Question 1

Saleh, an accountant, is the sole shareholder of Turquoise Corporation, a C corporation. Turquoise is a personal service corporation with a fiscal year ending September 30 (pursuant to a § 444 election). The corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2019. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2019, if the corporation is to continue to use its fiscal year without negative tax effects?
A) $0
B) $27,500
C) $82,500
D) $247,500
E) None of these.

Accepted Answer

To avoid negative tax effects, a personal service corporation must pay its owner-employees a salary that is at least equal to the lesser of 25% of the prior year's salary or the salary for the short period. Here, 25% of $330,000 is $82,500, which is the amount that must be paid to Saleh for the period October 1 through December 31, 2019.

Question 2

In general, the purpose of ASC 740 is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments for the current year and all future years.

Accepted Answer

ASC 740 is an accounting standard that provides guidance on how to account for income taxes. The purpose of ASC 740 is to ensure that businesses accurately report their tax liabilities and to provide users of financial statements with information about the taxes that a business is required to pay.

Question 3

In 2019, Bluebird Corporation had net income from operations of $100,000. Further, Bluebird recognized a long-term capital gain of $30,000 and a short-term capital loss of $45,000. Which of the following statements is correct?
A) Bluebird Corporation will have taxable income in 2019 of $100,000 and will have a net capital loss of $15,000 that can be carried back 3 years and forward 5 years.
B) Bluebird Corporation may use the capital loss to offset the capital gain and must carry the net capital loss of $15,000 forward five years as a short-term capital loss.
C) Bluebird Corporation may deduct $33,000 of the capital loss in 2019 and may carry forward the remainder of the capital loss indefinitely to offset capital gains.
D) Bluebird Corporation will have taxable income in 2019 of $85,000.
E) None of these.

Accepted Answer

Net income from operations is $100,000. Long-term capital gain is $30,000. Short-term capital loss is $45,000. Net capital loss is $15,000 ($30,000 - $45,000). Net capital loss can be carried back 3 years and forward 5 years.

Question 4

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

Accepted Answer

The current tax expense reported on GAAP financial statements reflects the amount of income taxes a company expects to pay to domestic or foreign governments for the current year, based on applicable tax laws and rates.

Question 5

Only U.S. corporations are included in a combined GAAP financial statement.

Accepted Answer

Combined GAAP financial statements can include entities from multiple countries, not just U.S. corporations, as long as they meet the criteria for combination under U.S. GAAP.

Question 6

Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2019, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2019, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2020, compute Ivory Corporation's 2019 deduction for the above amounts.
A) $250,000
B) $225,000
C) $200,000
D) $125,000
E) None of these.

Accepted Answer

The answer of Ivory Corporation, a calendar year, accrual method...

Question 7

A deferred tax liability represents a potential future tax benefit associated with income reported in the current-year
GAAP financial statements.

Accepted Answer

A deferred tax liability represents taxes that are accrued but not yet paid, typically arising from temporary differences between the accounting and tax treatments of income and expenses, indicating a future tax payment obligation, not a benefit.

Question 8

Temporary differences are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return but not in the same reporting period.

Accepted Answer

Temporary differences arise when there is a discrepancy between the timing of income or expense recognition in the financial statements prepared according to Generally Accepted Accounting Principles (GAAP) and the timing for tax purposes on the Federal income tax return. These differences will reverse and become aligned in future reporting periods.

Question 9

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

Accepted Answer

The answer of An example of a deferred tax asset...

Question 10

Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current year. In addition, Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss. Elk's taxable income is:
A) $63,000.
B) $73,000.
C) $80,000.
D) $90,000.
E) None of these.

Accepted Answer

Elk's taxable income is calculated as operating income ($370,000) minus operating expenses ($290,000), resulting in $80,000. The net capital loss ($17,000 short-term loss - $10,000 long-term gain = $7,000 loss) is not deductible against ordinary income for a C corporation, so it does not affect taxable income.

Question 11

On December 31, 2019, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?
A) In 2019, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2020.
B) In 2020, if payment was made at any time during that year.
C) In 2019, if payment was made on or before April 15, 2020.
D) In 2020, but only if payment was made on or before April 15, 2020.
E) None of these.

Accepted Answer

The answer of On December 31, 2019, Peregrine Corporation, an...

Question 12

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return if a proper election is made.

Accepted Answer

A domestic subsidiary that is 80% or more owned by a parent corporation can be included in the parent's consolidated tax return, provided a proper election is made to treat them as a consolidated group. This allows the parent and its subsidiaries to file a single consolidated tax return, combining their incomes, deductions, and credits.

Question 13

Patrick, an attorney, is the sole shareholder of Gander Corporation, a C corporation. Gander is a personal service corporation with a fiscal year ending November 30 (pursuant to a § 444 election). The corporation paid Patrick a salary of $180,000 during its fiscal year ending November 30, 2019. How much salary must Gander pay Patrick during the period December 1 through December 31, 2019, to permit the corporation to continue to use its fiscal year without negative tax effects?
A) $0
B) $30,000
C) $165,000
D) $180,000
E) None of these

Accepted Answer

The answer of Patrick, an attorney, is the sole shareholder...

Question 14

Permanent differences include items that appear in the Federal income tax return as income or deduction and in the
GAAP financial statements as revenue or expense but in different reporting periods.

Accepted Answer

Permanent differences are items that are included in the calculation of taxable income or financial income but never both. They do not reverse over time, unlike temporary differences which may appear in different periods for tax and financial reporting.

Question 15

Sunset Corporation (a C corporation) had operating income of $200,000 and operating expenses of $175,000. In addition, Sunset had a $30,000 long-term capital gain, a $52,000 short-term capital loss, and $5,000 tax-exempt interest income. What is Sunset Corporation's taxable income for the year?
A) $0
B) $3,000
C) $22,000
D) $30,000
E) None of these.

Accepted Answer

Sunset Corporation's taxable income calculation starts with its operating income of $200,000 minus operating expenses of $175,000, resulting in a net operating income of $25,000. The $30,000 long-term capital gain minus the $52,000 short-term capital loss results in a net capital loss of $22,000. However, corporations can only deduct up to $3,000 of net capital losses against ordinary income. Therefore, the $22,000 net capital loss reduces to a $3,000 deduction against the operating income. This results in a taxable income of $22,000 ($25,000 - $3,000). The $5,000 of tax-exempt interest income is not taxable. The correct taxable income is not explicitly listed among the options provided, making "None of these" the correct choice.

Question 16

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

Accepted Answer

A deferred tax liability represents a future tax payment a company expects to make to tax authorities in future years, due to temporary differences between its taxable income and its accounting earnings before taxes as reported in its financial statements.

Question 17

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. It's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

Accepted Answer

The answer of Yahr, Inc., is a domestic corporation with...

Question 18

Copper Corporation, a C corporation, had gross receipts of $25 million in 2016, $26 million in 2017, and $23 million in2018. Gold Corporation, a personal service corporation (PSC), had gross receipts of $24 million in 2016, $27 million in 2017, and $25 million in 2018. Which of the corporations will be allowed to use the cash method of accounting in
2019?
A) Copper Corporation only.
B) Gold Corporation only.
C) Both Copper Corporation and Gold Corporation.
D) Neither Copper Corporation nor Gold Corporation.
E) None of these.

Accepted Answer

Both Copper Corporation and Gold Corporation are allowed to use the cash method of accounting in 2019 because their average annual gross receipts for the three preceding tax years (2016, 2017, and 2018) do not exceed $26 million, which is the threshold for businesses to use the cash method of accounting as per the IRS guidelines effective from tax years beginning after December 31, 2017.

Question 19

Carrot Corporation, a C corporation, has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2019. Carrot Corporation had taxable income from other sources of $720,000. Prior years'
Transactions included the following: $$\begin{array} { l l r } 
2015 & \text { Net long-term capital gain } & \$ 150,000 \
2016 & \text { Net short-term capital gain } & 60,000 \
2017 & \text { Net short-term capital gain } & 45,000 \
2018 & \text { Net long-term capital gain } & 35,000
\end{array}$$ Compute the amount of Carrot's capital loss carryover to 2020.
A) $0
B) $32,000
C) $45,000
D) $185,000
E) None of these.

Accepted Answer

The answer of Carrot Corporation, a C corporation, has a...

Question 20

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current-year
GAAP financial statements.

Accepted Answer

A deferred tax asset arises when there are temporary differences between the tax base of an asset or liability and its carrying amount in the financial statements, leading to the recognition of taxable amounts in future periods when the asset is realized or the liability is settled. This results in a future tax benefit, as the company anticipates paying less tax in the future due to these differences.

Quiz 17: Corporations: Introduction and Operating Rules

In general, the purpose of ASC 740 is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments for the current year and all future years.

In 2019, Bluebird Corporation had net income from operations of $100,000. Further, Bluebird recognized a long-term capital gain of $30,000 and a short-term capital loss of $45,000. Which of the following statements is correct?

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

Only U.S. corporations are included in a combined GAAP financial statement.

A deferred tax liability represents a potential future tax benefit associated with income reported in the current-year GAAP financial statements.

Temporary differences are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return but not in the same reporting period.

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current year. In addition, Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss. Elk's taxable income is:

On December 31, 2019, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return if a proper election is made.

Permanent differences include items that appear in the Federal income tax return as income or deduction and in the GAAP financial statements as revenue or expense but in different reporting periods.

Sunset Corporation (a C corporation) had operating income of $200,000 and operating expenses of $175,000. In addition, Sunset had a $30,000 long-term capital gain, a $52,000 short-term capital loss, and $5,000 tax-exempt interest income. What is Sunset Corporation's taxable income for the year?

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. It's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current-year GAAP financial statements.