Question 1

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 2

Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2012.
  On December 28, Marchal's tax department calculated that the corporation's actual 2012 state income tax liability was $67,140. Consequently, Marchal accrued a $6,140 liability for state income tax payable at year end.
a. Compute Marchal's 2012 state income tax expense per books.
b. If Marchal has not adopted the recurring item exception as its method of accounting for state income taxes, compute Marchal's 2012 federal deduction for state income tax.

Accepted Answer

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

Question 3

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 4

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2012, Randall made the following cash payments. To what extent can Randall deduct the payments in 2012?
a. $50,000 for a two-year warehouse lease beginning on March 1, 2013.
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, 2013.
d. $5,000 compensation to a consultant who spent two weeks in January 2013 analyzing Randall's payroll system.
e. $22,000 property tax to the local government for the first six months of 2013.

Accepted Answer

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

Question 5

Krasco Inc.'s auditors prepared the following reconciliation between book and taxable income. The corporation has a 34% tax rate.  a. Compute Krasco's tax expense per books and tax payable.
b. Compute Krasco's net increase in deferred tax assets or deferred tax liabilities (identify which) for the year.

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year.  Which of the following statements is true?

Accepted Answer

The answer of Monro Inc. uses the accrual method of...

Question 8

Ladow Inc. incurred a $32,000 net operating loss in 2012. Ladow's 2010 taxable income was $28,000, and its 2011 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 2010, offsetting the $28,000 taxable income, resulting in a refund of $5,760 (28,000 * 20%). The remaining $4,000 NOL can be carried forward to 2011.

Question 9

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.

Question 10

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year.  Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

Accepted Answer

The reconciliation shows that the allowance for bad debts increased by $54,600 during the year. This means that Earl Company recognized $54,600 more in bad debt expense for book purposes than for tax purposes. Since this difference is a timing difference and not a permanent difference, it creates a temporary excess of book income over taxable income. Therefore, the correct answer is (D) $54,600 temporary excess of book income over taxable income.

Question 11

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

Accepted Answer

If Garfield can't use any of the NOL as a carryback deduction, the NOL will not result in a deferred tax liability. It will result in a deferred tax asset, which represents a future tax benefit that can be used to reduce taxable income in future years. Garfield can carry the NOL forward for up to 20 years to offset future taxable income. Option A is true, as the NOL will not result in deferred tax consequences if it is fully used as a carryback deduction. Option C is true, as Garfield can elect to give up the carryback of the NOL and instead only carry it forward. Option D is true, as Garfield can carry the NOL forward for up to 20 years.

Question 12

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year.  Because of the difference between the GAAP and the tax rules for accounting for bad debts, Monro Inc. has an:

Accepted Answer

The answer of Monro Inc. uses the accrual method of...

Question 13

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year.  Which of the following statements is true?

Accepted Answer

The answer of Earl Company uses the accrual method of...

Question 14

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 15

Zephex is a calendar year corporation. On December 1, 2012, 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, 2012, through March 31, 2013. On December 2, 2012, Zephex billed a client $38,250 for services rendered to the client in November. The client did not pay the bill until January 14, 2013.
a. If Zephex is a cash basis taxpayer, how much 2012 income should it recognize with respect to the above transactions?
b. If Zephex is an accrual basis taxpayer, how much 2012 book income should it report and how much 2012 taxable income should it recognize with respect to the above transactions?

Accepted Answer

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

Question 16

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

Accepted Answer

According to the current tax laws, Valley Inc. can elect to use the NOL as a carryforward deduction, which means they can use it to reduce their taxable income in future years. They cannot use it as a carryback deduction since this is not allowed under current tax laws.

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.

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

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. Which of the following statements is true?

Ladow Inc. incurred a $32,000 net operating loss in 2012. Ladow's 2010 taxable income was $28,000, and its 2011 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.

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?

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

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

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. Because of the difference between the GAAP and the tax rules for accounting for bad debts, Monro Inc. has an:

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. Which of the following statements is true?

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

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