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.  Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

Accepted Answer

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

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

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 4

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 5

Ladow Inc. incurred a $32,000 net operating loss in 2015. Ladow's 2013 taxable income was $28,000, and its 2014 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 2013 first, offsetting the $28,000 taxable income, resulting in a refund of $5,760 (28,000 * 20%). The remaining $4,000 NOL can be carried back to 2014, but it does not affect the refund calculation for 2013.

Question 6

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 7

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 result in a deferred tax liability. This is because the NOL can only be carried forward to offset future taxable income, which will result in a lower tax expense and a lower tax liability in the future. However, since the NOL cannot be used to reduce taxable income in the current year, the company will have a higher tax expense and a higher tax liability than it would have had without the NOL. This creates a deferred tax liability. The other statements are true: if Garfield can carry the entire NOL back to a prior year, there will be no deferred tax consequences; Garfield can elect to give up the carryback of the NOL; and if Garfield can't use any of the NOL as a carryback deduction, it can carry the NOL forward for 20 years.

Question 8

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

Accepted Answer

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

Question 9

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 10

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 11

Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2015.
  a. Compute Marchal's 2015 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 2015 federal deduction for state income tax.

Accepted Answer

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

Question 12

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

Accepted Answer

According to the tax code, taxpayers may elect to use an NOL as a carryforward or carryback deduction. Therefore, statement A is incorrect. Statement B is incorrect because the tax code allows for both carryforward and carryback deductions. Statement C is correct because taxpayers have the option to choose how to use the NOL. Therefore, the best choice is C. Statement D is incorrect because statement C is true.

Question 13

Zephex is a calendar year corporation. On December 1, 2015, 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, 2015, through March 31, 2016. On December 2, 2015, Zephex billed a client $38,250 for services rendered to the client in November. The client did not pay the bill until January 14, 2016.
a. If Zephex is a cash basis taxpayer, how much 2015 income should it recognize with respect to the above transactions?
b. If Zephex is an accrual basis taxpayer, how much 2015 book income should it report and how much 2015 taxable income should it recognize with respect to the above transactions?

Accepted Answer

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

Question 14

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 15

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 reconciliation shows an increase in the allowance for bad debts of $88,500, which means that the bad debt expense per books for the current year is also $88,500. The deduction for bad debts is the amount that was actually written off during the year, which is $80,000. Therefore, the correct statement is that bad debt expense per books is $88,500, and the deduction for bad debts is $80,000. Choice D is the only one that matches this statement.

Question 16

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2015, Randall made the following cash payments. To what extent can Randall deduct the payments in 2015?
a. $50,000 for a two-year warehouse lease beginning on March 1, 2016.
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, 2016.
d. $5,000 compensation to a consultant who spent two weeks in January 2016 analyzing Randall's payroll system.
e. $22,000 property tax to the local government for the first six months of 2016.

Accepted Answer

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

Quiz 6: Taxable Income From Business Operations

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:

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.

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: