Question 1

In January 2020, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Miss Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2020, the company experienced a decline in its stock price, and Miss Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2020, what is the nature of the book-tax difference due to the options exercised?

Accepted Answer

The book-tax difference is unfavorable because the company will have a tax deduction of $40,000 (the bargain element) while the expense recorded on the books was $50,000 (the value of the options granted). This difference is permanent because it will not reverse in future periods.

Question 2

BTW Corporation has taxable income in the current year that can be offset with an NOL carryover from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year?

Accepted Answer

The book-tax difference created by the net operating loss carryover deduction in the current year is temporary because the deduction reduces taxable income in the current year but does not affect book income. The nature of this book-tax difference is favorable because it results in a lower tax liability for the current year.

Question 3

In January 2019, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company did not expect Miss Svaro to leave the company, the options vested at the time theywere granted with a total value of $54,500. In December of 2020, the company experienced a surge in its stock price, and Miss Svaro exercised the options. The total bargain element at the time of exercise was $69,000. For 2020, what is the book-tax difference due to the options exercised?

Accepted Answer

The answer of In January 2019, Khors Company issued nonqualified...

Question 4

Studios reported a net capital loss of $39,000 in Year 5. It reported net capital gains of $32,000 in Year 4 and $45,000 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 book-tax difference in Year 6 is $7,000 favorable because the studio can carry over the $39,000 net capital loss from Year 5 to offset the $45,000 net capital gain in Year 6, resulting in a taxable gain of $6,000. However, since it had a $32,000 gain in Year 4, the total carryover used in Year 6 would be $7,000 ($39,000 - $32,000), leaving a net gain of $38,000 ($45,000 - $7,000) for book purposes but only $32,000 for tax purposes. This results in a favorable book-tax difference because the taxable income is lower than the book income.

Question 5

In January 2019, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company did not expect Miss Svaro to leave the company, the options vested at the time they were granted with a total value of $50,000. In December of 2020, the company experienced a surge in its stock price, and Miss Svaro exercised the options. The total bargain element at the time of exercise was $60,000. For 2020, what is the book-tax difference due to the options exercised?

Accepted Answer

The answer of In January 2019, Khors Company issued nonqualified...

Question 6

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. This is because the losses reduce taxable income for tax purposes but do not necessarily reduce financial accounting income. This creates a temporary difference between the book and tax basis of the corporation's assets and liabilities.

Question 7

Which of the following is deductible in calculating the charitable contribution limit modified taxable income?

Accepted Answer

The answer of Which of the following is deductible in...

Question 8

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 9

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

Accepted Answer

Corporations do not have the same $3,000 deduction limit for net capital losses that individuals do. Instead, corporations can only use capital losses to offset capital gains. If their capital losses exceed their capital gains, they cannot deduct the excess from other types of income as individuals can.

Question 10

Tatoo Incorporated reported a net capital loss of $13,000 in 2020. The company had a net capital gain of $4,300 in 2018 and $3,000 in 2017. In 2019, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo's capital loss carryover to 2021 remaining after it applies the carryback?

Accepted Answer

First, Tatoo can carry back the $13,000 capital loss to 2018 and reduce its net capital gain to $0 ($4,300 - $13,000 = -$8,700). Then, any remaining loss ($4,300 - $8,700 = -$4,400) can be carried back to 2017 to reduce the net capital gain to $0 ($3,000 - $4,400 = -$1,400). The remaining loss from 2019($1,000) can be carried over to 2020. Thus, the amount of Tatoo's capital loss carryover to 2021 remaining after it applies the carryback is $5,700 ($13,000 - $8,700 - $1,000 = $3,300, which can be carried over to 2021).

Question 11

Which of the following statements regarding net operating losses generated in 2020 is true?

Accepted Answer

Under the Tax Cuts and Jobs Act (TCJA) of 2017, for losses arising in tax years beginning after December 31, 2017, the NOL carryback provision was eliminated, and corporations can now carry forward NOLs indefinitely. This change allows corporations to offset future taxable income without the previous 20-year limitation.

Question 12

Orange Incorporated issued 26,000 nonqualified stock options valued at $52,000 (in total). The options vest over two years-half in 2020 (the year of issue) and half in 2020. One thousand options are exercised in 2021 with a bargain element on each option of $6. What is the 2021 book-tax difference associated with the stock options?

Accepted Answer

The answer of Orange Incorporated issued 26,000 nonqualified stock options...

Question 13

Which of the following statements regarding charitable contributions is false?

Accepted Answer

The amount deductible for noncash contributions is not always the adjusted basis of the property donated. It is generally the fair market value of the property at the time of the contribution, subject to certain limitations and exceptions.

Question 14

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 net capital loss of $30,000 from Year 5 can be carried over to offset the net capital gains in subsequent years. In Year 6, the studio had a net capital gain of $27,000, which can be fully offset by part of the loss from Year 5, leaving a carryover of $3,000 ($30,000 - $27,000) to future years. This results in a $27,000 reduction in taxable income for Year 6, which is favorable for the studio. The choice mentions $16,000, which seems to be a calculation error. The correct calculation based on the given information should focus on the offset of the $27,000 gain by the previous loss, making the answer related to the favorable outcome of reducing taxable income by the full amount of the gain. However, without the option that directly matches this calculation, the closest correct principle is recognizing the favorable outcome of reducing taxable income, despite the numerical discrepancy.

Question 15

Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

Accepted Answer

Charitable contributions are allowable deductions in calculating a corporation's net operating loss (NOL). This is because they are considered part of the ordinary and necessary expenses of conducting a business.

Question 16

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

Accepted Answer

Nonqualified stock options (NQOs) do require expense recognition for financial accounting purposes. The expense is typically recognized over the vesting period based on the fair value of the options at the grant date.

Question 17

Orange Incorporated issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years-half in 2020 (the year of issue) and half in 2020. One thousand options are exercised in 2021 with a bargain element on each option of $6. What is the 2021 book-tax difference associated with the stock options?

Accepted Answer

The answer of Orange Incorporated issued 20,000 nonqualified stock options...

Question 18

Tatoo Incorporated reported a net capital loss of $14,900 in 2020. The company had a net capital gain of $6,200 in 2018 and $4,900 in 2017. In 2019, although the company suffered a net operating loss, it had net capital gains of $2,900. What is the amount of Tatoo's capital loss carryover to 2021 remaining after it applies the carryback?

Accepted Answer

The net capital loss of $14,900 from 2020 can be carried back to offset the net capital gains from the previous three years. First, it offsets the $2,900 gain in 2019, then the $6,200 gain in 2018, and finally the $4,900 gain in 2017. After offsetting these gains, $3,800 of the loss remains to be carried forward to 2021.

Question 19

Which of the following is not required to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity for a calendar year-end corporation?

Accepted Answer

Approval from the IRS prior to making the contribution is not required for an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity for a calendar year-end corporation. However, approval of the payment from the board of directors and payment made within three and one-half months of the tax year-end are necessary requirements for the deduction.

Question 20

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)?

Accepted Answer

For nonqualified stock options (NQOs), the correct treatment is to recognize an expense for their value over the vesting period for financial reporting purposes, and for tax purposes, the employer can deduct the bargain element at the time of exercise.

Quiz 5: Corporate Operations