Question 1

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?

Accepted Answer

A owns at least 20 but not more than 50 percent of the stock of B.

Question 2

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

Accepted Answer

Incentive stock options (ISOs) are not expensed for financial accounting purposes when ASC 718 does not apply, and there is no tax deduction available for the company when the options are exercised.

Question 3

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 of2017, 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?

Accepted Answer

The answer of In January 2017, Khors Company issues nonqualified...

Question 4

Which of the following statements regarding capital gains and losses is false?

Accepted Answer

Corporations cannot deduct net capital losses against ordinary income. Unlike individuals, they can only use capital losses to offset capital gains.

Question 5

For corporations, which of the following regarding net capital losses is true?

Accepted Answer

Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used before they expire.

Question 6

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

Accepted Answer

The answer of Which of the following statements regarding incentive...

Question 7

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?

Accepted Answer

The premiums paid for life insurance where the company is the beneficiary are not deductible for tax purposes, creating a permanent and unfavorable book-tax difference.

Question 8

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?

Accepted Answer

The book-tax difference is the difference between the book expense and tax expense related to the stock option plan. In this case, the book expense is the fair value of the options granted, which is $40,000, spread over the vesting period of 2 years, resulting in $20,000 of expense per year.

For tax purposes, the company can take a deduction for the amount of the bargain element on the options exercised, which is $6 per option in this case, resulting in a total tax deduction of $6,000 (1,000 options x $6 bargain element).

Therefore, the book expense of $20,000 exceeds the tax deduction of $6,000, resulting in a $14,000 unfavorable book-tax difference.

Question 9

Which of the following statements regarding book-tax differences associated with purchased goodwill is false?

Accepted Answer

Temporary book-tax differences can be either favorable or unfavorable depending on the specific situation. Therefore, statement B is false. The other statements are all true.

Question 10

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 of2017, 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?

Accepted Answer

The answer of In January 2016, Khors Company issues nonqualified...

Question 11

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?

Accepted Answer

Corporation A includes the dividend in its gross income without any book-tax difference, indicating it likely owns less than 20% of Corporation B's stock, as this ownership level typically does not qualify for the dividends received deduction that would create a book-tax difference.

Question 12

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?

Accepted Answer

The answer of Studios reported a net capital loss of...

Question 13

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 differenceassociated with the gain on the sale?

Accepted Answer

The book-tax difference associated with the gain on the sale is temporary and unfavorable because the accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes. This means that the company will have to pay more taxes in the current period, but will be able to recover the tax cost-recovery deductions in future periods. Therefore, the difference is considered temporary and unfavorable.

Question 14

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

Accepted Answer

Under ASC 718, stock option-related book-tax differences can be both temporary and permanent, making statement A false.

Question 15

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?

Accepted Answer

Interest expense on a loan used to purchase tax-exempt municipal bonds is not deductible for tax purposes, creating a permanent, unfavorable book-tax difference.

Question 16

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 financialaccounting 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 dividendsreceived deduction)?

Accepted Answer

Under the general rule of accounting for investments, Coop would record its share of Chicken's earnings as income and record any dividends received as a reduction of the investment account. Coop's share of Chicken's earnings would be $8,000 (40% x $20,000) and it would reduce its investment account by $10,000. The book-tax difference associated with the dividend distribution would be $2,000 unfavorable because Coop would record the $10,000 dividend as a reduction of its investment account for book purposes, but for tax purposes, it would be treated as dividend income and subject to taxation.

Question 17

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

Accepted Answer

Under ASC 718, the correct treatment of the exercise of nonqualified stock options (NQOs) is to expense the value of the options over their vesting period and tax-deduct the bargain element (the difference between the exercise price and the market value of the stock at the time of exercise) at exercise. This results in a financial expense over time and a tax deductible expense at exercise.

Question 18

Over what time period do corporations amortize purchased goodwill for tax purposes?

Accepted Answer

Corporations amortize purchased goodwill over 180 months (15 years) for tax purposes according to the IRS guidelines.

Question 19

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

Accepted Answer

Under ASC 718, companies must recognize an expense for the fair value of stock options over the vesting period. For ISOs, there is no tax deduction for the company when the options are exercised.

Question 20

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

Accepted Answer

Before ASC 718, companies did not recognize an expense for NQOs in financial statements, but they could deduct the bargain element at exercise for tax purposes.

Quiz 16: Corporate Operations

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