Question 1

Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?

Accepted Answer

Studios carries back $14,000 of the loss to year 4, and then carries the remaining $16,000 forward to year 6. In year 6 it deducts $16,000 for tax purposes and $0 for book purposes.

Question 2

TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Inc. is the beneficiary. What is the nature of the book-tax difference created by this expense?

Accepted Answer

Life insurance premiums for key employees are not deductible for tax purposes.

Question 3

AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale?

Accepted Answer

The gain recognized by AmStore is higher for tax purposes than it is for book purposes because the tax accumulated depreciation is higher than the book accumulated depreciation (the basis is higher for book purposes than for tax purposes). This adjustment is the reversal of the favorable book-tax difference for depreciation on the asset.

Question 4

Which of the following statements regarding nonqualified stock options (NQOs) is false?

Accepted Answer

If ASC 718 applies, stock option-related book-tax differences can be temporary or permanent.

Question 5

BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year?

Accepted Answer

Book income will exceed taxable income in the current year, so the book-tax difference is favorabl

Question 6

Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years-half in 2016 (the year of issue) and half in 2017. One thousand options are exercised in 2017 with a bargain element on each option of $6. What is the 2017 book-tax difference associated with the stock options?

Accepted Answer

The book-tax difference in 2017 is the difference between $10,000 expensed for book purposes (50% × $20,000) and $6,000 (1,000 options exercised × $6 bargain element). It is unfavorable because book expenses exceed tax deductions.

Question 7

Tatoo Inc. reported a net capital loss of $13,000 in 2016. It had a net capital gain of $4,300 in 2014 and $3,000 in 2013. In 2015, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo's capital loss carryover remaining after it applies the carryback?

Accepted Answer

The net capital loss is first carried back to 2013 as $3,000 is deducted against net capital gain. The $4,300 net capital gain in 2014 is offset next. Because Tatoo reported a net operating loss in 2015, it is not allowed to apply the carryback to that year. The remaining carryover is $5,700 ($13,000 - $3,000 - $4,300).

Question 8

iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense?

Accepted Answer

Interest expense on loans to acquire investments that produce tax-exempt income is not deductible under section 265.

Question 9

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs) that were granted when ASC 718 applies?

Accepted Answer

Under ASC 718, the value of options is expensed over the vesting period for books and the bargain element is deducted in the year of exercise for tax purposes creating a temporary book-tax differenc

Question 10

In January 2015, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2016, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $60,000. For 2016, what is the book-tax difference due to the options exercised?

Accepted Answer

For financial purposes, the company deducts the entire $50,000 value of the stock options in 2015, when the stock option is grante

Question 11

In January 2016, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2016, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2016, what is the nature of the book-tax difference due to the options exercised?

Accepted Answer

The book-tax difference is unfavorable because the book deduction ($50,000) exceeds the tax deduction ($40,000), resulting in a higher taxable income for the company. The adjustment is permanent because it will not ever reverse.

Question 12

Which of the following statements regarding capital gains and losses is false?

Accepted Answer

Corporations cannot deduct capital losses against ordinary incom

Question 13

For corporations, which of the following regarding net capital losses is true?

Accepted Answer

Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used before they expire.

Question 14

Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 applies?

Accepted Answer

Under ASC 718, option values are expensed over the vesting period creating an unfavorable permanent book-tax differenc

Question 15

Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 did not apply?

Accepted Answer

Before ASC 718, option values were not required to be expensed for book purposes.

Question 16

Over what time period do corporations amortize purchased goodwill for tax purposes?

Accepted Answer

Goodwill is amortized over 15 years (180 months).

Question 17

Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2016. Chicken also reports financial accounting earnings of $20,000 for that year. Assume that Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

Accepted Answer

Coop recognizes $10,000 in dividend income for tax purposes but only $8,000 of book income (40 percent of the $20,000 earnings of Chicken). Because taxable income is greater than book income, the difference is unfavorabl

Question 18

Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 does not apply?

Accepted Answer

Before ASC 718, option values were not required to be expense

Question 19

Which of the following statements regarding incentive stock options (ISOs) is false?

Accepted Answer

Book-tax differences associated with ISOs are permanent because no deductions can be taken for tax purposes.

Question 20

Which of the following statements regarding book-tax differences associated with purchased goodwill is false?

Accepted Answer

Temporary book-tax differences associated with goodwill can be either favorable or unfavorable depending on the specific circumstances, so statement C is false. The other statements are all correct.

Quiz 16: Corporate Operations