Question 1

New York,Inc.owns 100% of Brooklyn,Inc.and Queens,Inc.Taxable income for the three corporations for their first year was as follows:   Which of the following statements is false?

Accepted Answer

According to the IRS regulations, a foreign corporation cannot be a member of a consolidated return. Therefore, if Brooklyn, Inc. is a foreign corporation, it cannot be part of a consolidated return, making statement C false. Statements A, B, and D are true. Consolidated taxable income is calculated by adding the taxable income of all the corporations that are part of the group. If a consolidated return is filed, a loss from one corporation can offset profits of another corporation, resulting in a tax benefit. Electing to file a consolidated tax return is optional for affiliated groups.

Question 2

Aaron,Inc.is a nonprofit corporation that collects and distributes food for needy families.Aaron,Inc.also operates a small grocery store for profit.Which of the following statements is true?

Accepted Answer

Only the income from the grocery store is taxable, because it is operated for profit. The income from the collection and distribution of food is likely considered a charitable activity and therefore exempt from taxation.

Question 3

Sonic Corporation has a 35% marginal tax rate and received $10,000 of dividends from Roller,Inc.,a U.S.corporation in which Sonic owns less than 2% of the outstanding stock.Sonic's effective tax rate on the Roller dividend is:

Accepted Answer

Sonic Corporation can claim a 50% dividends received deduction (DRD) for owning less than 20% of Roller, Inc. Therefore, the taxable portion of the dividend is $5,000 ($10,000 x 50%). The tax on this amount at a 35% rate is $1,750, resulting in an effective tax rate of 10.5% ($1,750/$10,000).

Question 4

In its first taxable year,Platform,Inc.generated a $200,000 net operating loss and made a $10,000 cash donation to a local charity.In its second year,Platform generated $350,000 operating income and made a $20,000 donation to the same charity.Compute Platform's taxable income for its second year.

Accepted Answer

Platform's net operating loss carryforward from its first year is $200,000. In its second year, Platform generated $350,000 operating income, which is more than enough to offset the net operating loss carryforward. Therefore, Platform's taxable income for its second year is $350,000 - $200,000 = $150,000. However, Platform also made a $20,000 donation to charity, which is deductible from taxable income. Therefore, Platform's taxable income for its second year is $150,000 - $20,000 = $130,000.

Question 5

Which of the following is a primary legal characteristic of the corporate form of business?

Accepted Answer

The management of a corporation is typically centralized in a Board of Directors elected by the shareholders, which differentiates it from other forms of business such as sole proprietorships or partnerships where management is often handled by the owners of the business themselves. B, C, and D are not primary legal characteristics of the corporate form of business – shareholders generally have the right to sell their stock without seeking permission, the life of the corporation is typically not tied to the existence of its shareholders, and shareholders are generally not personally liable for the debts of the corporation (unless they engage in illegal or unethical behavior).

Question 6

The stock of Wheel Corporation,a U.S.company,is publicly traded,with no single shareholder owning more than 5 percent of its outstanding stock.Wheel owns 90 percent of the outstanding stock of Axle,Inc,also a U.S.company.Axle owns 100% of the outstanding stock of Tire Corporation,a German company.Wheel and Tire each own 50 percent of the outstanding stock of Bumper,Inc.,a U.S.company.Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation,a U.S.company.Which of these corporations form an affiliated group eligible to file a consolidated tax return?

Accepted Answer

The answer of The stock of Wheel Corporation,a U.S.company,is publicly...

Question 7

Westside,Inc.owns 15% of Innsbrook's common stock.This year,Westside generated $50,000 operating income and received $20,000 dividends from Innsbrook.Westside's taxable income is:

Accepted Answer

Westside's taxable income includes its operating income of $50,000 plus the dividends received from Innsbrook. Since Westside owns less than 20% of Innsbrook, it can exclude 50% of the dividends received from taxation. Therefore, $20,000 x 50% = $10,000 is excluded, and $10,000 is taxable. Thus, taxable income is $50,000 + $10,000 = $56,000.

Question 8

Corporations report their taxable income and calculate the federal income tax on Form 1040.

Accepted Answer

Corporations use Form 1120 to report their taxable income and calculate their federal income tax. Form 1040 is used by individuals to report their personal income and calculate their personal income tax.

Question 9

Which of the following statements regarding the tax treatment of corporate dividends is true?

Accepted Answer

Dividend payments between members of an affiliated group of corporations filing a consolidated return are generally tax exempt to avoid double taxation within the group.

Question 10

Wave Corporation owns 90% of the stock of Surf,Inc.Each corporation reports the following separate items for the current tax year:   Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

Accepted Answer

To calculate consolidated taxable income, we need to add the taxable income of both corporations, subtract any intercompany transactions, and then apply the applicable tax rate. 
Wave Corporation's taxable income: $250,000
Surf, Inc.'s taxable income: $160,000 x 90% (since Wave owns 90% of Surf) = $144,000
Total consolidated taxable income: $250,000 + $144,000 = $394,000
Therefore the correct answer is option B, which is $395,000 (rounded off to the nearest thousand).

Question 11

Corporations are rarely targeted in political debates over taxation.

Accepted Answer

Corporations are often targeted in political debates over taxation, as they are seen as having the potential to contribute a significant amount to government revenue through taxes. Debate often revolves around the appropriate tax rate and which types of corporations should be taxed.

Question 12

Thunder,Inc.has invested in the stock of several corporations and has $500,000 operating income before dividends:   Calculate Thunder's dividends-received deduction and taxable income:

Accepted Answer

The dividends-received deduction (DRD) is calculated as follows:
- 70% DRD for dividends received from corporations in which Thunder, Inc. owns less than 20% of the stock: $100,000 x 70% = $70,000
- 80% DRD for dividends received from corporations in which Thunder, Inc. owns 20% or more but less than 80% of the stock: $120,000 x 80% = $96,000
- 100% DRD for dividends received from corporations in which Thunder, Inc. owns 80% or more of the stock: $80,000 x 100% = $80,000

Total DRD = $70,000 + $96,000 + $80,000 = $246,000

Taxable income = operating income before dividends - DRD = $500,000 - $246,000 = $254,000

Therefore, Choice B is the correct answer, with a DRD of $246,000 and taxable income of $254,000.

Question 13

Loda Inc.made an $8,300 nondeductible charitable contribution and a $2,000 nondeductible political contribution this year.Which of the following statements is true?

Accepted Answer

Nondeductible charitable contributions are usually considered temporary book/tax differences since they may become deductible in the future if the company's taxable income changes. On the other hand, political contributions are typically permanent book/tax differences that cannot be deducted for tax purposes. Therefore, Choice C is the correct answer.

Question 14

Fleet,Inc.owns 85% of the stock of Pete,Inc.and 35% of the stock of Zete,Inc.The remaining stock of Pete and Zete is owned by unrelated individuals.Which of the following statements is correct?

Accepted Answer

An affiliated group is a group of corporations connected through stock ownership, with one corporation owning at least 80% of the stock of another corporation.

In this case, Fleet owns 85% of the stock of Pete, Inc. This meets the requirement of at least 80% ownership, so Fleet and Pete are considered an affiliated group.

However, Fleet only owns 35% of the stock of Zete, Inc. This is not enough ownership to form an affiliated group with Zete. Therefore, answer choice B is incorrect.

Answer choice A is incorrect because it suggests that all three companies are in an affiliated group, which is not the case.

Answer choice D is incorrect because there is at least one affiliated group present (Fleet and Pete).

Question 15

The burden of corporate taxation is often borne by corporate shareholders,customers,employees,and suppliers.

Accepted Answer

The burden of corporate taxation can be passed on to various groups related to the corporation, including shareholders (through reduced dividends and stock prices), customers (through higher prices), employees (through reduced wages and benefits), and suppliers (through reduced orders and prices). Therefore, corporate taxation can have indirect effects on these groups.

Question 16

Frazier,Inc.paid a $150,000 cash dividend to its shareholders.The corporation cannot deduct this payment on its corporate income tax return.

Accepted Answer

Cash dividends are not tax deductible for corporations.

Question 17

Brace,Inc.owns 90% of West common stock.This year,Brace generated $50,000 operating income and received $10,000 dividends from West.Brace's taxable income is:

Accepted Answer

Brace's taxable income includes its operating income of $50,000. The dividends received from West, a 90%-owned subsidiary, are likely eligible for the dividends received deduction (DRD), which can significantly reduce or eliminate the taxable income attributable to these dividends, depending on the jurisdiction's specific tax laws. Therefore, the dividends do not increase Brace's taxable income, leaving it at $50,000.

Question 18

A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income?

Accepted Answer

A corporation that owns more than $10 million of total assets uses Schedule M-3 to reconcile book income to taxable income. Schedule M-3 is required to provide a more detailed reconciliation of book and taxable income than Schedule M-1, which is used by smaller corporations. Schedule M-2 is used to report adjustments to accumulated earnings and profits, and Schedule M-4 is used to report earnings and profits of a foreign corporation.

Question 19

A significant advantage of issuing stock instead of debt is that payment of dividends is discretionary.

Accepted Answer

Payment of dividends for equity (stocks) is not a legal obligation, unlike debt where interest payments are a legal obligation. Companies can choose to pay dividends to shareholders or reinvest profits back into the business to fuel growth.

Question 20

Fleet,Inc.owns 85% of the stock of Pete,Inc.and 35% of the stock of Zete,Inc.and 90% of the stock of Stock ownership of Bete,Inc.Bete owns 5% of the stock of Pete and 5% of the stock of Zete.Zete owns 10% of the stock of Bete.The remaining stock of Pete and Zete is owned by unrelated individuals.Which of the following statements is correct?

Accepted Answer

According to the information given in the question, Fleet owns 85% of Pete's stock, 35% of Zete's stock, and 90% of Bete's stock. Bete owns 5% of Pete's stock and 5% of Zete's stock, while Zete owns 10% of Bete's stock.

Therefore, Fleet, Pete, and Bete are an affiliated group because Fleet owns more than 80% of the stock of Pete and Bete, and Bete owns 5% of the stock of Pete.

Zete is not a part of this affiliated group as Fleet owns only 35% of Zete's stock, which is below the 80% ownership threshold. Therefore, the correct answer is D.

Quiz 11: The Corporate Taxpayer

New York,Inc.owns 100% of Brooklyn,Inc.and Queens,Inc.Taxable income for the three corporations for their first year was as follows: Which of the following statements is false?