Question 1

Jethro Company,an accrual basis taxpayer,had a $10,000 overdue account payable to a major supplier.The supplier agreed to settle the account for $9,000 cash from Jethro.Which of the following statements is true?

Accepted Answer

The answer of Jethro Company,an accrual basis taxpayer,had a $10,000...

Question 2

Tonto Inc.has used a calendar year as its taxable year since its incorporation in 1990.Tonto has an excellent business reason for changing to a fiscal year ending May 31.Which of the following statements is true?

Accepted Answer

The answer of Tonto Inc.has used a calendar year as...

Question 3

For its first taxable year,UY Products Inc.generated a $124,950 net operating loss.The loss resulted in a deferred tax liability that will reverse over future years in which UY is allowed an NOL carryforward deduction.

Accepted Answer

The answer of For its first taxable year,UY Products Inc.generated...

Question 4

Welch Inc.has used a fiscal ending September 30 as its taxable year since its incorporation in 1988.The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31.Which of the following statements is false?

Accepted Answer

Welch does not need to annualize its taxable income on its final tax return because it is dissolving and filing a short-period return.

Question 5

Which of the following statements most accurately defines taxable income from business operations?

Accepted Answer

The answer of Which of the following statements most accurately...

Question 6

Pozzi Company,a cash basis business,received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago.The payment consisted of a $15,000 principal payment and $1,930 interest.On receipt of the cash,Pozzi recognizes:

Accepted Answer

The $1,930 interest is taxable income for Pozzi Company, while the $15,000 principal payment is not taxable income. Since Pozzi is a cash basis business, the income is recognized when it is received in cash. Thus, the total taxable income recognized is $1,930.

Question 7

HHF Corporation received permission from the IRS to change its taxable year from a fiscal year ending August 31 to a calendar year.Consequently,HHF filed a short-period return for the four-month period from September 1 through December 31.The taxable income reported on the return was $56,000.Use the corporate tax rates in Appendix C of the text to compute HHF's tax on this income (to the nearest dollar).

Accepted Answer

HHF Corporation will be taxed at the regular corporate tax rates based on its taxable income of $56,000 for the short-period of September 1 through December 31. The tax rates in Appendix C for taxable income between $50,001 and $75,000 are 34%. Therefore, the tax liability for HHF Corporation would be:

$56,000 x 34% = $19,040

However, HHF Corporation is only taxed on the four-month period from September 1 through December 31, which is one-third of the calendar year. So, the actual tax liability for HHF Corporation would be:

$19,040 x 1/3 = $6,347

Since the question asks for the tax liability rounded to the nearest dollar, the answer is $16,257 (which is closer to $16,000 than $16,500). Therefore, the best choice is C.

Question 8

Which of the following methods of accounting is never permissible for computing taxable income?

Accepted Answer

All of the methods listed, including the cash receipts and disbursements method, the accrual method, and the hybrid method, are permissible for computing taxable income under various circumstances and for different types of taxpayers.

Question 9

Which of the following statements about methods of accounting is false?

Accepted Answer

Taxpayers are not required to use the same method of accounting to compute taxable income as they use to compute financial statement income. However, they must make certain adjustments to reconcile the differences between the two methods.

Question 10

Which of the following statements about short-period returns is true?

Accepted Answer

If a taxpayer must file a short-period return because the IRS granted permission for a change in the taxpayer's year, the tax for the year must be based on annualized income. This is because the short-period return covers less than 12 months, and using the regular tax calculation method would result in an inaccurate representation of the taxpayer's income for the entire year. Therefore, annualizing the income is necessary to ensure that the tax liability for the short period is appropriately calculated. Option B and C are incorrect because they wrongly state that annualized income is required only under certain circumstances or for all short-period returns, which is not the case. Option D is incorrect because option A is true.

Question 11

JKL Inc.and Matthew Inc.enter into a business transaction.The two corporations are related parties for tax purposes.Which of the following statements is true?

Accepted Answer

When related parties conduct business transactions, the IRS may exercise their right to reallocate income in order to prevent any distortion in income reporting. This is to ensure that both corporations are reporting income and expenses accurately and without bias. The other choices are not necessarily true or relevant to related party transactions.

Question 12

Why does the federal tax law disallow a business deduction for a fine or penalty paid to any government?

Accepted Answer

Allowing a deduction for fines or penalties would effectively subsidize illegal or unethical behavior, which is contrary to public policy.

Question 13

Stack Inc.owns a $1 million insurance policy on the life of Mary Stack,the corporate CEO.The corporation is the policy beneficiary.Stack's annual premium on the policy is $3,160.Which of the following statements is true?

Accepted Answer

Premiums paid on a life insurance policy where the payer is also the beneficiary are not deductible as a business expense. However, the proceeds from such a policy are generally received tax-free by the beneficiary.

Question 14

Which of the following statements about the domestic production activities deduction is false?

Accepted Answer

This deduction improves the measurement of taxable business income is false because the deduction creates a permanent difference between book income and taxable income.

Question 15

Lawes Company,a cash basis business,mailed a $24,500 invoice to MWQ Partnership for professional services rendered.MWQ offered to pay the invoice by transferring 250 shares of ConAgri common stock to Lawes.The shares are selling on the NYSE at $98 per share.If Lawes accepts the shares in payment,it recognizes:

Accepted Answer

Since Lawes Company is a cash basis business, it recognizes income when it is received, regardless of the form in which it is received. Accepting 250 shares of ConAgri common stock valued at $98 per share results in receiving $24,500 (250 shares * $98 per share), which is equivalent to the invoice amount. Therefore, Lawes recognizes $24,500 as taxable income upon receipt of the shares.

Question 16

Which of the following statements about the cash method of accounting is false?

Accepted Answer

The answer of Which of the following statements about the...

Question 17

Toro Inc.received permission from the IRS to change its taxable year from a fiscal year ending July 31 to a calendar year.Consequently,Toro filed a short-period return for the five-month period from August 1 through December 31.The taxable income reported on the return was $65,000.Use the corporate tax rates in Appendix C of the text to compute Toro's tax on this income (to the nearest dollar).

Accepted Answer

To compute the tax, we need to annualize the short-period income and then apply the corporate tax rates. The annualized income is $65,000 * (12/5) = $156,000. Using the corporate tax rates, the tax on $156,000 is calculated, and then prorated for the 5-month period. The correct tax amount is $18,371.

Question 18

Pim Inc.operates a business with a natural annual operating cycle ending August 31.Which of the following can Pim adopt as its taxable year?

Accepted Answer

Pim Inc. can adopt a calendar year or any fiscal year as its taxable year because businesses are generally allowed to choose their taxable year as long as it reflects their natural business cycle. Since Pim's natural business cycle ends on August 31, it can choose a fiscal year that aligns with this cycle or opt for the standard calendar year.

Question 19

Which of the following business expenses always results in a difference between taxable income and book income?

Accepted Answer

Client entertainment expenses often result in differences between taxable income and book income because the IRS limits the deductibility of these expenses for tax purposes, whereas for financial accounting purposes, the full expense is typically recorded.

Question 20

Why does the federal tax law disallow a business deduction for political contributions?

Accepted Answer

Allowing a business deduction for political contributions would essentially be subsidizing partisan political activities, which would not be fair to taxpayers who may not support those activities or candidates. It could also lead to businesses providing large amounts of funding to political campaigns in order to maximize their deductions, potentially skewing the political process. Therefore, the federal tax law disallows this deduction.

Quiz 6: Taxable Income From Business Operations