REG Unit 3

In Year 1, Best Corp., an accrual basis calendar year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt financed and was held for over a year. Best recorded the following information for Year 1:

Loss from Best's operations	(10,000)
Dividends received	100,000
Taxable income (before dividends-received deduction)	90,000

Best's dividends-received deduction on its Year 1 tax return was:

a. $50,000

b. $100,000

c. $45,000

d. $65,000

c. $45,000

The selection of an accounting method for tax purposes by a newly incorporated C corporation:

a. must be disclosed in the company’s organizing documents

b. is made on the initial tax return by using the chosen method

c. is made by filing and request for a private letter ruling from the IRS

d. must first be approved by the company’s board of directors

b. is made on the initial tax return by using the chosen method

Which of the following taxpayers may use the cash method of accounting?

a. a qualified personal service corporation

b. a C corporation with annual gross receipts of $50,000,000

c. a tax shelter

d. a manufacturer

a. a qualified personal service corporation

Lake Corp., an accrual-basis calendar year C corporation, had the following Year 1 receipts:

Year 2 advanced rental payments where the lease ends in Year 3	125,000
Lease cancellation payment from a 5-year lease tenant	50,000

Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its Year 1 tax return?

a. $125,000

b. $175,000

c. $50,000

d. $0

b. $175,000

Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its Year 2 and Year 1 balance sheets, respectively. During Year 2, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace's Year 2 corporate income tax return, what amount should Ace include as rent revenue?

a. $50,000

b. $65,000

c. $60,000

d. $55,000

b. $65,000

Kell Corp. Income statement for the current year
Sales		900,000
Cost of sales		600,000
Gross margin		300,000
Operating expenses		250,000
Operating income		50,000
Other income:
Gain on sale of investments	15,000
Life insurance policy proceeds	10,000
Dividends	3,000	28,000
Total		78,000
Other expense:
Contributions		8,000
Income before income tax		70,000

 

The life insurance policy proceeds represent a lump sum payment in full as a result of the death of Kell's controller. Kell was the owner and beneficiary of this policy. In its current year income tax return, Kell should report taxable life insurance proceeds of:

a. $5,000

b. $8,000

c. $0

d. $10,000

c. $0

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, Year 1, amounted to $1,000,000. For the year ended December 31, Year 1, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:

Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness)	$1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses)	(5,000)
Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy)	3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries)	4,000
Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, Year 1, and is amortizing it over a 48-month period)	6,000
Contribution to a qualified charity (this contribution was authorized by Ral's board of directors in December Year 1, to be paid on January 31, Year 2)	75,000

On December 1, Year 1, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, Year 2 to cover rents for Year 2, Year 3, and Year 4. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, Year 1.

What amount should Ral include in its Year 1 taxable income for rent revenue?

a. $750

b. $27,000

c. $0

d. $9,000

b. $27,000

Pierce Corp., an accrual-basis, calendar-year C corporation, had the following Year 1 receipts:

Year 2 advance rental payments for a lease ending in Year 3	250,000
Lease cancellation payment from a five-year lease tenant	100,000

Pierce had no restrictions on the use of the advance rental payments and renders no services in connection with the rental income. What amount of gross income should Pierce report on its Year 1 tax return?

a. $350,000

b. $100,000

c. $250,000

d. $0

a. $350,000

This question is based on the following data:

Sydney Corporation Income Statement For the year ended December 31, Year 5
Sales				1,800,000
Cost of sales				(1,200,000)
Gross margin				600,000
Operating expenses				(500,000)
Operating income				100,000
Other income:
	Gain on sale of investments		30,000
	Life insurance policy proceeds		20,000
	Dividends		6,000
		Total		56,000
Other expense:
	Contributions			(18,000)
	Income before income tax			138,000

The life insurance policy proceeds represent a lump-sum payment in full as a result of the untimely death of Sydney's chief financial officer. Sydney was the owner and sole beneficiary of the policy; however, on receipt of the insurance proceeds, Sydney distributed the entire amount to the CFO's surviving spouse. On its Year 5 income tax return, Sydney should report taxable life insurance proceeds of:

a. $0

b. $20,000

c. $16,000

d. $10,000

a. $0

Nare, an accrual-basis, calendar-year taxpayer, owns a building that was rented to Mott under a 10-year lease expiring August 31, Year 3. On January 2, Year 1, Mott paid $30,000 as consideration for canceling the lease. On November 1, Year 1, Nare leased the building to Pine under a five-year lease. Pine paid Nare $5,000 rent for each of the two months of November and December, and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 1 income tax return?

a. $10,000

b. $15,000

c. $40,000

d. $45,000

d. $45,000

Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $35 million per year for the past three years. To purchase software, customers key in their credit card number to a secure website and receive a password that allows the customer to immediately download the software. As a result, Dart doesn't record accounts receivable or inventory on its books. Which of the following statements is correct?

a. dart may utilize any method of accounting dart chooses as long as dart consistently applies the method is chooses

b. dart must use the accrual method of accounting

c. dart may utilize the cash basis method of accounting until it incurs an additional $10 million to develop additional software

d. dart may use either the cash or accrual method of accounting as long as dart elected a calendar year-end

b. dart must use the accrual method of accounting

An S corporation engaged in manufacturing has a year-end of June 30. Revenue consistently has been more than $35 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year-end. Which of the following statements is correct if it changes to a C corporation?

a. the year-end will be December 31, using the accrual basis of accounting

b. the year-end will be December 31, using the cash basis of accounting

c. the year-end will be June 30, using the cash basis of accounting

d. the year-end will be June 30, using the accrual basis of accounting

d. the year-end will be June 30, using the accrual basis of accounting

A C corporation reported interest income as follows:

Interest Income Description	Amount
State-issued municipal bonds	$5,000
U.S. treasury bonds	$6,000
Corporate bonds	$3,000

What amount should the corporation report as taxable interest income on the Form 1120, U.S. Corporation Income Tax Return?

a. $8,000

b. $9,000

c. $14,000

d. $3,000

b. $9,000

In the case of a corporation that is not a financial institution, which of the following statements is correct with regard to the deduction for bad debts?

a. either the reserve method or the direct charge-off method may be used, if the election is made in the corporation’s first taxable year

b. a corporation is required to use the direct charge-off method rather than the reserve method

c. on approval form the IRS, a corporation may change its method from direct charge-off to reserve

d. if the reserve method was consistently used in prior years, the corporation may take a deduction for a reasonable addition to the reserve for bad debts

b. a corporation is required to use the direct charge-off method rather than the reserve method

Quail, Inc. manufactures consumer products and sells them to distributors. Quail advertises its products to increase sales and enhance the value of its trade name. What is the appropriate tax treatment for the advertising costs?

a. amortize the cost over 36 months

b. amortize the cost over 60 months

c. amortize the cost over 15 years

d. deduct the costs currently as ordinary and necessary business expenses

d. deduct the costs currently as ordinary and necessary business expenses

Axis Corp. is an accrual basis calendar year corporation. On December 13, Year 1, the board of directors declared a 2 percent of profits bonus to all employees for services rendered during Year 1 and notified them in writing. None of the employees own stock in Axis. The amount represents reasonable compensation for services rendered and was paid on March 13, Year 2. Axis' bonus expense may:

a. be deducted on Axis’ Year 1 tax return

b. not be deducted on Axis’ Year 1 tax return because the pre-share employee amount cannot be determined with reasonable accuracy at the time of the declaration of the bonus

c. be deducted on Axis’ Year 2 tax return

d. not be deducted on Axis’ tax return because payment is a disguised dividend

a. be deducted on Axis’ Year 1 tax return

A cash-basis individual taxpayer owns 55% of Stone, a C corporation. Stone uses the accrual method of accounting and owes the taxpayer $4,500 for rent incurred during Year 1. In Year 2, one-half of this expense was paid and reported as income by the taxpayer. What amount of this expense may Stone deduct for Year 2?

a. $0

b. $2,250

c. $4,500

d. $2,475

b. $2,250

As the result of an IRS audit of a C corporation and its sole shareholder, the IRS agent proposes that a portion of the shareholder's salary is unreasonable. Because the corporation has significant earnings and profits, the agent has determined that the unreasonable portion of the salary is a dividend. Which of the following is correct regarding the impact of the proposed adjustment to both the corporation and its shareholder?

a. allowance of the full amount as salary expense to the corporation and reclassification of the unreasonable portion of the shareholder’s salary to dividend treatment

b. partial disallowance of salary expense, a corresponding increase in deductible dividends to the corporation, and no effect on the shareholder’s return since both salaries and dividends are taxable income

c. full disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and no effect on the shareholder since both salaries and dividends are taxable income

d. partial disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and reclassification of the shareholder’s salary to dividend treatment

d. partial disallowance of salary expense, a corresponding increase in nondeductible dividends to the corporation, and reclassification of the shareholder’s salary to dividend treatment

For the current year, the three highest-paid employees at a publicly traded corporation earned nonperformance-based salaries as follows:

Employee	Salary
Chief executive officer	$3,000,000
Chief financial officer	$1,500,000
Chief information officer	$900,000

What amount may the corporation deduct in salaries expense for the current year?

a. $2,900,000

b. $5,400,000

c. $900,000

d. $3,000,000

a. $2,900,000

In Year 1, a corporation established a $10,000 reserve for credit losses and determined that $14,000 in credit losses were uncollectible. In Year 2, the corporation established a $15,000 reserve for credit losses and determined that $13,000 in credit losses were uncollectible. The corporation does not use the reserve method for calculating credit loss expense for tax purposes. Regarding credit losses, the corporation's tax deduction for Year 2 is:

a. $4,000 more than the book expense

b. equal to the book expense

c. $2,000 more than the book expense

d. $2,000 less than the book expense

d. $2,000 less than the book expense

On December 1, Year 3, a calendar-year, accrual-basis corporation determined that its employees were entitled to bonuses of $60,000. The employees were notified of their bonus amounts, and there were no conditions that would limit or eliminate the bonuses. The corporation notified the employees that the bonuses were to be paid as follows in Year 4: $20,000 on March 1; $20,000 on April 15; and $20,000 on June 1. The corporation subsequently paid those amounts according to that schedule. For federal tax purposes, what amount is the corporation entitled to deduct for Year 3?

a. $40,000

b. $60,000

c. $0

d. $20,000

d. $20,000

Which of the following costs are expensable/amortizable organizational expenditures?

a. commissions paid by the corporation to an underwriter

b. professional fees to issue the corporate stock

c. legal fees for drafting the corporate charter

d. printing costs to issue the corporate stock

c. legal fees for drafting the corporate charter

The costs of organizing a corporation:

a. may be deducted only in the year in which these costs are paid

b. are nondeductible capital expenditures

c. may be amortized over a period of not less than 180 months even if these costs are capitalized on the company’s books

d. may be deducted in full in the year in which these costs are incurred even if paid in later years

c. may be amortized over a period of not less than 180 months even if these costs are capitalized on the company’s books

Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1, Year 1, and incurred the following costs:

Legal fees to obtain corporate charter	41,000
Commission paid to underwriter	25,000
Other stock issue costs	10,000

Brown wishes to amortize its organizational costs over the shortest period allowed for tax purposes. In Year 1, what amount should Brown deduct for the organizational expenses?

a. $1,200

b. $8,600

c. $5,000

d. $6,200

d. $6,200

In Year 2, Garland Corp. contributed $40,000 to a qualified charitable organization. Garland's Year 2 taxable income before the deduction for charitable contributions was $410,000. Included in that amount is a $20,000 dividends received deduction. Garland also had carryover contributions of $5,000 from the prior year. In Year 2, what amount can Garland deduct as charitable contributions?

a. $43,000

b. $45,000

c. $41,000

d. $40,000

a. $43,000

Kell Corp. Income statement for the current year
Sales		900,000
Cost of sales		600,000
Gross margin		300,000
Operating expenses		250,000
Operating income		50,000
Other income:
Gain on sale of investments	15,000
Life insurance policy proceeds	10,000
Dividends	3,000	28,000
Total		78,000
Other expense:
Contributions		8,000
Income before income tax		70,000

 

All of the contributions were to qualified charitable organizations. When Kell computes the maximum allowable deduction for contributions, what percentage of contribution base income should Kell use?

a. 5%

b. 60%

c. 30%

d. 10%

d. 10%

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, Year 1, amounted to $1,000,000. For the year ended December 31, Year 1, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:

Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness)	$1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses)	(5,000)
Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy)	3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries)	4,000
Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, Year 1, and is amortizing it over a 48-month period)	6,000
Contribution to a qualified charity (this contribution was authorized by Ral's board of directors in December Year 1, to be paid on January 31, Year 2)	75,000

On December 1, Year 1, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, Year 2 to cover rents for Year 2, Year 3, and Year 4. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, Year 1.

With regard to Ral's contribution to the qualified charity, Ral:

a. can elect to carry forward indefinitely any portion of the $75,000 not deducted in Year 1 or Year 2

b. cannot deduct any portion of the $75,000 in year 1 because the contribution was not paid in year 1

c. can elect to deduct in its Year 1 return any portion of the $75,000 that does not exceed the deduction limitation for Year 1

d. can deduct the entire $75,000 in its Year 1 return because Ral reports on the accrual basis

c. can elect to deduct in its Year 1 return any portion of the $75,000 that does not exceed the deduction limitation for Year 1

Haze Corp., an accrual-basis, calendar-year C corporation, began business on January 1, Year 1, and incurred the following costs:

Underwriting fees to issue corporate stock	12,000
Legal fees to draft the corporate charter	41,000

What was the maximum amount of organization costs that Haze could deduct for tax purposes on its Year 1 income tax return?

a. $7,400

b. $0

c. $2,400

d. $5,000

a. $7,400

Roger Corp. had operating income of $300,000 after deducting $12,000 for charitable contributions made during the fiscal year, but not including dividends of $10,000 received from a 10 percent-owned domestic taxable corporation. How much is the base amount to which the percentage limitation should be applied in computing the maximum deduction for the charitable contribution?

a. $322,000

b. $312,000

c. $300,000

d. $317,000

a. $322,000

For Year 2, Quest Corp., an accrual basis calendar year C corporation, had an $8,000 unexpired charitable contribution carryover from Year 1. Quest's Year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, Year 2, Quest's board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, Year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its Year 2 income tax return?

a. $20,000

b. $8,000

c. $23,000

d. $15,000

a. $20,000

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income?

I. cost of merchandise

II. business expenses other than cost of merchandise

a. neither I nor II

b. I only

c. II only

d. both I and II

b. I only

A corporation's penalty for underpaying federal estimated taxes is:

a. not deductible

b. fully deductible in the year paid

c. fully deductible if reasonable cause can be established for the underpayment

d. partially deductible

a. not deductible

Kell Corp.
Income statement for the current year

Sales		900,000
Cost of sales		600,000
Gross margin		300,000
Operating expenses		250,000
Operating income		50,000
Other income:
Gain on sale of investments	15,000
Life insurance policy proceeds	10,000
Dividends	3,000	28,000
Total		78,000
Other expense:
Contributions		8,000
Income before income tax		70,000

Included in Kell's operating expenses were the following life insurance premiums:

Term life insurance premiums paid on the life of Kell's controller, with Kell as owner and beneficiary of policy	2,000
Group-term life insurance premiums paid on employees' lives, with the employees' dependents as owners and beneficiaries of the policies	18,000

In its current year income tax return, what amount should Kell deduct for life insurance premiums?

a. $0

b. $2,000

c. $18,000

d. $20,000

c. $18,000

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, Year 1, amounted to $1,000,000. For the year ended December 31, Year 1, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:

Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness)	$1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses)	(5,000)
Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy)	3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries)	4,000
Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, Year 1, and is amortizing it over a 48-month period)	6,000
Contribution to a qualified charity (this contribution was authorized by Ral's board of directors in December Year 1, to be paid on January 31, Year 2)	75,000

 

On December 1, Year 1, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, Year 2 to cover rents for Year 2, Year 3, and Year 4. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, Year 1.

What amount should Ral deduct for keyman and group life insurance premiums in computing taxable income for Year 1?

a. $3,000

b. $0

c. $4,000

d. $7,000

c. $4,000

Nichol Corp. gave gifts to 15 individuals who were customers of the business. The gifts were not in the nature of advertising. The market values of the gifts were as follows:

5 gifts @ $15 each

9 gifts @ $30 each

1 gift @ $100

What amount is deductible as business gifts?

a. $0

b. $325

c. $75

d. $445

b. $325

A corporation had the following entertainment expense items for the year:

• Membership dues to an athletic club: $60,000

• Theater tickets: $20,000

• Fees to a social club: $12,000

What amount of book/tax difference is attributable to the entertainment expenses?

a. $0

b. $46,000

c. $60,000

d. $92,000

d. $92,000

A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory. Which of the following statements is accurate regarding the use of the LIFO method?

a. the LIFO method can be used for tax purposes even if the FIFO method is used for financial statement purposes

b. the taxpayer is required to receive permission each year from the Internal Revenue Service to continue the use of the LIFO method

c. under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods

d. in periods of rising prices, the LIFO method results in a lower cost of sales and higher taxable income, when compared to the FIFO method

c. under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods

What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year?

a. $3,000

b. $0

c. $10,000

d. $5,000

b. $0

A C corporation has gross receipts of $150,000, $35,000 of other income, and deductible expenses of $95,000. In addition, the corporation incurred a net long-term capital loss of $25,000 in the current year. What is the corporation's taxable income?

a. $115,000

b. $87,000

c. $90,000

d. $65,000

c. $90,000

The corporate dividends-received deduction:

a. may be claimed by S corporations

b. is unaffected by the percentage of the investee’s stock owned by the investor corporation

c. is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period

d. must exceed the applicable percentage of the recipient shareholder’s taxable income

c. is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period

Kisco Corp.'s taxable income before taking the dividends-received deduction was $70,000. This includes $10,000 in dividends from an unrelated taxable domestic corporation. Given a 21 percent tax rate, what would Kisco's income tax be before any credits?

a. $13,650

b. $15,750

c. $10,000

d. $12,500

a. $13,650

Acorn Inc. had the following items of income and expense:

Sales	500,000
Cost of sales	250,000
Dividends received	25,000

The dividends were received from a corporation of which Acorn owns 30 percent. In Acorn's corporate income tax return, what amount should be reported as income before special deductions?

a. $250,000

b. $275,000

c. $508,750

d. $525,000

b. $275,000

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral's retained earnings at January 1, Year 1, amounted to $1,000,000. For the year ended December 31, Year 1, Ral's book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:

Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness)	$1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses)	(5,000)
Keyman insurance premiums paid on Budd's life (Ral is the beneficiary of this policy)	3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral's four employees (the employees' spouses are the beneficiaries)	4,000
Amortization of cost of acquiring a perpetual dealer's franchise (Ral paid $48,000 for this franchise on July 1, Year 1, and is amortizing it over a 48-month period)	6,000
Contribution to a recognized, qualified charity (this contribution was authorized by Ral's board of directors in December Year 1, to be paid on January 31, Year 2)	75,000

On December 1, Year 1, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, Year 2 to cover rents for Year 2, Year 3, and Year 4. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, Year 1.

What portion of the dividend revenue should be included in Ral's Year 1 taxable income?

a. $200

b. $500

c. $900

d. $150

b. $500

During the current year, Nale Corp. received dividends of $1,000 from a 10 percent-owned taxable domestic corporation. When Nale computes the maximum allowable deduction for contributions in its current year return, the amount of dividends to be included in the calculation of taxable income is:

a. $1,000

b. $0

c. $300

d. $200

a. $1,000

Parent Corp. owns 15% of Sub Corp. Parent has gross income of $43,000 and allowable deductions of $40,000 before considering any dividends-received deduction (DRD). Included in the $43,000 gross income is $8,000 in dividends from Sub.

What is the maximum DRD available to Parent?

a. $1,950

b. $8,000

c. $4,000

d. $1,500

c. $4,000

Buster-Copper Corp. received the following dividends during the taxable year. Each investment has been owned for the previous five years.

Received From	Amount	Percentage Owned
Ronald Corp.	$10,000	10%
Donald Corp.	$6,000	25%
Fence Corp.	$1,000	2%

What amount is the dividends-received deduction?

a. $11,050

b. $0

c. $8,500

d. $9,400

d. $9,400

Pope, a C corporation, owns 15% of Arden Corporation. Arden paid a $3,000 cash dividend to Pope. What is the amount of Pope's dividends-received deduction?

a. $1,950

b. $3,000

c. $0

d. $1,500

d. $1,500

Beta, a C corporation, reported the following items of income and expenses for the year:

Gross income	600,000
Dividend income from a 30% owned domestic corporation	100,000
Operating expenses	400,000

What is Beta's taxable income for the year?

a. $250,000

b. $300,000

c. $235,000

d. $200,000

c. $235,000

Kell Corp. Income statement for the current year
Sales		900,000
Cost of sales		600,000
Gross margin		300,000
Operating expenses		250,000
Operating income		50,000
Other income:
Gain on sale of investments	15,000
Life insurance policy proceeds	10,000
Dividends	3,000	28,000
Total		78,000
Other expense:
Contributions		8,000
Income before income tax		70,000

 

The dividends were declared and received in the current year from an unrelated taxable domestic corporation in which Kell owned less than 1% of the investee’s stock. Kell had no portfolio indebtedness. In its current year income tax return, Kell should claim a dividends-received deduction of:

a. $0

b. $1,950

c. $100

d. $1,500

d. $1,500

Which of the following entities must include in gross income 100% of dividends received from unrelated taxable domestic corporations in computing regular taxable income?

		Personal service corporations	Personal holding companies
	A.	Yes	Yes
	B.	No	No
	C.	Yes	No
	D.	No	Yes

a. Yes, Yes

Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?

		Interest Incurred on Loan to Carry U.S. Obligations	Provision for State Corporation Income Tax
	A.	Yes	Yes
	B.	No	Yes
	C.	No	No
	D.	Yes	No

c. No, No

In Year 1, Starke Corp., an accrual basis calendar year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What amount should Starke's taxable income be as reconciled on Starke's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?

a. $500,000

b. $330,000

c. $502,000

d. $550,000

c. $502,000

During the current year, a corporation received $50,000 of interest income on bonds issued by the state in which it has its principal office. The state used the proceeds of the bonds for road construction projects. Which of the following statements best characterizes the interest income to be recognized by the corporation in the current year?

a. interest of $50,000 is included in neither the corporation’s financial statements nor its taxable income

b. interest of $50,000 is included in both the corporation’s financial statements and its taxable income

c. interest of $50,000 is included in the corporation’s financial statements and is reported on its tax return as a temporary difference

d. interest of $50,000 is included in the corporation’s financial statements and is reported on its tax return as a permanent difference

d. interest of $50,000 is included in the corporation’s financial statements and is reported on its tax return as a permanent difference

During the current tax year, a corporation incurred the following fines and penalties:

• A customer penalty for failure to complete a contract timely, $3,200

• A state government penalty for code violations, $2,100

• Late fees accrued and paid for late payment to suppliers, $6,100

What amount is the total book/tax difference created by these penalties?

a. $2,100

b. $5,300

c. $0

d. $11,400

a. $2,100

A corporation with assets in excess of $10 million incurred the following expenses during the tax year:

Expense Description	Amount
Current state income taxes	$20,000
Business entertainment expenses	$7,000
Tax depreciation in excess of book depreciation	$3,000

What amount of the temporary differences between the tax return and the books must be reported on Schedule M-3?

a. $17,000 more taxable income than book income

b. $7,000 more taxable income than book income

c. $4,000 more taxable income than book income

d. $3,000 less taxable income than book income

d. $3,000 less taxable income than book income

Lite-Mart, a C corporation, had a beginning credit balance in its warranty reserve account of $120,000. During the year, Lite-Mart accrued estimated warranty expense of $16,000. At the end of the year, Lite-Mart's warranty reserve had a $90,000 credit balance. What amount of warranty expense should Lite-Mart deduct?

a. $14,000

b. $46,000

c. $30,000

d. $16,000

b. $46,000

Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up's federal income tax return?

a. $10,000 increase in taxable income

b. $5,000 increase in taxable income

c. $5,000 decrease in taxable income

d. $10,000 decrease in taxable income

a. $10,000 increase in taxable income

An accrual-basis C corporation that prepared its financial statements based on GAAP recorded $800,000 of bad debt expense. The total amount of bad debts that actually became worthless was $930,000. In respect to bad debt expense, what type of disclosure should the corporation show on Schedule M-3?

a. a permanent bad debt expense difference of $130,000

b. a temporary difference in which tax deductions exceed book deductions by $130,000

c. no difference between bad debt expense per income statement and deduction per tax return

d. a temporary difference in which book deductions exceed tax deduction by $130,000

b. a temporary difference in which tax deductions exceed book deductions by $130,000

Azure, a C corporation, reports the following:

• Pretax book income of $543,000.

• Depreciation on the tax return is $20,000 greater than depreciation on the financial statements.

• Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements.

• Fines for pollution appear as a $10,000 expense in the financial statements.

• Interest earned on municipal bonds is $25,000.

What is Azure's taxable income?

a. $528,000

b. $544,000

c. $559,000

d. $543,000

b. $544,000

Birch Corp. is an accrual basis calendar year C corporation. Its reported book income before federal income taxes was $250,000, which included $46,000 in municipal bond interest income. Birch's book expenses included $4,000 of interest incurred on indebtedness used to carry the municipal bonds. What should be the amount of Birch's taxable income, as reconciled on Birch's Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return?

a. $204,000

b. $208,000

c. $250,000

d. $254,000

b. $208,000

Prime Corp. is an accrual basis, calendar year C corporation. Its current year reported book income before federal income taxes was $300,000, which included $17,000 corporate bond interest income. A $20,000 expense for term life insurance premiums on corporate officers was incurred. Prime was the policy owner and beneficiary. What was Prime's current year taxable income as reconciled on Prime's Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return?

a. $280,000

b. $320,000

c. $283,000

d. $300,000

b. $320,000

Vital Corp. is an accrual basis, calendar year C corporation. Its Year 2 reported book income before federal income taxes was $500,000. Included in that amount were the following items:

Year 1 state franchise tax refund	$50,000
Municipal bond interest income	7,500

What should be the amount of Vital's Year 2 taxable income as reconciled on Vital's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?

a. $442,500

b. $450,000

c. $492,500

d. $500,000

c. $492,500

For the current year, Kelly Corp. had net income per books of $300,000 before the provision for federal income taxes. Included in the net income were the following items:

Dividend income from an unaffiliated domestic taxable corporation (taxable income limitation does not apply and there is no portfolio indebtedness)	50,000
Bad debt expense (represents the increase in the allowance for doubtful accounts)	80,000

Assuming no bad debt was written off, what is Kelly's taxable income for the current year?

a $355,000

b. $330,000

c. $380,000

d. $250,000

a $355,000

Hook Corp., a calendar year C corporation, reported the following Year 2 financial information:

Net income per books	$ 210,000
Federal income taxes per books	114,000
Tax depreciation in excess of book depreciation	66,000
Charitable contributions per books	46,000

What is Hook's taxable income?

a. $212,000

b. $273,600

c. $390,000

d. $229,500

b. $273,600

In Year 2, a corporation had book income and taxable income of $200,000 before taking the corporation's charitable deductions into account. The corporation made $50,000 in charitable contributions during Year 2. How will the corporation's tax deduction for the charitable contribution differ from its deduction for financial accounting purposes?

a. the tax deduction will be $20,000 lower than the financial accounting expense

b. the tax deduction will be $30,000 greater than the financial accounting expense

c. the tax deduction will be the same as the financial accounting expense

d. the tax deduction will be $30,000 lower than the financial accounting expense

d. the tax deduction will be $30,000 lower than the financial accounting expense

A C corporation had business meals of $40,000 and business entertainment of $12,000. Based on this information, what increase to book income should be made in calculating the corporation's taxable income?

a. $32,000

b. $26,000

c. $46,000

d. $52,000

a. $32,000

A corporation has book income of $50,000 in the current year, which includes the following:

State income taxes	$3,000
Federal income taxes	$12,000

What is the corporation's taxable income for the current year?

a. $65,000

b. $53,000

c. $62,000

d. $50,000

c. $62,000

Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback-carryover years?

a. foreign tax credit

b. minimum tax credit

c. general business credit

d. work opportunity tax credit

c. general business credit

Foreign income taxes paid by a corporation:

a. may be claimed only as a credit

b. may be claimed only as a deduction

c. may be claimed either as a deduction or as a credit, at the option of the corporation

d. do not qualify either as a deduction or as a credit

c. may be claimed either as a deduction or as a credit, at the option of the corporation

The accumulated earnings tax can be imposed:

a. on personal holding companies

b. on both partnerships and corporations

c. regardless of the number of stockholders in a corporation

d. on companies that make distributions in excess of accumulated earnings

c. regardless of the number of stockholders in a corporation

Edge Corp., a calendar-year C corporation, had a net operating loss and zero tax liability for its Year 1 tax year. To avoid the penalty for underpayment of estimated taxes, Edge could compute its first quarter Year 2 estimated income tax payment using the:

		Annualized income method	Preceding year method
	A.	No	No
	B.	No	Yes
	C.	Yes	No
	D.	Yes	Yes

c. Yes, No

Blink Corp., an accrual basis calendar year corporation, carried back a net operating loss for the tax year ended December 31, Year 1. Blink's gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, Year 2. Which method(s) of estimated tax payment can Blink use for its quarterly payments during the Year 2 tax year to avoid underpayment of federal estimated taxes?

I. 100% of the preceding tax year method

II. annualized income method

a. both I and II

b. II only

c. neither I nor II

d. I only

b. II only

No penalty will be imposed on a corporation for underpayment of estimated tax for a particular year if:

a. the corporation is a personal holding company

b. estimated tax payments for the year equal at least 80% of the tax shown on the return for that year

c. the underpayment of tax for that year is less than $500

d. the accumulated earnings tax is at least $1,000

c. the underpayment of tax for that year is less than $500

A C corporation had a federal income tax liability of $40,000 for each of the last five years, each covering a 12-month period. The tax for the current year is $48,000. What is the lowest amount that must have been paid as estimated taxes for the current year so that no penalty for underpayment is applicable?

a. $40,000

b. $48,000

c. $44,000

d. $52,800

a. $40,000

A corporation has $500,000 in net book income, including deductions for the following items:

Description	Amount
Federal income tax	$100,000
State income tax	$50,000
Foreign income tax	$20,000

The corporation chooses to take the benefit of the foreign tax credit under Section 901. What should the corporation report as its taxable income?

a. $520,000

b. $500,000

c. $600,000

d. $620,000

d. $620,000

The accumulated earnings tax can be imposed:

a. on both partnerships and corporations

b. only on parent-subsidiary affiliated groups

c. on companies that make distributions in excess of accumulated earnings

d. on regular corporations not classified as personal holding companies

d. on regular corporations not classified as personal holding companies

Kari Corp., a manufacturing company, was organized on January 2, Year 1. Its Year 1 federal taxable income was $400,000 and its federal income tax was $100,000. What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for Year 1 if Kari takes only the minimum accumulated earnings credit?

a. $50,000

b. $300,000

c. $150,000

d. $0

a. $50,000

Ati Corp. has two common stockholders. Ati derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Ati is a:

a. corporation subject to the accumulated earnings tax

b. corporation subject to tax only on income not distributed to stockholders

c. regulated investment company

d. personal holding company

d. personal holding company

Edge Corp. met the stock ownership requirements of a personal holding company. What sources of income must Edge consider to determine if the income requirements for a personal holding company have been met?

I. interest earned on tax-exempt obligations

II. dividends received from an unrelated domestic corporation

a. I only

b. II only

c. both I and II

d. neither I nor II

b. II only

The personal holding company income test requires the company's income for a given taxable year to be at least:

a. 30% of undistributed personal holding company income

b. 50% of taxable income

c. 60% of adjusted ordinary gross income

d. 80% of ordinary gross income

c. 60% of adjusted ordinary gross income

Kane Corp. is a calendar year domestic personal holding company. Which deduction(s) must Kane make from Year 1 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?

		Federal income taxes	Net long-term capital gain less related federal income taxes
	A.	No	No
	B.	No	Yes
	C.	Yes	No
	D.	Yes	Yes

d. Yes, Yes

The following information pertains to Hull, Inc., a personal holding company, for the current year:

Undistributed personal holding company income	$100,000
Dividends paid during the current year	20,000
Consent dividends reported in the current year individual income tax returns of the holders of Hull's common stock, but not paid by Hull to its stockholders	10,000

In calculating its current year personal holding company tax, what amount should Hull deduct for dividends paid?

a. $20,000

b. $10,000

c. $30,000

d. $0

c. $30,000

What is the carryforward period for a net operating loss occurring in tax years after December 31, 2017, and before January 1, 2021?

a. 20-year carryforward

b. no carryforward

c. five-year carryforward

d. indefinite carryforward

d. indefinite carryforward

A C corporation's net capital losses are:

a. deductible from the corporation’s ordinary income only to the extent of $3,000

b. carried back 3 years and forward 5 years

c. carried forward indefinitely until fully utilized

d. deductible in full from the corporation’s ordinary income

b. carried back 3 years and forward 5 years

Jones Inc., a C corporation, has operating revenues of $170,000, operating expenses of $210,000, and dividend income of $20,000 in the current year. The dividend income was paid by a domestic company in which Jones Inc. holds a 15 percent ownership stake. What is Jones Inc.'s net operating loss for the current year?

a. $30,000

b. $24,000

c. $0

d. $20,000

a. $30,000

Smith Corp., a C corporation, earned $51,000 of taxable income before its NOL deduction in the current year. Smith Corp. still has a $45,000 net operating loss carryforward that was generated in 2016. What is Smith Corp.'s taxable income for the current year after considering the NOL carryforward from 2016?

a. $15,000

b. $6,000

c. $10,200

d. $0

b. $6,000

Smith Corp., a C corporation, earned $51,000 of taxable income before its NOL deduction in the current year. Smith Corp. has a $45,000 net operating loss carryforward that was generated last year (a post-2017 year). What is Smith Corp.'s taxable income for the current year after considering the NOL carryforward from last year?

a. $0

b. $15,000

c. $10,200

d. $6,000

c. $10,200

Garcia Corp., a C corporation, earned $51,000 of taxable income before its NOL deduction this year. Garcia Corp. has a $60,000 net operating loss carryforward that was generated last year (a post-2017 year). What is Garcia Corp.'s current year taxable income (loss) after the NOL deduction?

a. $3,000

b. $10,200

c. ($9,000)

d. $0

b. $10,200

Holland Inc. has operating revenues of $130,000, operating expenses of $200,000, and a capital gain of $30,000. Holland Inc. also has an unexpired capital loss carryforward from a prior year of $14,000. What is Holland Inc.'s net operating loss in the current year?

a. $0

b. $40,000

c. $54,000

d. $70,000

c. $54,000

Dreamscape, Inc., a widget retailer, had taxable income of $150,000 from operations during its taxable year. In addition, Dreamscape incurred a $35,000 loss from the sale of investment land, a capital asset. No other gains or losses were generated during the taxable year, nor had been in past years. In Dreamscape's tax return for that year, what is the proper treatment of the $35,000 loss?

a. use $3,000 of the loss to reduce the taxable income to $147,000 and carry the remaining $32,000 forward for 5 years

b. carry the $35,000 capital loss forward for five years

c. the $35,000 capital loss can be used in the current year to reduce taxable income to $115,000

d. use $3,000 of the loss to reduce the taxable income of $147,000 carry the remaining $32,000 forward for 3 years

b. carry the $35,000 capital loss forward for five years

James Corp., a C corporation, sold two capital assets in the current year. The first asset was sold at a gain of $15,000, and the second was sold at a loss of $22,000. How much net capital gain or (loss) will James Corp. recognize in the current year?

a. $15,000

b. ($3,000)

c. ($7,000)

d. $0

d. $0

James Corp., a C corporation, sold two capital assets in the current year. One asset was sold at a gain of $15,000, and the other was sold at a loss of $22,000. Last year, James Corp. had a $2,000 net capital loss. James Corp. has no other capital asset sales in any other years. What is James Corp.'s current year net capital gain (loss) on its current year tax return?

a. ($3,000)

b. ($7,000)

c. $0

d. ($9,000)

c. $0