Question 1

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

Temporary book-tax differences arise when the income or expense is recognized in different years for book (financial accounting) and tax purposes. However, in the long term, the total amount of income or expense reported for that item will be the same for both book and tax purposes, resulting in a permanent book-tax difference of zero.

Question 2

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

Accepted Answer

According to IRS regulations, companies using nonqualified stock options deduct expenses in the year the options are exercised.

Question 3

For incentive stock options granted when ASC 718 (a codification of FAS 123R) applies, the value of the options that vest in a given year always creates a permanent, unfavorable book-tax difference.

Accepted Answer

This statement is true. Incentive stock options (ISOs) granted under ASC 718 are subject to specific accounting and tax treatment. The difference between the fair market value of the stock when the option is exercised and the exercise price of the option creates a book-tax difference, which is unfavorable because it will result in a higher book expense than tax expense. This difference is permanent, as it cannot be reversed in future years.

Question 4

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

Accepted Answer

Corporations calculate taxable income instead of AGI, and the calculation process is different from individuals.

Question 5

Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.

Accepted Answer

The answer of Large corporations are allowed to use the...

Question 6

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

Accepted Answer

The answer of Federal income tax expense reported on a...

Question 7

Bingo Corporation incurred a net operating loss in 2014. If it carries the loss back, it must first carry the loss back to offset its 2013 taxable income and then it carries any remaining loss back to offset its 2012 taxable income.

Accepted Answer

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

Question 8

Corporations can carry net operating loss sustained in 2014 back two years and forward 20 years.

Accepted Answer

The statement is true. Under the tax laws in the United States, corporations may carry net operating losses back two years and forward 20 years to offset taxable income in those years. This can help reduce a corporation's tax liability and improve its overall financial position. It's worth noting that recent tax reform legislation has made some changes to the way net operating losses are treated, so it's always a good idea to consult with a tax professional or financial advisor to understand how the rules apply in your specific situation.

Question 9

In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. It 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 reduce book income more than taxable income.

Question 10

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

Accepted Answer

Goodwill created in an asset acquisition is an intangible asset that is amortized for book purposes over a set period of time. However, for tax purposes, goodwill cannot be amortized, which leads to a temporary difference between the book and tax basis of the asset. This results in a deferred tax liability that will eventually reverse over time.

Question 11

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

Accepted Answer

A corporation can carry a net capital loss back three years and forward five years as per the Internal Revenue Service (IRS) rules. This helps corporations to offset capital gains and reduce their tax liability in those years.

Question 12

Net operating losses generally create permanent book-tax differences.

Accepted Answer

Net operating losses (NOL) can create temporary book-tax differences as the losses can be carried forward to future years for tax purposes, but may be fully or partially reversed (or utilized) for book purposes in the current year. Permanent book-tax differences refer to differences that will never be reconciled, such as non-deductibility of fines and penalties for tax purposes but expensing of them for book purposes.

Question 13

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

Accepted Answer

The answer of A corporation may carry a net capital...

Question 14

In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.

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 from their ordinary income like individuals can.

Question 15

A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during the year but is exercised in a later year.

Accepted Answer

A nonqualified stock option creates a temporary book-tax difference because the tax deduction is recognized when the option is exercised, while the book expense is recognized over the vesting period.

Question 16

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

Accepted Answer

The answer of In general, a corporation can elect to...

Question 17

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 18

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.

Question 19

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. When income is included in book income, but excluded from taxable income, it creates a permanent book-tax difference that will not be reconciled over time. This can result in a lower taxable income and therefore reduced tax liability for the company.

Question 20

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

Accepted Answer

Corporations do not have a standard deduction. Instead, they can deduct their business expenses from their revenues to determine their taxable income.

Quiz 16: Corporate Operations