Question 1

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 2

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 answer of Calliwell Corporation is a Colorado corporation engaged...

Question 3

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

Accepted Answer

The Domestic Production Activities Deduction is based solely on domestic production activities and does not take into account overseas sales of domestic products. Therefore, Option A is not used to compute the deduction. Options B, C, and D are all factors that are used in the computation of the Domestic Production Activities Deduction.

Question 4

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

The answer of Palm Corporation has book income of $424,000....

Question 5

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 6

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 certain filers beginning with tax years ending on or after December 31, 2004. However, Schedule M-1 still applies to certain small corporations and flow-through entities.

Question 7

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 35% on their taxable income, while other corporations have a graduated tax rate. Therefore, Lexington's regular tax liability will be greater than it would have been if it were not a personal service corporation.

Question 8

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 deprecation was $90,000. Based only on these items, compute Slipper's taxable income.

Accepted Answer

The answer of Slipper Corporation has book income of $500,000....

Question 9

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 only limited to U.S. taxpayers engaged in manufacturing activities. It is available to any taxpayer that engages in eligible production activities, including but not limited to manufacturing, agriculture, construction, engineering, and software development.

Question 10

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 11

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 answer of Calliwell Corporation is a Colorado corporation engaged...

Question 12

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

WEK's taxable income would be the sum of its taxable income from domestic manufacturing ($1,239,000) and its taxable income from foreign manufacturing ($1,773,000), minus its total compensation paid to workers in both the United States and foreign countries ($487,000 + $599,200 = $1,086,200).

Taxable income = $1,239,000 + $1,773,000 - $1,086,200 = $2,926,800

However, WEK is also entitled to a deduction for foreign earned income under IRC Section 911, which allows U.S. taxpayers to exclude a portion of their income earned abroad. The maximum exclusion for 2021 is $108,700.

Therefore, WEK's taxable income would be:

Taxable income = $2,926,800 - $108,700 = $2,818,100

The closest option is C) $2,900,490.

Question 13

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 14

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

Accepted Answer

To calculate the regular tax liability, we must use the tax rate schedule. For 2019, corporations with taxable income between $50,000 and $75,000 are taxed at a rate of 25%. Corporations with taxable income between $75,000 and $10,000,000 are taxed at a rate of 34%. Therefore, the tax liability for TasteCo, Inc. would be:

($75,000 - $50,000) x 0.25 + ($210,500 - $75,000) x 0.34 = $15,625 + $51,325 = $66,950

However, the tax liability is then reduced by any credits the corporation may be eligible for. Without information about any credits, the best answer choice is B.

Question 15

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...

Question 16

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 17

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

Morton Inc. can claim a domestic production activities deduction equal to 9% of its qualified production income, which in this case is $45,000 (9% x $500,000). This deduction is subtracted from Morton's taxable income of $500,000 to arrive at a taxable income of $455,000. Therefore, choice A is the correct answer.

Question 18

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 answer of John's, Inc. manufactures and sells fine furniture....

Question 19

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

Starting with book income of $1,200,000, we need to make adjustments to determine taxable income.

First, we add back the income tax expense of $620,000. This is a non-deductible expense on the tax return, so we need to add it back.

$1,200,000 + $620,000 = $1,820,000

Next, we subtract the municipal bond interest income of $10,000. This is tax-exempt income and is not included in taxable income.

$1,820,000 - $10,000 = $1,810,000

Finally, we add back the meals and entertainment expense of $150,000. This is only partially deductible on the tax return (50%), so we add back the full amount.

$1,810,000 + $150,000 = $1,960,000

Therefore, Honu's taxable income is $1,960,000, which is answer choice D.

Question 20

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

Accepted Answer

Schedule M-1 is used to reconcile a corporation's financial accounting income to its taxable income. Line 8 reports the amount of tax-exempt interest and Line 2 should reflect the corporation's taxable income computed on its tax return, not the actual federal income tax liability. A corporation realizing a gain on a like-kind exchange would report it on Schedule M-1 as an increase in assets, but it would not affect taxable income. However, a corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1 as an increase to taxable income.

Quiz 11: The Corporate Taxpayer