Question 1

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. $$\begin{array} { l l } 
\text { Begirruing allowarce for bad debts } & \$ 950,000 \
\text { Actual write-offs of accourts receivable during the year } & ( 899,600 ) \
\text { Addition to allowarce } & \$ 845,000 \
\text { Erding allowarce for bad debts } & \$ \underline { 895,400 }
\end{array}$$ Which of the following statements is true?

Accepted Answer

The bad debt expense per books is the addition to the allowance, which is $845,000. The deduction for bad debts is the actual write-offs, which is $899,600.

Question 2

Assuming a 30% marginal tax rate, compute the after-tax cost of the following business expenses.
a. $12,300 meals and entertainment.
b. $42,000 rent on factory equipment.
c. $8,050 premium for key-person life insurance.

Accepted Answer

The answer of Assuming a 30% marginal tax rate, compute...

Question 3

Valley Inc. incurred a $71,400 net operating loss this year. Which of the following statements is true?

Accepted Answer

According to IRS regulations, a net operating loss (NOL) can be carried back two years and carried forward 20 years. However, a taxpayer can elect to forgo the carryback period and only use the NOL as a carryforward deduction. Therefore, option C is correct. Option A is incorrect because Valley can choose to carry the NOL forward, not just use it as a carryforward deduction. Option B is incorrect because carryback is not the only option available to Valley.

Question 4

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. $$\begin{array} { l l } 
\text { Begirruing allowarce for bad debts } & \$ 950,000 \
\text { Actual write-offs of accourts receivable during the year } & ( 899,600 ) \
\text { Addition to allowarce } & \$ 845,000 \
\text { Erding allowarce for bad debts } & \$ \underline { 895,400 }
\end{array}$$ Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

Accepted Answer

The addition to the allowance for bad debts of $845,000 is higher than the actual write-offs of $899,600, resulting in a net increase of $54,400 in the allowance for bad debts. Since the accrual method is used, this increase is recognized as an expense and reduces book income. However, for tax purposes, bad debt expense is not recognized until the related accounts receivable are actually written off. Therefore, this results in a temporary excess of book income over taxable income of $54,400.

Question 5

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. $$\begin{array} { l l } 
\text { Begirruing allowarce for bad debts } & \$ 61,150 \
\text { Actual write-offs of accourts receivable during the year } & ( 80,000 ) \
\text { Addition to allowarce } & \$ \underline { 88,500 } \
\text { Erdirig allowarce for bad debts } & \$ 9,650 \
\hline
\end{array}$$ Because of the difference between the GAAP and the tax rules for accounting for bad debts, Monro Inc. has an:

Accepted Answer

The addition to the allowance for bad debts exceeds the actual write-offs of accounts receivable during the year, resulting in a temporary excess of taxable income over book income. This is because for tax purposes, bad debts can only be deducted once they are actually written-off, while for GAAP purposes an allowance is established based on estimation of expected losses. Therefore, the addition to the allowance is not yet deductible for tax purposes, leading to a temporary excess of taxable income.

Question 6

Which of the following statements about the NOL deduction is false?

Accepted Answer

All of the statements about the NOL deduction are true. The deduction helps to prevent tax distortions that can arise from a one-year reporting period, can result in a tax refund if the NOL can be carried back against previous years' taxable income, and has value based on the NPV of its related tax savings.

Question 7

Krasco Inc.'s auditors prepared the following reconciliation between book and taxable income. The corporation has a 34% tax rate.
 $$\begin{array} { l r } 
\text { Book income before tax } & \$ 8,288,900 \
\text { Net permarnent differences } & ( 35,770 \} \
\text { Net temporary differences } & 112,400 \
\text { Taxable incorne } & \$ 8,365,530
\end{array}$$

Accepted Answer

The answer of Krasco Inc.'s auditors prepared the following reconciliation...

Question 8

This year, Garfield Inc. generated a $25,000 net operating loss. Which of the following statements is false?

Accepted Answer

If Garfield is unable to use the NOL as a carryback deduction, it will result in a deferred tax liability because the NOL will reduce the taxable income in future years, which will result in a lower tax expense and a lower deferred tax liability. Therefore, the false statement is that if Garfield can carry the entire NOL back to deduct against prior year taxable income, the NOL will have no deferred tax consequences.

Question 9

Ladow Inc. incurred a $32,000 net operating loss in 2016. Ladow's 2014 taxable income was $28,000, and its 2015 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.

Accepted Answer

The NOL of $32,000 can be carried back to 2014, offsetting the $28,000 taxable income, resulting in a refund of $5,760 (28,000 * 20% tax rate for 2014). The remaining $4,000 NOL can be carried back to 2015, but the refund from 2014 is $5,760.

Question 10

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2016, Randall made the following cash payments. To what extent can Randall deduct the payments in 2016?
a. $50,000 for a two-year warehouse lease beginning on March 1, 2017.
b. $95,000 of inventory items held for sale to customers.
c. $1,800 to purchase a new refrigerator for the employees' lounge. The refrigerator was delivered on February 1, 2017.
d. $5,000 compensation to a consultant who spent two weeks in January 2017 analyzing Randall's payroll system.
e. $22,000 property tax to the local government for the first six months of 2017.

Accepted Answer

The answer of Randall Company uses the calendar year and...

Question 11

Zephex is a calendar year corporation. On December 1, 2016, Zephex received a $12,000 check from a tenant that leases office space owned by Zephex. This payment was rent for the four-month period from December 1, 2016, through March 31, 2017. On December 2, 2016, Zephex billed a client $38,250 for services rendered to the client in November. The client did not pay the bill until January 14, 2017.
a. If Zephex is a cash basis taxpayer, how much 2016 income should it recognize with respect to the above transactions?
b. If Zephex is an accrual basis taxpayer, how much 2016 book income should it report and how much 2016 taxable income should it recognize with respect to the above transactions?

Accepted Answer

The answer of Zephex is a calendar year corporation. On...

Question 12

Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2016.
 $\begin{array} { l l l } 
\text { March } 11 & \text { Balarce due of } 2015 \text { tax } & 13,600 \
 \text { April } 2 & \text { Estimated } 2016 \text { tax payment } & 15,250 \

\text { Jure 2}&\text {  Estirmated 2016 tax payment }&15,250\
\text { Septermber 3}&\text {  Estirnated 2016 tax payrnent }&15,250\
\text { December 2}&\text {Estimated 2016  tax payment} & 15,250
\end{array}$

Accepted Answer

The answer of Marchal Inc., a calendar year, accrual basis...

Question 13

Which of the following statements about an NOL deduction is false?

Accepted Answer

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

Question 14

Slumar, an accrual basis, calendar year corporation, reported $7,289,200 net income before tax on its financial statement prepared in accordance with GAAP. The corporate records reveal the following information.The allowance for bad debts on January 1 was $104,700. Write-offs for the year totaled $113,228, and the addition to the allowance for the year was $105,000.
Slumar earned $3,072,800 net income from its U.S. manufacturing activity and $4,101,700 from its foreign manufacturing activity.
At its December 16 meeting, Slumar's board of directors authorized a $100,000 salary bonus for the corporation's CEO. Slumar paid the bonus to the CEO on January 4. The CEO owns 62% of Slumar's outstanding stock.
Slumar was incorporated last year. On its first tax return, it reported a $334,712 net operating loss.
Compute Slumar's taxable income.

Accepted Answer

The answer of Slumar, an accrual basis, calendar year corporation,...

Question 15

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. $$\begin{array} { l l } 
\text { Begirruing allowarce for bad debts } & \$ 61,150 \
\text { Actual write-offs of accourts receivable during the year } & ( 80,000 ) \
\text { Addition to allowarce } & \$ \underline { 88,500 } \
\text { Erdirig allowarce for bad debts } & \$ 9,650 \
\hline
\end{array}$$ Which of the following statements is true?

Accepted Answer

The addition to the allowance for bad debts is the amount that has been estimated as necessary to cover potential bad debts for the year, so it represents the bad debt expense per books. Therefore, bad debt expense per books is $88,500.
The actual write-offs of accounts receivable during the year represent the deduction for bad debts, which is $80,000. Therefore, the deduction for bad debts is $80,000.
So, the correct choice is D.

Question 16

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

Accepted Answer

The tax benefit rule requires taxpayers to include in their taxable income any recoveries on bad debts that were previously written off and deducted from taxable income, thus statement B is false because the receipt of the $17,500 does affect the current year's taxable income by increasing it.

Quiz 6: Taxable Income From Business Operations

Assuming a 30% marginal tax rate, compute the after-tax cost of the following business expenses. a. $12,300 meals and entertainment. b. $42,000 rent on factory equipment. c. $8,050 premium for key-person life insurance.