Question 1

Which of the following statements regarding book-tax differences associated with purchased goodwill is false?
A)It is possible to have no book-tax difference in a year.
B)In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book-tax difference will be unfavorable.
C)Temporary book-tax differences associated with goodwill are always favorable.
D)If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognized.

Accepted Answer

Temporary book-tax differences associated with goodwill can be either favorable or unfavorable, depending on the timing of the amortization of goodwill for tax and book purposes. It is not always the case that they are favorable.

Question 2

Coop Incorporated owns 40percent of Chicken Incorporated. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume 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 dividends received deduction)?
A)$2,000 unfavorable.
B)$2,000 favorable.
C)$10,000 unfavorable.
D)$10,000 favorable.
E)None of the choices is correct.

Accepted Answer

The answer of Coop Incorporated owns 40percent of Chicken Incorporated....

Question 3

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?
A)Temporary book-tax differences affect the computation of taxable income whereas permanent differences do not.
B)All corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C)Temporary book-tax differences will reverse in future years whereas permanent differences will not.
D)Neither temporary nor permanent book-tax differences will reverse in future years.

Accepted Answer

Temporary book-tax differences will reverse in future years whereas permanent differences will not.

Question 4

TrendSetter Incorporated paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Incorporated is the beneficiary. What is the nature of the book-tax difference created by this expense?
A)Permanent; favorable.
B)Permanent; unfavorable.
C)Temporary; favorable.
D)Temporary; unfavorable.

Accepted Answer

The premiums paid for life insurance where the company is the beneficiary are not deductible for tax purposes, creating a permanent difference between book income and taxable income. This difference is unfavorable because it increases taxable income without a corresponding deduction.

Question 5

AmStore Incorporated sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation andimmediate expensing 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 difference associated with the gain on the sale?
A)Permanent; favorable.
B)Permanent; unfavorable.
C)Temporary; favorable.
D)Temporary; unfavorable.

Accepted Answer

The book-tax difference associated with the gain on the sale is temporary because it is due to a timing difference in when the depreciation expense is recognized for financial accounting compared to tax purposes. Additionally, the difference is unfavorable because the accumulated depreciation for tax reporting purposes is greater than the accumulated depreciation for financial accounting purposes, resulting in a higher tax basis and lower gain on the sale.

Question 6

Large corporations (corporations with more than $1,000,000 in taxable income in any of the three years prior to the current year)can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

Accepted Answer

Large corporations can only use their prior year tax liability to determine their first quarterly estimated payment. Subsequent payments must be based on the current year's expected tax liability.

Question 7

Which of the following statements regarding book-tax differences is true?
A)Corporations are not required to report book-tax differences on their income tax returns.
B)Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
C)Income excludable for tax purposes usually creates a temporary book-tax difference.
D)None of the choices are correct.

Accepted Answer

Temporary book-tax differences arise when a revenue or expense item is recognized in different periods for financial accounting purposes than for tax purposes. Over time, the total amount of income recognized will be the same for both book and tax purposes, but the timing of when that income is recognized may differ.

Question 8

Over what time period do corporations amortize purchased goodwill for tax purposes?
A)180 months.
B)150 months.
C)60 months.
D)None of the choices are correct.

Accepted Answer

According to the United States Internal Revenue Code, corporations amortize purchased goodwill for tax purposes over a period of 15 years or 180 months.

Question 9

WFO Corporation has gross receipts according to the following schedule:  If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?
A)Year 3.
B)Year 4.
C)Year 5.
D)Year 6.
E)None of the choices are correct.

Accepted Answer

The answer of WFO Corporation has gross receipts according to...

Question 10

Coop Incorporated owns 10 percent of Chicken Incorporated. At the end of the year, Coop has $100,000 in invested Chicken stock and Coop's Chicken stock is worth $115,000. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume 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 dividends received deduction)?
A)$1000 unfavorable.
B)$10,000 favorable.
C)$15,000 unfavorable.
D)$15,000 favorable.
E)None of the choices is correct.

Accepted Answer

The dividend distribution is not taxable to Coop because Coop owns less than 20% of Chicken. Therefore, the book-tax difference is $10,000 favorable.

Question 11

Which of the following does NOT create a permanent book-tax difference?
A)Organizational and start-up expenses.
B)Key employee death benefit income.
C)Fines and penalties expenses.
D)Municipal bond interest income.

Accepted Answer

Organizational and start-up expenses do not create a permanent book-tax difference because they can be deducted over time for tax purposes, aligning the book and tax treatments over the period of amortization.

Question 12

Which of the following does NOT create a temporary book-tax difference?
A)Deferred compensation.
B)Bad-debt expense.
C)Depreciation expense.
D)Dividends received deduction.

Accepted Answer

Dividends received deduction is a permanent book-tax difference because it is a deduction allowed for tax purposes but is not reflected in the financial statements. Deferred compensation, bad debt expense, and depreciation expense are examples of temporary book-tax differences because they are deductible for tax purposes before they are recognized on the financial statements.

Question 13

Coop Incorporated owns 36 percent of Chicken Incorporated. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $20,000 in the current year. Chicken also reports financial accounting earnings of $30,000 for that year. Assume 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 dividends received deduction)?
A)$9,200 unfavorable.
B)$9,200 favorable.
C)$20,000 unfavorable.
D)$20,000 favorable.
E)None of the choices is correct.

Accepted Answer

The book value of Coop's investment in Chicken would increase by $7,200 (36% of $20,000), resulting in an increase in Coop's book income of $7,200. However, the dividend distribution will not result in a taxable income to Coop because it is below Coop's share of Chicken's earnings (36% of $30,000, or $10,800). Therefore, there will be a temporary difference between the book and taxable income of $7,200, which will reverse in a later period when Chicken's earnings are realized. This temporary difference results in a deferred tax liability of $2,000 (the amount of the temporary difference multiplied by the corporate tax rate of 28%), which represents the book-tax difference to Coop associated with the dividend distribution. Since Coop's taxable income is lower than its book income, the book-tax difference is unfavorable.

Question 14

iScope Incorporated 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?
A)Permanent; favorable.
B)Permanent; unfavorable.
C)Temporary; favorable.
D)Temporary; unfavorable.

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 15

For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.

Accepted Answer

For estimated tax purposes, a "large" corporation is defined as one with average annual gross receipts of $1 million or more for the three preceding tax years.

Question 16

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

Accepted Answer

The annualized income method is commonly used by corporations to calculate their quarterly estimated payments based on their expected annual income for the current year.

Question 17

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?
A)A owns less than 20 percent of the stock of B.
B)A owns at least 20 but not more than 50 percent of the stock of B.
C)A owns more than 50 percent of the stock of B.
D)Cannot be determined.

Accepted Answer

Corporation A includes the dividend in its gross income without any book-tax difference, which typically indicates that A owns less than 20% of B's stock, as dividends received from such ownership are generally fully taxable.

Question 18

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?
A)A owns less than 20 percent of the stock of B.
B)A owns at least 20 but not more than 50 percent of the stock of B.
C)A owns more than 50 percent of the stock of B.
D)Cannot be determined.

Accepted Answer

If Corporation A owns less than 20% of the stock of Corporation B, then it would be eligible for a dividends-received deduction (DRD) equal to 50% of the dividend amount. This would result in a lower amount of gross income for tax purposes than what was reported by Corporation A. Since Corporation A included the entire dividend amount in gross income, it must own at least 20% but no more than 50% of Corporation B's stock.

Question 19

Which of the following describes the correct treatment of incentive stock options (ISOs)?
A)Financial accounting-no expense; tax-no deduction.
B)Financial accounting-no expense; tax-deduct bargain element at exercise.
C)Financial-expense value over vesting period; tax-no deduction.
D)Financial-expense value over vesting period; tax-deduct bargain element at exercise.

Accepted Answer

In financial accounting, the value of ISOs is expensed over the vesting period. For tax purposes, there is no deduction for the company when ISOs are exercised.

Question 20

WFO Corporation has gross receipts according to the following schedule:  If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?
A)Year 3.
B)Year 4.
C)Year 5.
D)Year 6.
E)None of the choices are correct.

Accepted Answer

The answer of WFO Corporation has gross receipts according to...

Quiz 16: Corporate Operations

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

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

TrendSetter Incorporated paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Incorporated is the beneficiary. What is the nature of the book-tax difference created by this expense?

Large corporations (corporations with more than $1,000,000 in taxable income in any of the three years prior to the current year)can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

Which of the following statements regarding book-tax differences is true?

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

WFO Corporation has gross receipts according to the following schedule: If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

Which of the following does NOT create a permanent book-tax difference?

Which of the following does NOT create a temporary book-tax difference?

iScope Incorporated 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?

For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

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?

Which of the following describes the correct treatment of incentive stock options (ISOs) ?

WFO Corporation has gross receipts according to the following schedule: If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?