Question 1

In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. Adams has a favorable temporary book-tax difference for that year.

Accepted Answer

Goodwill impairment exceeding allowable amortization for tax purposes would create an unfavorable temporary book-tax difference, as it would lead to higher expenses recognized for financial reporting purposes than for tax purposes, reducing taxable income less than book income for that year.

Question 2

Corporations calculate adjusted gross income (AGI) in the same way as individuals.

Accepted Answer

Corporations calculate taxable income in a similar manner to individuals, but they do not calculate adjusted gross income (AGI) as this concept is specific to individual income tax returns.

Question 3

A corporation may carry a net capital loss back two years and forward 20 years.

Accepted Answer

False

Question 4

Bingo Corporation incurred a net operating loss in 2016. If Bingo carries the loss back, it must first carry the loss back to offset its 2015 taxable income and then carry any remaining loss back to offset its 2014 taxable income.

Accepted Answer

The answer of Bingo Corporation incurred a net operating loss...

Question 5

For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.

Accepted Answer

Goodwill created in an asset acquisition is generally amortized over a period of 15 years for tax purposes but is not amortized for book purposes, leading to temporary book-tax differences.

Question 6

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

Accepted Answer

An unfavorable temporary book-tax difference is so named because it causes taxable income to increase relative to book income.

Question 7

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.

Accepted Answer

The answer of Federal income tax expense reported on a...

Question 8

In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.

Accepted Answer

Corporations can only deduct capital losses to the extent of their capital gains. If their losses exceed their gains, they can carry back the loss to the previous three years and forward to the next five years to offset gains in those years, but they cannot deduct the entire amount of a net capital loss from their ordinary income like individuals can.

Question 9

Net operating losses generally create permanent book-tax differences.

Accepted Answer

Net operating losses create temporary book-tax differences because they can be carried forward or backward to offset taxable income in other years, affecting the timing of when income is taxed, not the total amount of income taxed over time.

Question 10

Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

Accepted Answer

Corporations do not have a standard deduction in the same way that individual taxpayers do. Instead, corporations are able to deduct their business expenses from their revenues to determine their taxable income.

Question 11

Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

Accepted Answer

Temporary book-tax differences arise when there is a difference between the amount of income or deduction reported in a corporation's financial statements (book income) and the amount reported on the corporation's tax return (tax income). However, over the long term, these temporary differences will reverse, resulting in the same total amount of income or deduction for both book and tax purposes. This is because book income and tax income must eventually be reconciled through adjusting entries or deferred tax accounting, so that the corporation ultimately reports the same amount for both financial reporting and tax purposes.

Question 12

A nonqualified stock option will create a permanent book-tax difference in a given year if it accrues during the year but is exercised in a later year.

Accepted Answer

The answer of A nonqualified stock option will create a...

Question 13

Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.

Accepted Answer

The answer of Large corporations are allowed to use the...

Question 14

For incentive stock options granted when ASC 718 applies, the value of the options that accrue in a given year always creates a permanent, unfavorable book-tax difference.

Accepted Answer

Under ASC 718, the value of incentive stock options is recognized as an expense on the company's books, but no tax deduction is allowed until the options are exercised. This creates a permanent book-tax difference, which is unfavorable for tax purposes.

Question 15

For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

Accepted Answer

Companies using nonqualified stock options deduct expenses in the year the options are exercised for tax purposes.

Question 16

Corporations may carry net operating loss sustained in 2015 back two years and forward 20 years.

Accepted Answer

This is true according to the Internal Revenue Service (IRS) rules. Corporations can carry back NOLs for two years and carry them forward for up to 20 years.

Question 17

A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.

Accepted Answer

A corporation can carry a net capital loss back three years and forward five years to offset capital gains in those years.

Question 18

Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

Accepted Answer

If income is included in book income but excluded from taxable income, then it will create a book-tax difference. This difference may be permanent if there is no expectation of the income being included in taxable income in future years. This can result in a favorable book-tax difference, since the company will have higher book income than taxable income, leading to lower tax liability.

Question 19

A corporation may carry a net capital loss back three years and forward five years.

Accepted Answer

This is true according to the tax laws in many countries, including the United States. A corporation can use net capital losses from one year to offset capital gains in other years, and if there are still losses leftover, they can be carried back or forward to other tax years. This allows corporations to more effectively manage their tax liabilities over time, and can be especially helpful during times of economic uncertainty or market volatility.

Question 20

In general, a corporation can elect to use either the accrual or cash method of accounting no matter how large the corporation.

Accepted Answer

The answer of In general, a corporation can elect to...

Quiz 16: Corporate Operations