo's capital loss carryover remaining after it applies the carryback? A) $4,700. B) $5,700. C) $8,700. D) $13,000.
B Explanation: The net capital loss is first carried back to 2016 as $3,000 is deducted against net capital gain. The $4,300 net capital gain in 2017 is offset next. Because Tatoo reported a net operating loss in 2018, it is not allowed to apply the carryback to that year. The remaining carryover is $5,700 ($13,000 − $3,000 − $4,300).
84) Which of the following statements is false regarding consolidated tax returns? A) An affiliated group can file a consolidated tax return only if it elects to do so. B) To file a consolidated tax return, one corporation must own at least 50 percent of the stock of another corporation. C) For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member. D) For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.
B Explanation: To file a consolidated tax return, one corporation must own at least 80 percent of the stock of another corporation.
59) Which of the following statements regarding nonqualified stock options (NQOs) is false? A) Book-tax differences associated with NQOs may be either permanent or temporary. B) If the value of the options that accrue is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable. C) No expense recognition is required for NQOs for financial accounting purposes. D) All stock option-related book-tax differences are temporary.
C Explanation: ASC 718 requires compensation expense recognition for all stock options.
79) Jazz Corporation owns 50 percent of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A) $0. B) $5,000. C) $6,500. D) $10,000.
C Explanation: Because Jazz owns at least 20 percent and less than 80 percent of the Williams stock, it is entitled to a 65 percent dividends received deduction ($10,000 × 65%).
68) BTW Corporation has taxable income in the current year that can be offset with an NOL carryover from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year? A) Permanent; favorable. B) Permanent; unfavorable. C) Temporary; favorable. D) Temporary; unfavorable.
C Explanation: Book income will exceed taxable income in the current year, so the book-tax difference is favorable. The book-tax difference is temporary because it is the reversal of an unfavorable difference in the year the NOL was created.
76) Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true? A) Corporations may not carry over or carry back excess charitable contributions. B) Corporations can carry excess charitable contributions over to a future year or back to a prior year. C) Corporations can carry excess charitable contributions over to a future year but not back to a prior year. D) Corporations can carry excess charitable contributions back to a prior year but not over to a future year.
C Explanation: Corporations may carry excess charitable contributions over for up to five years but they may not carry them back.
86) Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations? A) 100 percent of the prior year's tax liability (with a few exceptions). B) 100 percent of the current year's tax liability. C) 100 percent of the estimated current-year tax liability using the annualized income method. D) All of the choices are acceptable methods of determining the required annual payment of federal income tax for corporations.
D Explanation: All methods are acceptable.
81) Jazz Corporation owns 10 percent of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A) $0. B) $2,000. C) $4,000. D) $5,000. E) None of the choices are correct.
D Explanation: Because Jazz owns less than 20 percent of the Williams stock, the DRD percentage is 50 percent. Even though $2,000 (50% × 4,000 taxable income before the DRD) is less than the full DRD of $5,000, deducting the full DRD creates a net operating loss for Jazz [$4,000 − $5,000 = ($1,000)] so Jazz may deduct the full $5,000 DRD.
75) If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book-tax difference is created? A) Permanent; favorable. B) Permanent; unfavorable. C) Temporary; favorable. D) Temporary; unfavorable.
D Explanation: 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.
60) Which of the following statements regarding incentive stock options (ISOs) is false? A) ISO-related compensation expense creates permanent book-tax differences. B) Book-tax differences related to ISO-related compensation expense are always unfavorable. C) The ISO-related compensation expense is recorded for book purposes as the ISO vests. D) Book-tax differences associated with ISO-related compensation expenses can be either permanent or temporary.
D Explanation: Book-tax differences associated with ISOs are permanent because no deductions can be taken for tax purposes.
44) WFO Corporation has gross receipts according to the following schedule: Year 1 $22.00 million Year 2 $24.00 million Year 3 $26.00 million Year 4 $26.50 million Year 5 $27.00 million Year 6 $28.00 million If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method? A) Year 3. B) Year 4. C) Year 5. D) Year 6. E) None of the choices are correct.
D Explanation: Corporations with $26 million or less in annual average 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 annual average gross receipts of $26.5 million.
71) Which of the following statements regarding charitable contributions is false? A) Only contributions made to qualified charitable organizations are deductible. B) Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions). C) Corporations can qualify to deduct a contribution before actually paying the contribution to the charity. D) The amount deductible for noncash contributions is always the adjusted basis of the property donated.
D Explanation: Depending on the nature of the property, the amount deductible for a contribution can be the fair market value of the contributed property.
62) In January 2018, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company did not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2019, the company experienced a surge in its stock price, and Ms. Svaro exercised the options. The total bargain element at the time of exercise was $60,000. For 2019, what is the book-tax difference due to the options exercised? A) $10,000 unfavorable. B) $10,000 favorable. C) $50,000 unfavorable. D) $60,000 favorable.
D Explanation: For financial purposes, the company deducts the entire $50,000 value of the stock options in 2018, when the stock option is granted. For tax purposes, the company deducts the $60,000 bargain element in 2019, when the stock option is exercised. For 2019, the book-tax difference is favorable in the amount of $60,000.
65) For corporations, which of the following regarding net capital losses is true? A) A corporation that experiences a net capital loss has a favorable book-tax difference in the year of the loss. B) A corporation that experiences a net capital loss in Year 4 first carries the loss back to Year 3, then Year 2, and then Year 1 before carrying it forward. C) Net capital loss carrybacks are deductible in determining a corporation's net operating loss. D) Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used before they expire.
D Explanation: Net capital losses create an unfavorable book-tax difference in the year they occur and a favorable book-tax difference in the year they are applied. These book-tax differences are temporary.
66) 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? A) $11,000 unfavorable. B) $11,000 favorable. C) $16,000 unfavorable. D) $16,000 favorable.
D Explanation: Studios carries back $14,000 of the loss to Year 4, and then carries the remaining $16,000 forward to Year 6. In Year 6 it deducts $16,000 for tax purposes and $0 for book purposes.
14) For tax purposes, a corporation may deduct the entire amount of a net capital loss in the year incurred.
FALSE Explanation: A corporation can deduct a capital loss only against capital gains.
15) A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.
FALSE Explanation: A corporation carries a net capital loss back three years (required) and forward five years.
16) A corporation may carry a net capital loss back two years and forward 20 years.
FALSE Explanation: A corporation carries a net capital loss back three years and forward five years.
4) C corporations with annual average gross receipts of $26 million or more are allowed to use the cash method of accounting for at least the first two years of their existence.
FALSE Explanation: A corporation may not use the cash method of accounting in the second year if it reported more than $26 million in gross receipts in the first year.
13) A nonqualified stock option will create a permanent book-tax difference in a given year if it accrues during the year but is exercised in a later year.
FALSE Explanation: A deductible temporary difference (deferred tax asset) is created in the year the option accrues and is recorded as an expense for book purposes.
30) The dividends received deduction cannot create a net operating loss. The deduction can reduce income to zero but not below zero.
FALSE Explanation: A dividends received deduction is limited to 50 percent or 65 percent of taxable income unless it creates or increases a net operating loss deduction, in which case the full amount is allowed.
37) The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.
FALSE Explanation: ASC 810 governs consolidated financial reporting while IRC sections 1501-1504 and the accompanying regulations govern income tax consolidation.
18) Corporations may carry a net operating loss sustained in 2019 back two years and forward 20 years.
FALSE Explanation: An NOL sustained in 2019 can be carried forward indefinitely with no carryback permitted.
36) An affiliated group must file a consolidated tax return.
FALSE Explanation: An affiliated group must elect to file a consolidated tax return in the first year, after which filing a consolidated tax return is mandatory on a going-forward basis.
6) An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.
FALSE Explanation: Any book-tax difference that requires an add-back to book income to compute taxable income is an unfavorable book-tax difference because it requires an adjustment that increases taxable income relative to book income.
33) A C corporation reports its taxable income or loss on Form 1065.
FALSE Explanation: C Corporations report taxable income or loss on Form 1120.
2) Corporations calculate adjusted gross income (AGI) in the same way as individuals.
FALSE Explanation: Corporations do not calculate AGI.
3) Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.
FALSE Explanation: Corporations do not have standard deductions.
1) In general, all C corporations can elect to use either the accrual or cash method of accounting.
FALSE Explanation: Corporations with annual average gross receipts of more than $26 million over the prior three years are required to use the accrual method.
39) Volos Company (a calendar-year corporation) began operations in March of 2017 and was not profitable through December of 2018. Volos has been profitable for the first quarter of 2019 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2019 because it had no tax liability for the 2018 tax year and has been in business for at least 12 months.
FALSE Explanation: Estimated taxes are due if the corporation expects to incur a tax liability of $500 or more for the year. A corporation can base its estimated payments on the prior year's tax liability only if it is positive, which is not the case here.
8) Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.
FALSE Explanation: Federal income tax expense generates a permanent book-tax difference for
42) For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.
FALSE Explanation: For estimated tax purposes, a "large" corporation is a corporation with more than $1,000,000 of taxable income in any of the three years prior to the current year.
11) In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. Adams has a favorable temporary book-tax difference for that year.
FALSE Explanation: Goodwill impairment in excess of tax goodwill creates either a permanent difference or an unfavorable temporary book-tax difference.
41) Large corporations (corporations with more than $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.
FALSE Explanation: Large corporations can use the prior-year liability to determine the first quarter estimated tax payment only.
20) Net operating losses generally create permanent book-tax differences.
FALSE Explanation: NOLs are treated as deductible temporary differences.
35) Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.
FALSE Explanation: Schedule M-1 is less detailed than Schedule M-3 and does not require the taxpayer to distinguish between temporary and permanent differences.
34) Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability).
FALSE Explanation: Schedule M-1 reconciles net income or loss with taxable income before NOL carryovers and special deductions (line 28 of Form 1120).
29) Corporations compute their dividends received deduction by multiplying the dividend amount by 10 percent, 50 percent, or 100 percent, depending on their ownership in the distributing corporation's stock.
FALSE Explanation: The DRD percentages are 50 percent, 65 percent, and 100 percent, depending on the stock ownership level.
19) Bingo Corporation incurred a $10 million net operating loss in 2019. Bingo reported taxable income of $12 million in 2020. Bingo can offset the entire $10 million NOL carryover against taxable income in 2020.
FALSE Explanation: The NOL can only offset 80 percent of taxable income in the carryover year ($9.6 million). The remaining NOL of $400,000 is carried over to 2021.
22) For 2019, accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.
FALSE Explanation: The deduction is allowed in the year authorized by the board of directors provided the payment is made within three and a half months after year-end.
5) Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.
TRUE
7) Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.
TRUE
9) For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.
TRUE
38) Calendar-year C corporations that request an extension for filing their 2019 tax returns will have a tax return due date of October 15.
TRUE Explanation: Calendar-and fiscal-year corporations other than those with a June 30 year-end can extend their tax returns for five months.
12) For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.
TRUE Explanation: The corporation deducts as compensation expense the excess of the fair market value of the stock acquired over the exercise price on the date the NQO is exercised.
31) The dividends received deduction is subject to a limitation based on modified taxable income.
TRUE
32) Taxable income of all C corporations is subject to a flat 21 percent tax rate.
TRUE
54) Coop Inc. owns 40 percent of Chicken Inc. 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)? A) $2,000 unfavorable. B) $2,000 favorable. C) $10,000 unfavorable. D) $10,000 favorable. E) None of the choices are correct.
A Explanation: Coop recognizes $10,000 in dividend income for tax purposes but only $8,000 of book income (40 percent of the $20,000 earnings of Chicken). Because taxable income is greater than book income, the difference is unfavorable.
52) Corporation A receives a dividend from Corporation B. Corporation A includes the dividend in its gross income for tax and financial accounting purposes (no book-tax difference). If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own? A) A owns less than 20 percent of the stock of B. B) A owns at least 20 but not more than 50 percent of the stock of B. C) A owns more than 50 percent of the stock of B. D) Cannot be determined.
A Explanation: Corporations generally include dividends from corporations in which they own less than 20 percent in both taxable and financial income (dividends are not income for book purposes if Corporation A accounts for its stock ownership under the equity method, which generally begins with a 20 percent ownership interest).
55) Over what time period do corporations amortize purchased goodwill for tax purposes? A) 180 months. B) 150 months. C) 60 months. D) None of the choices are correct.
A Explanation: Goodwill is amortized over 15 years (180 months) for tax purposes.
78) Which of the following is deductible in calculating DRD modified taxable income? A) Charitable contribution deduction. B) Net capital loss carrybacks. C) NOL carryovers. D) Dividends received deduction.
A Explanation: NOL carryovers, NCL carrybacks, and the DRD itself are not included in the DRD modified taxable income calculation.
69) Which of the following is allowable as a deduction in calculating a corporation's net operating loss? A) Charitable contribution deduction. B) Net capital loss carryback. C) Net operating loss carryover from other years. D) Both charitable contribution deduction and net operating loss carryover from other years are deductible in computing the current-year NOL.
A Explanation: Net capital loss carrybacks and net operating loss carryovers are not deductible in calculating a current-year net operating loss.
45) Which of the following does NOT create a permanent book-tax difference? A) Organizational and start-up expenses. B) Key employee death benefit income. C) Fines and penalties expenses. D) Municipal bond interest income.
A Explanation: 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.
88) Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income as of the end of the third quarter? A) $300,000. B) $320,000. C) $400,000. D) $480,000.
A Explanation: The annual estimated taxable income for the third quarter is determined by annualizing cumulative taxable income for the first half of the year. $300,000 = 2 × ($100,000 first quarter income + $50,000 second quarter income).
61) Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years—half in 2019 (the year of issue) and half in 2020. One thousand options are exercised in 2020 with a bargain element on each option of $6. What is the 2020 book-tax difference associated with the stock options? A) $14,000 unfavorable. B) $6,000 favorable. C) $24,000 unfavorable. D) $24,000 favorable. E) None of the choices are correct.
A Explanation: The book-tax difference in 2020 is the difference between $20,000 expensed for book purposes (50% × $40,000) and $6,000 deducted for tax purposes (1,000 options exercised × $6 bargain element). It is unfavorable because the book expense exceeds the tax deduction.
40) Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.
TRUE
87) Which of the following statements is false regarding corporate estimated tax payments? A) The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. B) Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000 (including the alternative minimum tax). C) Even though a corporation extends its tax return, it still must pay its tax liability for the year by three and one-half months after year-end. D) Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.
B Explanation: Corporations are required to make quarterly estimated payments if their federal income tax liability (including alternative minimum tax) is $500 or more.
64) Which of the following statements regarding capital gains and losses is false? A) In terms of tax treatment, corporations generally prefer capital gains to ordinary income. B) Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year. C) C corporations can carry back net capital losses three years and they can carry them forward for five years. D) Corporations must apply capital loss carrybacks and carryovers in a particular order.
B Explanation: Corporations cannot deduct capital losses against ordinary income.
53) 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) A owns less than 20 percent of the stock of B. B) A owns at least 20 but not more than 50 percent of the stock of B. C) A owns more than 50 percent of the stock of B. D) Cannot be determined.
B Explanation: 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.
50) iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense? A) Permanent; favorable. B) Permanent; unfavorable. C) Temporary; favorable. D) Temporary; unfavorable.
B Explanation: Interest expense on loans to acquire investments that produce tax-exempt income is not deductible under section 265.
49) TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Inc. is the beneficiary. What is the nature of the book-tax difference created by this expense? A) Permanent; favorable. B) Permanent; unfavorable. C) Temporary; favorable. D) Temporary; unfavorable.
B Explanation: Life insurance premiums for key employees are not deductible for tax purposes.
82) For Corporation P to file a consolidated tax return with Corporation S, P must own what percentage of P's voting stock? A) 100 percent. B) 80 percent. C) More than 50 percent. D) 50 percent or more.
B Explanation: P must own at least 80 percent of the voting power and value of S to file a consolidated tax return with S.
72) Which of the following is not required to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity? A) Approval of the payment from the board of directors. B) Approval from the IRS prior to making the contribution. C) Payment made within three and one-half months of the tax year-end. D) All of the choices are necessary.
B Explanation: Prior IRS approval is not required.
89) Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior-year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true? A) Rapidpro may use the prior-year tax liability to determine its first and second quarter estimated tax payments only since it is a large corporation. B) To avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current-year actual tax liability to determine its estimated tax payment). C) To avoid penalty, the third quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its third quarter estimated taxable income (assume it does not rely on its current-year actual tax liability to determine its estimated tax payment). D) None of the choices are correct.
B Explanation: Rapidpro can use its prior-year tax liability to determine only the first quarter payment. After that, it must use the current year's liability or the annualized income method to determine payments. The second quarter payment is based on the annualized tax liability from the first quarter taxable income.
47) Which of the following statements regarding book-tax differences is true? A) Corporations are not required to report book-tax differences on their income tax returns. B) Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences. C) Income excludable for tax purposes usually creates a temporary book-tax difference. D) None of the choices are correct.
B Explanation: Temporary book-tax differences will eventually reverse; if a difference is favorable one year, it will be unfavorable in another.
77) Which of the following statements regarding the dividends and/or the dividends received deduction (DRD) is true? A) Dividends are taxed at preferential rates for corporations as well as for individuals. B) The DRD can increase the net operating loss of a corporation. C) Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock. D) The DRD allows corporations to deduct the amount of dividends that they distribute.
B Explanation: The DRD limitation does not apply if the DRD creates or increases a corporation's net operating loss.
56) Which of the following statements regarding book-tax differences associated with purchased goodwill is false? A) It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes. B) 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. C) Temporary book-tax differences associated with goodwill are always favorable. D) 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.
C Explanation: It is possible to have an unfavorable difference in a year when goodwill impairment exceeds the allowable amortization deduction.
73) Which of the following is deductible in calculating the charitable contribution limit modified taxable income? A) Net capital loss carrybacks. B) Dividends received deduction. C) NOL carryovers. D) Charitable contributions.
C Explanation: NOL and net capital loss carryovers are deductible in calculating modified taxable income for the charitable contribution limit but carrybacks and the DRD are not.
83) Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false? A) In general, smaller corporations are required to complete Schedule M-1 while larger corporations are required to complete Schedule M-3. B) Schedule M-3 lists more book-tax differences than Schedule M-1. C) Both Schedules M-1 and M-3 reconcile to a corporation's bottom line taxable income. D) Schedule M-1 does not distinguish between temporary and permanent book-tax differences whereas Schedule M-3 does.
C Explanation: Neither M-1 nor M-3 fully reconciles book income to taxable income. Both schedules reconcile to taxable income before NOL deductions and before the dividends received deduction.
48) It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons? A) Temporary book-tax differences affect the computation of taxable income whereas permanent differences do not. B) All corporations are required to disclose book-tax differences as permanent or temporary on their tax returns. C) Temporary book-tax differences will reverse in future years whereas permanent differences will not. D) Neither temporary nor permanent book-tax differences will reverse in future years.
C Explanation: Temporary book-tax differences will reverse in future years whereas permanent differences will not.
85) What is the unextended due date of the tax return of a calendar-year C corporation for 2019? A) February 15. B) March 15. C) April 15. D) October 15.
C Explanation: The unextended tax return due date for a calendar-year corporation is three and a half months after year-end.
57) Which of the following describes the correct treatment of incentive stock options (ISOs)? A) Financial accounting—no expense; tax—no deduction. B) Financial accounting—no expense; tax—deduct bargain element at exercise. C) Financial—expense value over vesting period; tax—no deduction. D) Financial—expense value over vesting period; tax—deduct bargain element at exercise.
C Explanation: Under ASC 718, option values are expensed over the vesting period, creating an unfavorable permanent book-tax difference.
63) In January 2019, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2019, the company experienced a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2019, what is the nature of the book-tax difference due to the options exercised? A) Favorable and temporary. B) Favorable and permanent. C) Unfavorable and temporary. D) Unfavorable and permanent. E) Not enough information to determine.
D Explanation: The adjustment is unfavorable because the book deduction exceeds the tax deduction. The adjustment is permanent because it will not ever reverse.
74) 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? A) $6,000 current-year deduction; $1,500 carryover. B) $7,500 current-year deduction; $0 carryover. C) $1,200 current-year deduction; $6,300 carryover. D) $7,200 current-year deduction; $300 carryover.
D Explanation: 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.
46) Which of the following does NOT create a temporary book-tax difference? A) Deferred compensation. B) Bad-debt expense. C) Depreciation expense. D) Dividends received deduction.
D Explanation: The dividends received deduction is a tax-only deduction. It creates a favorable permanent book-tax difference. Difficulty: 1 Easy
51) AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and 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? A) Permanent; favorable. B) Permanent; unfavorable. C) Temporary; favorable. D) Temporary; unfavorable.
D Explanation: The gain recognized by AmStore is higher 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.
58) Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)? A) Financial—no expense; tax—no deduction. B) Financial—no expense; tax—deduct bargain element at exercise. C) Financial—expense value over vesting period; tax—no deduction. D) Financial—expense value over vesting period; tax—deduct bargain element at exercise.
D Explanation: 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.
27) Corporations are not allowed to deduct charitable contributions in excess of 10 percent of the corporation's taxable income (before the charitable contribution and certain other deductions).
TRUE
28) The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.
TRUE
10) For incentive stock options, the value of the options that accrue in a given year always creates a permanent, unfavorable book-tax difference.
TRUE
17) A corporation may carry a net capital loss back three years and forward five years.
TRUE
21) Net capital loss carryovers are deductible against capital gains in determining a corporation's net operating loss for the year.
TRUE
23) GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified nonprofit organization, in November of 2019. GenerUs made the payment to FoodBank on February 2, 2020. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2019 tax return.
TRUE
24) NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while capital loss carrybacks are not.
TRUE
25) Corporations may carry excess charitable contributions forward five years, but they may not carry them back.
TRUE
26) A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.
TRUE