Question 1

Honu, Inc. has book income of $1,200,000. Book income includes $380,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of business meals expense. Based only on these items, compute Honu's taxable income.

Accepted Answer

The answer of Honu, Inc. has book income of $1,200,000....

Question 2

Weston Corporation has accumulated minimum tax credits of $134,000 from tax years prior to 2018. If 2018 regular tax before credits is $47,000 and Jackson qualifies for general business credits of $14,000, its allowable minimum tax credit for 2018 is:

Accepted Answer

The allowable minimum tax credit for 2018 is the greater of the tentative minimum tax for 2018 ($47,000) or the sum of the minimum tax credits available from prior years ($134,000) reduced by the amount of general business credits claimed for the year ($14,000).

Therefore, the calculation would be (tentative minimum tax of $47,000 is greater than the reduced amount of prior-year minimum tax credits of $120,000):

Allowable minimum tax credit = $47,000

Question 3

John's, Inc. manufactures and sells fine furniture. What is John's regular tax liability if it had taxable income of $40,000,000 for its fiscal year ended September 30, 2018?

Accepted Answer

For the fiscal year ended September 30, 2018, the corporate tax rate was 21% due to the Tax Cuts and Jobs Act of 2017. Therefore, John's regular tax liability would be 21% of $40,000,000, which equals $8,400,000.

Question 4

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of realty. Based only on these items, compute Airfreight's taxable income.

Accepted Answer

The $25,000 gain realized on the like-kind nontaxable exchange of realty is not included in taxable income, therefore taxable income is $370,000 - $25,000 = $345,000.

Question 5

Palm Corporation has book income of $424,000. Book income reflects $130,000 federal income tax expense and $55,000 depreciation expense. Tax depreciation expense computed under MACRS is $65,000. Palm received $25,000 of prepaid rent not included in book income. Based only on these items, compute Palm's taxable income.

Accepted Answer

Taxable income is computed as book income plus permanent differences and minus temporary differences. In this case, the permanent difference is the difference between tax depreciation and book depreciation, which is $65,000 - $55,000 = $10,000. The temporary difference is the prepaid rent, which is $25,000. Therefore, taxable income is $424,000 + $10,000 - $25,000 = $569,000.

Question 6

Forward Inc.'s book income of $739,000 includes a net long-term capital loss of $42,000 and charitable contribution of $170,000. Taxable income shown on the Schedule M-1 would be:

Accepted Answer

To calculate the taxable income shown on Schedule M-1 for Forward Inc., we start with the book income of $739,000. We then need to adjust for the net long-term capital loss and the charitable contribution, as these are treated differently for tax purposes compared to book purposes. The net long-term capital loss of $42,000 is not deductible for tax purposes, so we add it back to the book income. The charitable contribution deduction is limited to 10% of taxable income before the deduction. However, without knowing the taxable income before the deduction, we cannot precisely adjust for it here. Assuming the question intends for us to ignore the limitation or has provided all necessary adjustments, we would simply adjust for the net long-term capital loss. Therefore, the taxable income shown on Schedule M-1 would be $739,000 + $42,000 = $781,000. However, given the options provided and the typical adjustments for Schedule M-1, it seems there might be a misunderstanding in the calculation or the question's intent. Based on the options given and common adjustments, adding back the net long-term capital loss to the book income does not match any of the provided answers directly without considering the charitable contributions adjustment. Since none of the calculations directly lead to the answers given without further information, and based on the standard approach to adjusting book income for tax purposes, there seems to be a discrepancy in the explanation or the question's details.

Question 7

Forward Inc.'s 2021 book income of $739,000 includes a net long-term capital loss of $42,000 and charitable contribution of $170,000. Taxable income shown on the Schedule M-1 would be:

Accepted Answer

The answer of Forward Inc.'s 2021 book income of $739,000...

Question 8

Liston, Inc. had taxable income of $1 million for calendar year 2020. Compute Liston's regular tax liability.

Accepted Answer

The answer of Liston, Inc. had taxable income of $1...

Question 9

Slipper Corporation has book income of $500,000. Book income includes a $50,000 gain on the sale of equipment. The equipment originally cost $110,000 and was sold for $75,000. Accumulated book depreciation was $85,000; accumulated MACRS depreciation was $90,000. Based only on these items, compute Slipper's taxable income.

Accepted Answer

Taxable income is calculated by adjusting book income for differences between book and tax treatments. The gain on sale for tax purposes is $75,000 (sale price) - $110,000 (cost) + $90,000 (MACRS depreciation) = $55,000. Since the book gain was $50,000, we add back the $5,000 difference to the book income of $500,000 to get $505,000.

Question 10

Which of the following statements regarding Schedule M-1 is true?

Accepted Answer

Schedule M-1 is used to reconcile the corporation's accounting income with its taxable income. Line 8 reports the amount of dividends received from other corporations that are eligible for the dividends-received deduction. Line 5 reports nondeductible penalties and fines. Line 2 reports the federal income tax expense reflected on the corporation's current year tax return, not the actual tax liability for the year. A current gain on a like-kind exchange that is deferred for tax purposes would be reported on Schedule M-1.

Question 11

TasteCo, Inc. reported $210,500 of taxable income this year. What is its regular tax liability?

Accepted Answer

The regular tax liability for a corporation like TasteCo, Inc. with $210,500 of taxable income can be calculated based on the federal corporate income tax rates. For the 2021 tax year, the corporate tax rate is a flat 21%. Therefore, $210,500 * 21% = $44,205.

Question 12

Mandrake, Inc. has book income of $569,300. Its income includes a $50,700 bad debt expense, determined by the allowance method. Actual write offs this year were $48,000. Based only on this information, compute Mandrake's taxable income.

Accepted Answer

For tax purposes, the IRS does not allow companies to deduct bad debt expenses determined by the allowance method. Instead, actual write-offs are deductible. Therefore, to compute taxable income, we start with the book income of $569,300 and adjust for the difference between the bad debt expense reported ($50,700) and the actual write-offs ($48,000). This difference is $2,700 ($50,700 - $48,000), which was deducted in arriving at book income but is not deductible for tax purposes. Adding this back to the book income gives us $569,300 + $2,700 = $572,000.

Question 13

Poppy's book income of $739,300 includes a net long-term capital loss of $42,000 and federal income tax expense of $170,000. Based only on these items, Poppy's taxable income is:

Accepted Answer

The answer of Poppy's book income of $739,300 includes a...

Question 14

Sonic Corporation has a 21% 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's effective tax rate on the Roller dividend is 10.5% because, under the U.S. tax code, corporations that receive dividends from other U.S. corporations are entitled to a dividends-received deduction. Since Sonic owns less than 20% of Roller, Inc., it can deduct 50% of the dividends received, effectively taxing the remaining 50% at its marginal tax rate of 21%. Thus, 50% of the dividends are taxed at 21%, leading to an effective tax rate of 10.5% on the total dividends received.

Question 15

Which of the following statements regarding the current year 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. This facilitates the movement of funds within the group without incurring additional tax liabilities.

Question 16

Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liabilitybefore credits is $450,000. No estimated tax payments have been made. Which of the following statements is true?

Accepted Answer

The answer of Borough, Inc. is entitled to a rehabilitation...

Question 17

Thunder, Inc. has invested in the stock of several corporations and has $500,000 current year operating income before dividends: $\begin{array}{lrcl}
\text { Corporation } &\text { Dividend }&\text { Ownership\% } & \text { Incorporated }
\text { Hail, Inc. } & \$ 52,000 & 14 & \text { Delaware } \
\text { Hurricane Company } & 17,500 & 62 & \text { France } \
\text { Lightening, Inc. } & 2,800 & 41 & \text { Utah } \
\text { Tornado Corporation } & 131,000 & 92 & \text { New Jersev }
\end{array}$
 Calculate Thunder's dividends-received deduction and taxable income:

Accepted Answer

To calculate the DRD, we first need to find the total amount of dividends received by Thunder, Inc. This information is not provided in the question. Therefore, we cannot solve this problem.

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

According to the IRS, a corporation that owns more than $10 million of total assets must file Schedule M-3 to reconcile book income to taxable income. Schedule M-3 is a more detailed version of Schedule M-1, which is used by smaller corporations. Schedule M-2 and Schedule M-4 are not used for income reconciliation.

Question 19

Which of the following statements regarding Schedule M-3 is false?

Accepted Answer

Schedule M-3 replaces Schedule M-1 for corporations with total assets of $10 million or more for tax years beginning after December 31, 2004. It does not replace Schedule M-1 for all corporations.

Question 20

Maxwell, Inc. had taxable income of $2,500,000 for its fiscal year ended June 30, 2018. Compute Maxwell's regular tax liability.

Accepted Answer

For the fiscal year ended June 30, 2018, the corporate tax rate in the United States was a flat 21% due to the Tax Cuts and Jobs Act of 2017. Therefore, Maxwell, Inc.'s regular tax liability would be 21% of $2,500,000, which equals $525,000.

Quiz 11: The Corporate Taxpayer