Question 1

In the current year,Sunset Corporation (a C corporation) had operating income of $200,000 and operating expenses of $175,000.In addition,Sunset had a $30,000 long-term capital gain,a $52,000 short-term capital loss,and $5,000 tax-exempt interest income.What is Sunset Corporation's taxable income for the year?
A)$0
B)$3,000
C)$22,000
D)$30,000
E)None of the above

Accepted Answer

The answer of In the current year,Sunset Corporation (a C...

Question 2

In 2017,Bluebird Corporation had net income from operations of $100,000.Further,Bluebird recognized a long-term capital gain of $30,000,and a short-term capital loss of $45,000.Which of the following statements is correct?
A)Bluebird Corporation will have taxable income in 2017 of $100,000 and will have a net capital loss of $15,000 that can be carried back 3 years and forward 5 years.
B)Bluebird Corporation may use the capital loss to offset the capital gain and must carry the net capital loss of $15,000 forward five years as a short-term capital loss.
C)Bluebird Corporation may deduct $33,000 of the capital loss in 2017 and may carry forward the remainder of the capital loss indefinitely to offset capital gains.
D)Bluebird Corporation will have taxable income in 2017 of $85,000.
E)None of the above.

Accepted Answer

Bluebird Corporation will have taxable income in 2017 of $100,000 and will have a net capital loss of $15,000 that can be carried back 3 years and forward 5 years.

Question 3

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

Accepted Answer

This statement is true. A subtraction item on Schedule M-1 is used to reconcile the differences between the net income reported on the company's financial statements (which is used to calculate net income per books) and the net income reported on the tax return (which is used to calculate taxable income). Income that is included in net income per books but not included in taxable income is one type of subtraction item.

Question 4

Rachel is the sole member of an LLC,and Jordan is the sole shareholder of a C corporation.Both businesses were started in the current year,and each business has a long-term capital gain of $10,000 for the year.Neither business made any distributions during the year.With respect to this information,which of the following statements is correct?
A)The C corporation receives a preferential tax rate on the LTCG of $10,000.
B)The LLC must pay corporate tax on taxable income of $10,000.
C)Jordan must report $10,000 of LTCG on his tax return.
D)Rachel must report $10,000 of LTCG on her tax return.
E)None of the above.

Accepted Answer

LLCs are considered "pass-through" entities for tax purposes, meaning that the business itself is not taxed on the income or gains, but rather the profits or losses flow through to the individual owner's tax returns. Therefore, Rachel would be responsible for reporting the $10,000 LTCG on her personal tax return. On the other hand, C corporations are taxed as separate entities, and therefore the corporation would receive a preferential tax rate on the $10,000 LTCG. Jordan, as the sole shareholder, would not have to report this on his personal tax return unless the corporation distributes a portion of the gains to him as a dividend.

Question 5

Beige Corporation,a C corporation,purchases a warehouse on August 1,2001,for $1 million.Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 12,2017,for $1.2 million.What is the amount and character of the gain recognized by Beige on the sale of the realty?
A)Ordinary income of $0 and § 1231 gain of $611,750.
B)Ordinary income of $411,750 and § 1231 gain of $200,000.
C)Ordinary income of $82,350 and § 1231 gain of $529,400.
D)Ordinary income of $117,650 and § 1231 gain of $494,100.
E)None of the above.

Accepted Answer

The first step is to calculate the adjusted basis of the property: 
$1,000,000 (original cost) - $411,750 (depreciation taken) = $588,250 (adjusted basis)

The selling price of the property is $1.2 million, which results in a realized gain of $611,750 ($1.2 million - $588,250).

Next, we need to determine the character of the gain. Since the property was held for more than one year, it would be classified as a § 1231 asset.

The amount of gain that qualifies as § 1231 gain is determined by netting all of the § 1231 gains and losses for the year. Let’s assume that Beige Corporation had a loss of $82,350 from the sale of another § 1231 asset during the year.

$611,750 (realized gain) - $82,350 (§ 1231 loss) = $529,400 (§ 1231 gain)

Therefore, the final answer is:
Choice: C
 Ordinary income of $82,350 and § 1231 gain of $529,400.

Question 6

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However,an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Accepted Answer

This statement is true. Schedule M-3 is designed to provide more detailed information about the differences between financial statements and tax returns than Schedule M-1.

Question 7

Flycatcher Corporation,a C corporation,has two equal individual shareholders,Nancy and Pasqual.In the current year,Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder.Regardless of any tax consequences resulting from their interests in Flycatcher,Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket.With respect to the current year,which of the following statements is incorrect?
A)Flycatcher cannot avoid the corporate tax altogether by distributing all $100,000 of net profit as dividends to the shareholders.
B)Nancy incurs income tax of $1,500 on her dividend income.
C)Pasqual incurs income tax of $1,500 on his dividend income.
D)Flycatcher pays corporate tax of $22,250.
E)None of the above.

Accepted Answer

Pasqual incurs income tax of $1,500 on his dividend income is incorrect because qualified dividends are taxed at a lower rate, typically 0% for those in the 15% marginal tax bracket.

Question 8

Ivory Corporation,a calendar year,accrual method C corporation,has two cash method,calendar year shareholders who are unrelated to each other.Craig owns 35% of the stock,and Oscar owns the remaining 65%.During 2017,Ivory paid a salary of $100,000 to each shareholder.On December 31,2017,Ivory accrued a bonus of $25,000 to each shareholder.Assuming that the bonuses are paid to the shareholders on February 2,2018,compute Ivory Corporation's 2017 deduction for the above amounts.
A)$250,000
B)$225,000
C)$200,000
D)$125,000
E)None of above

Accepted Answer

Under the accrual method, expenses are deductible in the year incurred, even if payment is not made until a later year. Therefore, Ivory Corporation can deduct the salaries and accrued bonuses in the 2017 tax year.

The deduction for each shareholder's salary is $100,000, which adds up to a total of $200,000.

The deduction for each shareholder's accrued bonus is $25,000, which also adds up to a total of $50,000.

So, the total deduction for Ivory Corporation in 2017 is $200,000 + $50,000 = $250,000. However, the question asks for the deduction for the above amounts, which would only be the total deduction for the salaries and bonuses, not including any other expenses. Therefore, the correct answer is B) $225,000.

Question 9

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?
A)If a limited liability company with more than one owner does not make an election, the entity is taxed as a corporation.
B)All 50 states have passed laws that allow LLCs.
C)An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.
D)If a limited liability company with one owner does not make an election, the entity is taxed as a sole proprietorship.
E)A limited liability company with one owner can elect to be taxed as a corporation.

Accepted Answer

The answer of Which of the following statements is incorrect...

Question 10

Juanita owns 60% of the stock in a C corporation that had a profit of $200,000 in the current year.Carlos owns a 60% interest in a partnership that had a profit of $200,000 during the year.The corporation distributed $45,000 to Juanita,and the partnership distributed $45,000 to Carlos.With respect to this information,which of the following statements is incorrect?
A)Juanita must report $120,000 of income from the corporation.
B)The corporation must pay corporate tax on $200,000 of income.
C)Carlos must report $120,000 of income from the partnership.
D)The partnership is not subject to a Federal entity-level income tax.
E)None of the above.

Accepted Answer

Juanita does not report $120,000 of income from the corporation. Instead, she reports the $45,000 she received as a dividend. The corporation itself pays taxes on the $200,000 profit.

Question 11

Norma formed Hyacinth Enterprises,a proprietorship,in the current year.During the year,Hyacinth had operating income of $400,000 and operating expenses of $240,000.In addition,Hyacinth had a long-term capital loss of $10,000.Norma withdrew $75,000 from Hyacinth during the year.Assuming Norma has no other capital gains or losses,and ignoring any self-employment taxes,how does this information affect her adjusted gross income for the year?
A)Increases Norma's adjusted gross income by $157,000 ($160,000 ordinary business income - $3,000 long-term capital loss).
B)Increases Norma's adjusted gross income by $150,000 ($160,000 ordinary business income - $10,000 long-term capital loss).
C)Increases Norma's adjusted gross income by $75,000.
D)Increases Norma's adjusted gross income by $160,000.
E)None of the above.

Accepted Answer

Norma's adjusted gross income increases by $157,000 because the ordinary business income is $160,000 ($400,000 - $240,000), and she can only deduct $3,000 of the long-term capital loss against ordinary income.

Question 12

Pablo,a sole proprietor,sold stock held as an investment for a $40,000 long-term capital gain.Pablo's marginal tax rate is 33%.Loon Corporation,a C corporation,sold stock held as an investment for a $40,000 long-term capital gain.Loon's marginal tax rate is 35%.What tax rates are applicable to these capital gains?
A)15% rate applies to Pablo and 35% rate applies to Loon.
B)15% rate applies to Loon and 33% rate applies to Pablo.
C)35% rate applies to Loon and 33% rate applies to Pablo.
D)15% rate applies to both Pablo and Loon.
E)None of the above.

Accepted Answer

For individuals like Pablo, long-term capital gains are taxed at a maximum rate of 15% if their marginal tax rate is 33%. For C corporations like Loon, long-term capital gains are taxed at the ordinary corporate tax rate, which is 35% in this case.

Question 13

Bjorn owns a 60% interest in an S corporation that earned $150,000 in the current year.He also owns 60% of the stock in a C corporation that earned $150,000 during the year.The S corporation distributed $30,000 to Bjorn and the C corporation paid dividends of $30,000 to Bjorn.How much income must Bjorn report from these businesses?
A)$0 income from the S corporation and $30,000 income from the C corporation.
B)$30,000 income from the S corporation and $30,000 of dividend income from the C corporation.
C)$90,000 income from the S corporation and $0 income from the C corporation.
D)$90,000 income from the S corporation and $30,000 income from the C corporation.
E)None of the above.

Accepted Answer

Bjorn's share of income from the S corporation is $150,000 x 60% = $90,000. Since the S corporation distributed $30,000 to Bjorn, he must report $30,000 of income from the S corporation. 
Bjorn's share of income from the C corporation is also $150,000 x 60% = $90,000. The C corporation paid Bjorn $30,000 in dividends, which is not taxable income for Bjorn. However, he must report the $30,000 of dividend income on his tax return. Therefore, Bjorn must report $30,000 income from the S corporation and $30,000 dividend income from the C corporation, for a total of $60,000 of taxable income.

Question 14

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Accepted Answer

The answer of A corporation with $5 million or more...

Question 15

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Accepted Answer

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Question 16

Copper Corporation,a C corporation,had gross receipts of $5 million in 2014,$6 million in 2015,and $3 million in 2016.Gold Corporation,a personal service corporation (PSC),had gross receipts of $4 million in 2014,$7 million in 2015,and $5 million in 2016.Which of the corporations will be allowed to use the cash method of accounting in 2017?
A)Copper Corporation only.
B)Gold Corporation only.
C)Both Copper Corporation and Gold Corporation.
D)Neither Copper Corporation nor Gold Corporation.
E)None of the above.

Accepted Answer

The answer of Copper Corporation,a C corporation,had gross receipts of...

Question 17

Lucinda is a 60% shareholder in Rhea Corporation,a calendar year S corporation.During the current year,Rhea Corporation had gross income of $550,000 and operating expenses of $380,000.In addition,the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000.During the year,Rhea Corporation distributed $50,000 to Lucinda.With respect to this information,which of the following statements is correct?
A)Rhea Corporation will pay tax on taxable income of $200,000.
B)Lucinda reports ordinary income of $50,000.
C)Lucinda reports ordinary income of $120,000.
D)Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.
E)None of the above.

Accepted Answer

Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.Rhea Corporation's taxable income is $200,000 ($550,000 gross income - $380,000 operating expenses). Lucinda's ordinary income is 60% of the corporation's taxable income, or $120,000. However, Lucinda also reports a short-term capital gain of $18,000 (60% of the corporation's $30,000 short-term capital gain). Therefore, Lucinda's total income is $102,000 of ordinary income and $18,000 of short-term capital gain.

Question 18

Elk,a C corporation,has $370,000 operating income and $290,000 operating expenses during the current year.In addition,Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss.Elk's taxable income is:
A)$63,000.
B)$73,000.
C)$80,000.
D)$90,000.
E)None of the above.

Accepted Answer

Operating income = $370,000
Operating expenses = $290,000
Net operating income = $80,000
Long-term capital gain = $10,000
Short-term capital loss = $17,000
Taxable income = Net operating income + Long-term capital gain - Short-term capital loss
= $80,000 + $10,000 - $17,000
= $73,000
Therefore, the correct choice is C.

Question 19

Carrot Corporation,a C corporation,has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2017.Carrot Corporation had taxable income from other sources of $720,000.Prior years' transactions included the following:
Compute the amount of Carrot's capital loss carryover to 2018.

A)$0
B)$32,000
C)$45,000
D)$185,000
E)None of the above

Accepted Answer

The answer of Carrot Corporation,a C corporation,has a net short-term...

Question 20

On December 31,2017,Peregrine Corporation,an accrual method,calendar year taxpayer,accrued a performance bonus of $100,000 to Charles,a cash basis,calendar year taxpayer.Charles is president and sole shareholder of the corporation.When can Peregrine deduct the bonus?
A)In 2017, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2018.
B)In 2018, if payment was made at any time during that year.
C)In 2017, if payment was made on or before April 15, 2018.
D)In 2018, but only if payment was made on or before April 15, 2018.
E)None of the above.

Accepted Answer

The answer of On December 31,2017,Peregrine Corporation,an accrual method,calendar year...

Quiz 17: Corporations: Introduction and Operating Rules

In 2017,Bluebird Corporation had net income from operations of $100,000.Further,Bluebird recognized a long-term capital gain of $30,000,and a short-term capital loss of $45,000.Which of the following statements is correct?

Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However,an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Which of the following statements is incorrect about LLCs and the check-the-box Regulations?

A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1).

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Elk,a C corporation,has $370,000 operating income and $290,000 operating expenses during the current year.In addition,Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss.Elk's taxable income is:

On December 31,2017,Peregrine Corporation,an accrual method,calendar year taxpayer,accrued a performance bonus of $100,000 to Charles,a cash basis,calendar year taxpayer.Charles is president and sole shareholder of the corporation.When can Peregrine deduct the bonus?