Question 1

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

Tax gain is $55,000 = $75,000 - ($110,000 -$90,000). Tax gain is $5,000 more than book gain, so taxable income = $500,000 + $5,000.

Question 2

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

$855,900 = ($739,000 + $42,000 + $170,000) - 10% × ($739,000 + $42,000 + $170,000).

Question 3

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

Accepted Answer

Schedule M-3 replaces Schedule M-1 for tax years beginning after November 19, 2007, not December 31, 2004.

Question 4

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 5

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

$83,500 = $33,000 nonrefundable minimum tax credit ($47,000 - $14,000) + $50,500 refundable minimum tax credit [($134,000 - $33,000) x 50%]

Question 6

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

$424,000 + $130,000 - $10,000 + $25,000.

Question 7

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

$739,300 + $42,000 + $170,000.

Question 8

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

Students will need a corporate tax rate schedule. Under the transition rule, tax liability is $687,500 = $267,500 [($2,500,000 x 21%) x 6/12 + $425,000 ($850,000 from 2017 rate schedule x 6/12)

Question 9

Which of the following statements regarding the rehabilitation credit is false?

Accepted Answer

The rehabilitation credit is claimed over a 5-year period starting with the year the property is placed in service, not only in the year it is placed in service.

Question 10

Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability 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 11

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

Accepted Answer

The answer of TasteCo, Inc. reported $210,500 of taxable income...

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

$569,300 + $50,700 - $48,000.

Question 13

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 guidelines, a corporation that owns more than $10 million of total assets must use Schedule M-3 to reconcile book income to taxable income. Schedule M-3 is a detailed reconciliation that includes more information than Schedule M-1 or M-2, which are used for smaller corporations.

Question 14

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 gain realized on a like-kind nontaxable exchange of realty is not included in taxable income, so it must be subtracted from book income to calculate taxable income. Therefore, Airfreight's taxable income is $370,000 - $25,000 = $345,000.

Question 15

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

Students will need a corporate tax rate schedule. Under the transition rule, tax liability is $9,800,000 = $6,300,000 [($40,000,000 x 21%) x 9/12 + $3,500,000 ($14,000,000 from 2017 rate schedule x 3/12)

Question 16

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

Accepted Answer

Schedule M-1 is used by corporations to reconcile book income and tax income. Line 8 reports the amount of foreign taxes paid or accrued, Line 2 should reflect the corporation's total income tax liability before credits for the current year, and Line 10 reports the total of all other adjustments. If a corporation incurs nondeductible fines and penalties, it would report those amounts on Line 5. A corporation realizing a current gain on a like-kind exchange that is deferred for tax purposes would report that gain on Schedule M-1 as an adjustment to reconcile book income and tax income.

Question 17

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

$1,200,000 + $380,000 - $10,000 + 50% × $150,000.

Question 18

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

Because of the 50% DRD, Sonic's taxable income includes only $5,000 of the $10,000 Roller dividend. The tax on $5,000 is $1,050, and $1,050/$10,000 equals a 10.5% effective tax rate.

Question 19

Cranston Corporation has accumulated minimum tax credits of $924,000 from tax years prior to 2018. If 2018 regular tax before credits is $152,000, Cranston's allowable minimum tax credit for 2018 is:

Accepted Answer

$538,000 = $152,000 nonrefundable minimum tax credit + $386,000 refundable minimum tax credit [($924,000 - $152,000) x 50%]

Question 20

Liston, Inc. had taxable income of $1 million for calendar year 2018. Compute Liston's regular tax liability.

Accepted Answer

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

Quiz 11: The Corporate Taxpayer