Question 1

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

Accepted Answer

False

Question 2

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

Accepted Answer

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.

Accepted Answer

False

Question 4

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

Accepted Answer

This statement is true. Book income and taxable income can differ due to differences in accounting methods and tax laws. If income is included in book income but excluded from taxable income, it can result in a favorable, permanent book-tax difference.

Question 5

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

Accepted Answer

Corporations and individual taxpayers have different standard deduction amounts for different reasons. The standard deduction for individuals is based on their filing status and income level, while the standard deduction for corporations is based on their type of business entity and the amount of taxable income they have. It is not solely based on their revenues, so the statement is false.

Question 6

Net operating losses generally create permanent book-tax differences.

Accepted Answer

Net operating losses create temporary book-tax differences because they can be carried forward or backward to offset taxable income in other years, affecting the timing of when income is taxed, not the total amount of income taxed over time.

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.

Accepted Answer

Goodwill impairment exceeding allowable amortization for tax purposes would create an unfavorable temporary book-tax difference, as it would lead to higher expenses recognized for financial reporting purposes than for tax purposes, reducing taxable income less than book income for that year.

Question 8

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

Accepted Answer

This statement is true. According to the Internal Revenue Service (IRS), corporations may carry back a net operating loss for two years and forward for up to 20 years to offset taxable income.

Question 9

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

Accepted Answer

This is true. Companies using nonqualified stock options can deduct expenses in the year the options are exercised for tax purposes.

Question 10

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

Accepted Answer

When a corporation acquires an asset, any goodwill created as a result of the transaction is subject to book-tax differences, meaning there may be temporary differences between how the goodwill is valued on the company's financial statements and its tax returns. This can result in deferred tax liabilities or assets.

Question 11

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

Accepted Answer

This is true according to the IRS regulations.

Question 12

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

Accepted Answer

Corporations with average annual gross receipts exceeding $25 million over the prior three years are generally required to use the accrual method of accounting.

Question 13

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

Accepted Answer

An unfavorable temporary book-tax difference causes taxable income to increase relative to book income, not decrease.

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.

Accepted Answer

Large corporations with gross receipts of $5 million or more are generally required to use the accrual method of accounting, not the cash method, from the start.

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.

Accepted Answer

A corporation can carry a net capital loss back three years and forward five years to offset capital gains in those years.

Question 16

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

Accepted Answer

Corporations calculate taxable income differently than individuals, therefore they do not calculate 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.

Accepted Answer

This statement is true because over the long term, a corporation's book income and taxable income must reconcile due to the requirement to file tax returns and the need to comply with Generally Accepted Accounting Principles (GAAP). Therefore, although temporary book-tax differences may arise in a given year, over the long term the total amount of income or deduction reported 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.

Accepted Answer

The value of the options that accrue in a given year is a deductible expense for tax purposes but is not recognized as an expense on the income statement. This 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.

Accepted Answer

The answer of Bingo Corporation incurred a net operating loss...

Question 20

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

Accepted Answer

Corporations can only deduct capital losses to the extent of their capital gains. If their losses exceed their gains, they can carry back the loss to the previous three years and forward to the next five years to offset gains in those years, but they cannot deduct the entire amount of a net capital loss in the year it was incurred.

Quiz 5: Corporate Operations

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

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

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.

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

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

Net operating losses generally create permanent book-tax differences.

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.

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

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

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

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

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

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

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.

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.

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

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.

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.

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.

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