Question 1

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 2

John's,Inc.manufactures and sells fine furniture.What is John's regular tax liability if it had taxable income of $40,000,000?

Accepted Answer

The correct answer is A because the regular tax liability for a corporation with taxable income of $40,000,000 is $14,000,000.

Question 3

Morton Inc.is a Kansas corporation engaged exclusively in domestic manufacturing.This year,it earned $500,000 of qualified production income,which also equals its taxable income before the domestic manufacturing deduction.It paid compensation of $200,000 to its workforce.Calculate Morton's domestic production activities deduction and taxable income:

Accepted Answer

The domestic production activities deduction is 9% of the lesser of qualified production activities income or taxable income before the domestic production activities deduction. In this case, since the qualified production income of $500,000 is less than the taxable income before the deduction of $500,000, the deduction is 9% of $500,000, which equals $45,000. Therefore, the taxable income will be $455,000 ($500,000 - $45,000).

Question 4

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 5

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components.This year,it earned $2 million of net income from this qualified activity.Before the domestic production activities deduction,its taxable income is $2,100,000 and compensation paid to its U.S.workforce is $670,000.Its allowable domestic production activities deduction is:

Accepted Answer

The domestic production activities deduction is 9% of the lesser of qualified production activities income or taxable income. The qualified production activities income is $2 million, and the taxable income is $2,100,000. Therefore, the domestic production activities deduction is 9% of $2 million, which is $180,000.

Question 6

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

Accepted Answer

To calculate regular tax liability, we need to use the tax rate schedule. For the tax year 2020, the tax rate for a taxable income of $210,500 is 24%. Therefore, the regular tax liability is:

$210,500 x 24% = $50,520
Plus, the base tax amount for a taxable income of $163,300 to $207,350 is $32,569.50.

So, the total regular tax liability for TasteCo, Inc. is:

$50,520 + $32,569.50 = $83,089.50

The closest option to this amount is B: $65,345. Therefore, B is not the correct answer. The correct amount is higher than what is offered in the options, but the closest option to it is B.

Question 7

Palm Corporation has book income of $424,000.Book income reflects $200,000 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 by adding and subtracting permanent and temporary differences to book income. In this case, the permanent difference is the difference between book depreciation and tax 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 = $459,000.

Question 8

Honu,Inc.has book income of $1,200,000.Book income includes $620,000 income tax expense,$10,000 of municipal bond interest income,and $150,000 of meals and entertainment expense.Based only on these items,compute Honu's taxable income.

Accepted Answer

To calculate taxable income, we need to add back the tax-exempt income (municipal bond interest income) and disallowed expenses (meals and entertainment) to the book income and then subtract the income tax expense. 
Taxable income = Book income - Municipal bond interest income + Meals and entertainment expense - Income tax expense
Taxable income = $1,200,000 - $10,000 + $150,000 - $620,000
Taxable income = $720,000 
Therefore, the best choice is D) $1,885,000.

Question 9

Lexington Associates,Inc.is a personal service corporation.This year,Lexington reported $75,000 of taxable income.Which of the following statements regarding Lexington's regular tax liability is true?

Accepted Answer

Personal service corporations are subject to a flat tax rate of 21% on all their taxable income. Therefore, Lexington's regular tax liability will be greater than it would have been if it were not a personal service corporation, as its tax rate would have been based on the regular corporate tax rate schedule.

Question 10

WEK Inc.is a New York corporation with manufacturing operations in the United States and in 12 foreign countries.This year,its taxable income from domestic manufacturing was $1,239,000,and its taxable income from foreign manufacturing was $1,773,000.WEK had no other sources of taxable income.WEK paid $487,000 compensation to its U.S.workers and $599,200 compensation to its foreign workers.Compute WEK's taxable income.

Accepted Answer

The answer of WEK Inc.is a New York corporation with...

Question 11

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 12

Doctors Inc.is a corporation owned by four physicians in which they operate their medical practice.For the current year,Doctors Inc.had taxable income of $135,000.What is its regular tax liability?

Accepted Answer

The answer of Doctors Inc.is a corporation owned by four...

Question 13

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

Accepted Answer

The $25,000 gain realized on a like-kind nontaxable exchange of equipment is excluded from taxable income. Therefore, taxable income is equal to book income minus the excluded gain: 
Taxable income = $370,000 - $25,000 = $345,000. Option C is the correct answer.

Question 14

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

Accepted Answer

Option D is false. The domestic production activities deduction is not restricted to manufacturing activities only. It can be availed by qualifying taxpayers engaged in various activities, including construction, engineering, architecture, and more.

Question 15

Which of the following items is not used to compute the Domestic Production Activities Deduction?

Accepted Answer

Overseas sales of domestic products are not used to compute the Domestic Production Activities Deduction. The deduction is based on taxable income, compensation paid to US workforce, and net income from qualified domestic production activity.

Question 16

Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components.This year,it earned $2 million of net income from this qualified activity.Before the domestic production activities deduction,its taxable income is $2,100,000 and compensation paid to its U.S.workforce is $670,000.Its taxable income is:

Accepted Answer

The domestic production activities deduction (DPAD) is calculated as 9% of the lesser of qualified production activities income ($2,000,000) or taxable income before the deduction ($2,100,000). Thus, DPAD is 9% of $2,000,000, which is $180,000. Therefore, taxable income after the deduction is $2,100,000 - $180,000 = $1,920,000.

Question 17

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 18

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

Accepted Answer

This statement is false. Schedule M-3 replaced Schedule M-1 for all tax years beginning after December 31, 2007, not after December 31, 2004.

Question 19

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 credit of...

Question 20

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

Accepted Answer

Schedule M-1 reconciles a corporation's accounting income with its taxable income. Line 8 reports the amount of dividends received that are excluded from taxable income, Line 2 reflects the corporation's total tax liability before credits, and any current gains or losses deferred for tax purposes should be reflected on Line 7. Nondeductible fines and penalties would be reported on Line 5 as an adjustment to taxable income.

Quiz 11: The Corporate Taxpayer