Deck 5: Corporate Operations

Question 1

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.

Answer 1

False

Question 2

A corporation may carry a net capital loss back two years and forward 20 years.

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

Income that is included in book income,but excluded from taxable income,results in a favorable,permanent book-tax difference.

Question 5

Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

Question 6

Net operating losses generally create permanent book-tax differences.

Question 7

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.

Question 8

Corporations may carry a net operating loss sustained in the current year back two years and forward 20 years.

Question 9

For tax purposes,companies using nonqualified stock options deduct expenses in the year the options are exercised.

Question 10

For a corporation,goodwill created in an asset acquisition generally leads to temporary book-tax differences.

Question 11

A corporation may carry a net capital loss back three years and forward five years.

Question 12

In general,a corporation can elect to use either the accrual or cash method of accounting no matter how large the corporation.

Question 13

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

Question 14

Large corporations (gross receipts of $5 million or more)are allowed to use the cash method of accounting for at least the first two years of their existence.

Question 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.

Question 16

Corporations calculate adjusted gross income (AGI)in the same way as individuals.

Question 17

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.

Question 18

For incentive stock options granted when ASC 718 applies,the value of the options that accrue in a given year always creates a permanent,unfavorable book-tax difference.

Question 19

Bingo Corporation incurred a net operating loss in 2017.If Bingo carries the loss back,it must first carry the loss back to offset its 2016 taxable income and then carry any remaining loss back to offset its 2015 taxable income.

Question 20

For tax purposes,a corporation may deduct the entire amount of a net capital loss in the year incurred.

Question 21

The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.

Question 22

Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.

Question 23

Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

Question 24

An affiliated group must file a consolidated tax return.

Question 25

The dividends received deduction is subject to a limitation based on modified taxable income.

Question 26

For 2017,accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.

Question 27

Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year.

Question 28

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.

Question 29

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income,while NOL and capital loss carrybacks are not.

Question 30

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).

Question 31

The dividends received deduction cannot cause a net operating loss.The deduction can reduce income to zero but not below zero.

Question 32

Corporations compute their dividends received deduction by multiplying the dividend amount by 10%,50%,or 100% depending on their ownership in the distributing corporation's stock.

Question 33

Corporations may carry excess charitable contributions forward five years,but they may not carry them back.

Question 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).

Question 35

A C corporation reports its taxable income or loss on Form 1065.

Question 36

Calendar-year corporations that request an extension for filing their 2017 tax returns will have a tax return due date of October 15.

Question 37

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

Question 38

A corporation generally will report a favorable,temporary book-tax difference when it deducts a charitable contribution carryover.

Question 39

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank,a qualified non-profit organization,in November of 2017.GenerUs made payment to FoodBank on February 2,2018.GenerUs Inc.(a calendar-year corporation)may claim a deduction for the contribution on its 2017 tax return.

Question 40

Three brothers each own 20% of the stock in three corporations.Because no single brother owns more than 50% of a corporation,the tax law would not treat the corporations as a controlled group.

Question 41

A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.

Question 42

Urban Corporation receives tax-exempt income from Denver municipal bonds.All the proceeds from the bonds were used to fund public projects.In computing adjusted current earnings in its AMT computation,Urban must add back the interest income from its municipal bonds.

Question 43

The adjusted current earnings (ACE)adjustment is 75% of the difference between a corporation's alternative minimum taxable income before the ACE adjustment and its ACE.

Question 44

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.

Question 45

The tax rate for the corporate alternative minimum tax is a flat 26%.

Question 46

Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

Question 47

A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax.

Question 48

Small corporations (in terms of average annual gross receipts)are exempt from the alternative minimum tax.

Question 49

Which of the following does NOT create a temporary book-tax difference?

A) Deferred compensation.
B) Bad-debt expense.
C) Depreciation expense.
D) Domestic production activities deduction.

Question 50

Volos Company (a calendar-year corporation)began operations in March of 2015 and was not profitable through December of 2016.Volos has been profitable for the first quarter of 2017 and is trying to determine its first quarter estimated tax payment.It will have no estimated tax payment requirement in 2017 because it had no tax liability for the 2016 tax year and has been in business for at least 12 months.

Question 51

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.

Question 52

The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax.

Question 53

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 true.

Question 54

WFO Corporation has gross receipts according to the following schedule: 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.

Question 55

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

A) Temporary book-tax differences will reverse in future years whereas permanent differences will not.
B) Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C) Both temporary book-tax differences will reverse in future years whereas permanent differences will not and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns are reasons for why a corporation might distinguish between temporary and permanent differences.
D) Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.

Question 56

Corporations are allowed to deduct at least some AMT exemption regardless of profitability.

Question 57

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

Question 58

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.

Question 59

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.

Question 60

Minimum tax credits generated by the corporate AMT can be carried forward indefinitely.

Question 61

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.

Question 62

Which of the following describes the correct treatment of incentive stock options (ISOs)granted when ASC 718 applies?

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.

Question 63

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.

Question 64

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.

Question 65

In January 2017,Khors Company issues 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 2017,the company experiences 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 2017,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.

Question 66

Which of the following statements regarding incentive stock options (ISOs)is false?

A) If ASC 718 does not apply, ISOs do not create book-tax differences.
B) For ISOs granted when ASC 718 applies, book-tax differences are always unfavorable.
C) If ASC 718 applies, the value expensed for book purposes in a given year is the value of the options that accrue.
D) If ASC 718 applies, book-tax differences associated with ISOs may be either permanent or temporary.

Question 67

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.

Question 68

Which of the following describes the correct treatment of incentive stock options (ISOs)granted when ASC 718 does not apply?

A) Financial accounting-no expense; tax-no deduction.
B) Financial accounting-no expense; tax-deduct bargain element at exercise.
C) Financial accounting-expense value over vesting period; tax-no deduction.
D) Financial accounting-expense value over vesting period; tax-deduct bargain element at exercise.

Question 69

Which of the following describes the correct treatment of nonqualified stock options (NQOs)granted when ASC 718 did not apply?

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.

Question 70

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.

Question 71

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)that were granted when ASC 718 applies?

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.

Question 72

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.

Question 73

AmStore Inc.sold some of its heavy machinery at a gain.AmStore used the straight-line method for financial accounting depreciation and MACRS 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.

Question 74

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.

Question 75

In January 2016,Khors Company issues 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 2017,the company experiences a surge in its stock price,and Ms.Svaro exercises the options.The total bargain element at the time of exercise is $60,000.For 2017,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.

Question 76

Orange Inc.issued 20,000 nonqualified stock options valued at $40,000 (in total).The options vest over two years-half in 2017 (the year of issue)and half in 2018.One thousand options are exercised in 2018 with a bargain element on each option of $6.What is the 2018 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.

Question 77

Which of the following statements regarding nonqualified stock options (NQOs)is false?

A) If ASC 718 applies, book-tax differences associated with NQOs may be either permanent or temporary.
B) In a given year when ASC 718 applies, 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) Before ASC 718 applied, no expense recognition was required for NQOs for financial accounting purposes.
D) If ASC 718 does not apply, all stock option-related book-tax differences are temporary.

Question 78

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.

Question 79

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.

Question 80

Coop Inc.owns 40% 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 that 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.