Chapter 16

Chapter 16Student: ___________________________________________________________________________

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

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

True False 3. Corporations have a larger standard deduction than individual taxpayers because they generally have

higher revenues. True False

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

their existence. True False

5. 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. True False

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

relative to book income. True False

7. Income that is included in book income, but excluded from taxable income, results in a favorable,

permanent book-tax difference. True False

8. Federal income tax expense reported on a corporation's books generates a temporary book-tax

difference. True False

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

differences. True False

10. In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for

tax purposes. It has a favorable temporary book-tax difference for that year. True False

11. For incentive stock options granted when ASC 718 (a codification of FAS 123R) applies, the value of the

options that vest in a given year always creates a permanent, unfavorable book-tax difference. True False

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

exercised. True False

13. A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during

the year but is exercised in a later year. True False

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

True False

15. 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. True False

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

True False 17. A corporation may carry a net capital loss back three years and forward five years.

True False 18. Corporations can carry net operating losses (in years other than 2008 and 2009) back two years and

forward 20 years. True False

19. Bingo Corporation incurred a net operating loss in 2012. If it carries the loss back, it must first carry the

loss back to offset its 2011 taxable income and then it carries any remaining loss back to offset its 2010 taxable income. True False

20. Net operating losses generally create permanent book-tax differences.

True False 21. Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a

corporation's net operating loss for the year. True False

22. Accrual-method corporations are never allowed to deduct charitable contributions until they actually

make payment to the charity. True False

23. GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-

profit organization, in November of 2012. GenerUs made payment to FoodBank on February 2, 2013. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2012 tax return. True False

24. NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified

taxable income, while NOL and capital loss carrybacks are not. True False

25. Corporations may carry excess charitable contributions forward five years, but they may not carry them

back. True False

26. A corporation generally will report a favorable, temporary book-tax difference when it deducts a

charitable contribution carryover. True False

27. Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's

taxable income (before the charitable contribution and certain other deductions). True False

28. The dividends received deduction is designed to mitigate the extent to which corporate earnings are

subject to more than two levels of taxation. True False

29. Corporations compute their dividends received deduction by multiplying the dividend amount by 10

percent, 50 percent, or 100 percent depending on their ownership in the distributing corporation's stock. True False

30. The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero. True False

31. The dividends received deduction is subject to a limitation based on income.

True False 32. Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

True False 33. Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several

smaller corporations to take advantage of low marginal corporate tax rates at low levels of income. True False

34. Three brothers each own 20 percent of the stock in three corporations. Because no single brother owns

more than 50 percent of a corporation, the tax law would not treat the corporations as a controlled group. True False

35. The corporate tax form is Form 1065.

True False 36. Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is

applied to the tax rates to determine the corporation's gross tax liability). True False

37. Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or

permanent. True False

38. By default, an affiliated group must file a consolidated tax return.

True False 39. The rules for consolidated reporting for financial statement purposes are the same as the rules for

consolidated reporting for tax purposes. True False

40. Calendar-year corporations that request an extension for filing their tax returns will have a tax return due

date of September 15. True False

41. Volos Company (a calendar-year corporation) began operations in March of 2010 and was not profitable

through December of 2011. Volos has been profitable for the first quarter of 2012 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2012 because it had no tax liability for the 2011 tax year and has been in business for at least 12 months. True False

42. Most corporations use the annualized income method to determine their required annual payment for

purposes of making quarterly estimated payments. True False

43. Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior

to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year. True False

44. For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of

$5,000,000 in the three years prior to the current year. True False

45. Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax. True False

46. Urban Corporation receives tax-exempt income from Denver municipal bonds. All the proceeds from the

bonds were used to fund public projects. In computing its AMT base, Urban must add back the interest income from its municipal bonds to taxable income. True False

47. Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

True False 48. The tax rate for the corporate alternative minimum tax is a flat 26%.

True False 49. The adjusted current earnings (ACE) adjustment is 75% of the difference between a corporation's

alternative minimum taxable income before the ACE adjustment and its ACE. True False

50. Corporations are allowed to deduct at least some AMT exemption regardless of profitability.

True False 51. A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.

True False 52. Minimum tax credits generated by the AMT can be carried forward indefinitely.

True False 53. A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its

tentative minimum tax when its regular tax exceeds its tentative minimum tax. True False

54. The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular

tax. True False

55. Which of the following is not calculated in the corporate income tax formula?

A. Gross incomeB. Adjusted gross incomeC. Taxable incomeD. Regular tax liability

56. WFO Corporation has gross receipts according to the following schedule:

If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method? A. Year 3.B. Year 4.C. Year 5.D. Year 6.E. None of these.

57. Which of the following does NOT create a permanent book-tax difference? A. Organizational and start-up expensesB. Key employee death benefit incomeC. Fines and penalties expensesD. Municipal bond interest income

58. Which of the following does NOT create a temporary book-tax difference?

A. Deferred compensationB. Bad-debt expenseC. Depreciation expenseD. Domestic production activities deduction

59. Which of the following statements regarding book-tax differences is true?

A. Corporations are not required to report book-tax differences on their income tax returns.B.

Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.

C. Income excludable for tax purposes usually creates a temporary book-tax difference.D. None of these is true.

60. It is important to distinguish between temporary and permanent book-tax differences for which of the

following reasons? A. Temporary book-tax differences will reverse in future years whereas permanent differences will not.B.

Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.

C. Both A and B.D. Neither A nor B.

61. TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the

nature of the book-tax difference created by this expense? A. Permanent; favorableB. Permanent; unfavorableC. Temporary; favorableD. Temporary; unfavorable

62. 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? A. Permanent; favorableB. Permanent; unfavorableC. Temporary; favorableD. Temporary; unfavorable

63. 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? A. Permanent; favorableB. Permanent; unfavorableC. Temporary; favorableD. Temporary; unfavorable

64. Corporation A receives a dividend from Corporation B. Corporation A includes the dividend in its gross

income for tax and financial accounting purposes (no book-tax difference). If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own? A. A owns less than 20 percent of the stock of BB. A owns at least 20 but not more than 50 percent of the stock of BC. A owns more than 50 percent of the stock of BD. Cannot be determined

65. Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own? A. A owns less than 20 percent of the stock of BB. A owns at least 20 but not more than 50 percent of the stock of BC. A owns more than 50 percent of the stock of BD. Cannot be determined

66. Coop Inc. owns 40 percent of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop

a dividend of $10,000 in 2012. 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)? A. $2,000 unfavorableB. $2,000 favorableC. $10,000 unfavorableD. $10,000 favorableE. None of these

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

A. 180 monthsB. 150 monthsC. 60 monthsD. None of these

68. Which of the following statements regarding book-tax differences associated with purchased goodwill is

false? A.

It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.

B.

In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book-tax difference will be unfavorable.

C. Temporary book-tax differences associated with goodwill are always favorable.D.

If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognized.

69. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when

ASC 718 (a codification of FAS 123R) applies? A. Financial accounting—no expense; tax—no deductionB. Financial accounting—no expense; tax—deduct bargain element at exerciseC. Financial—expense value over vesting period; tax—no deductionD. Financial—expense value over vesting period; tax— deduct bargain element at exercise

70. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when

ASC 718 (a codification of FAS 123R) does not apply? A. Financial accounting—no expense; tax—no deductionB. Financial accounting—no expense; tax—deduct bargain element at exerciseC. Financial accounting—expense value over vesting period; tax—no deductionD. Financial accounting—expense value over vesting period; tax— deduct bargain element at exercise

71. Which of the following describes the correct treatment of the exercise of nonqualified stock options

(NQOs) that were granted when ASC 718 (a codification of FAS 123R) applies? A. Financial—no expense; tax—no deductionB. Financial—no expense; tax—deduct bargain element at exerciseC. Financial—expense value over vesting period; tax—no deductionD. Financial—expense value over vesting period; tax—deduct bargain element at exercise

72. Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 (a codification of FAS 123R) did not apply? A. Financial—no expense; tax—no deductionB. Financial—no expense; tax—deduct bargain element at exerciseC. Financial—expense value over vesting period; tax—no deductionD. Financial—expense value over vesting period; tax—deduct bargain element at exercise

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

A.

If ASC 718 (a codification of FAS 123R) applies, book-tax differences associated with NQOs may be either permanent or temporary.

B.

In a given year when ASC 718 applies, if the value of the options that vest is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable.

C.

Before ASC 718 applied, no expense recognition was required for NQOs for financial accounting purposes.

D. If ASC 718 does not apply, all stock option-related book-tax differences are temporary. 74. Which of the following statements regarding incentive stock options (ISOs) is false?

A. If ASC 718 (a codification of FAS 123R) does not apply, ISOs do not create book-tax differences.B. For ISOs granted when ASC 718 applies, book-tax differences are always unfavorable.C.

If ASC 718 applies, the value expensed for book purposes in a given year is the value of the options that vest.

D. If ASC 718 applies, book-tax differences associated with ISOs may be either permanent or temporary. 75. Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over

two years—half in 2012 (the year of issue) and half in 2013. One thousand options are exercised in 2013 with a bargain element on each option of $6. What is the 2013 book-tax difference associated with the stock options? A. $14,000 unfavorableB. $14,000 favorableC. $20,000 unfavorableD. $20,000 favorableE. None of these

76. In January 2011, 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 2012, 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 2012, what is the book-tax difference due to the options exercised? A. 10,000 unfavorableB. 10,000 favorableC. 50,000 unfavorableD. 60,000 favorable

77. In January 2012, 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 2013, 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 2013, what is the nature of the book-tax difference due to the options exercised? A. Favorable and temporary.B. Favorable and permanent.C. Unfavorable and temporary.D. Unfavorable and permanent.E. Not enough information to determine.

78. Which of the following statements regarding capital gains and losses is false? A. In terms of tax treatment, corporations generally prefer capital gains to ordinary income.B.

Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.

C.

C corporations can carry back net capital losses three years and they can carry them forward for five years.

D. Corporations must apply capital loss carrybacks and carryovers in a particular order. 79. For corporations, which of the following regarding net capital losses is true?

A.

A corporation that experiences a net capital loss has a favorable book-tax difference in the year of the loss.

B.

A corporation that experiences a net capital loss in year 4 first carries the loss back to year 3, then year 2, and then year 1 before carrying it forward.

C. Net capital loss carrybacks are deductible in determining a corporation's net operating loss.D.

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

80. 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? A. $11,000 unfavorableB. $11,000 favorableC. $16,000 unfavorableD. $16,000 favorable

81. Tatoo Inc. reported a net capital loss of $13,000 in 2012. It had a net capital gain of $4,300 in 2010 and

$3,000 in 2009. In 2011, though the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of the Tatoo's capital loss carryover remaining after it applies the carryback? A. $4,700B. $5,700C. $8,700D. $13,000

82. 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? A. Permanent; favorableB. Permanent; unfavorableC. Temporary; favorableD. Temporary; unfavorable

83. Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

A. Charitable contribution deductionB. Domestic production activities deductionC. Net capital loss carrybackD. Net operating losses from other years

84. Which of the following statements regarding net operating losses generated in 2012 is true?

A. Corporations can carry net operating losses back two years and forward up to 15 years.B.

A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future years.

C.

When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover.

D.

Marginal tax rates are irrelevant in determining the tax benefit of applying a net operating loss carryback or carryover.

E. None of these is a true statement.

85. Which of the following statements regarding charitable contributions is false? A. Only contributions made to qualified charitable organizations are deductible.B.

Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions).

C. Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.D. The amount deductible for non-cash contributions is always the adjusted basis of the property donated.

86. Which of the following is unnecessary to allow an accrual-method corporation to deduct charitable

contributions before actually paying the contribution to charity? A. Approval of the payment from the board of directors.B. Approval from the IRS prior to making the contribution.C. Payment made within two and one-half months of the tax year end.D. All of these are necessary.

87. Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could

give $5,000 in cash. Second, it could give stock it initially purchased two years ago for $4,000 but is now worth $6,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes? A. Cash > Stock > InventoryB. Stock > Cash > InventoryC. Inventory > Stock > CashD. Inventory > Cash > Stock

88. Which of the following is deductible in calculating the charitable contribution limit modified taxable

income? A. Net capital loss carrybacksB. NOL carrybacksC. NOL carryoversD. Charitable contributions

89. Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of

$72,000. Its charitable contributions for the year were $7,500. What is Remsco's current-year charitable contribution deduction and contribution carryover? A. $6,000 current-year deduction; $1,500 carryoverB. $7,500 current-year deduction; $0 carryoverC. $1,200 current-year deduction; $6,300 carryoverD. $7,200 current-year deduction; $300 carryover

90. If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what

kind of book-tax difference is created? A. Permanent; favorableB. Permanent; unfavorableC. Temporary; favorableD. Temporary; unfavorable

91. Which of the following statements regarding excess charitable contributions (contributions in excess of

the modified taxable income limitation) by corporations is true? A. Corporations may not carry over or carry back excess charitable contributions.B. Corporations can carry excess charitable contributions over to a future year or back to a prior year.C.

Corporations can carry excess charitable contributions over to a future year but not back to a prior year.

D.

Corporations can carry excess charitable contributions back to a prior year but not over to a future year.

92. Which of the following statements regarding the dividends and/or the dividends received deduction (DRD) is true? A. Dividends are taxed at preferential rates for corporations as well as for individuals.B. The DRD can increase the net operating loss of a corporation.C.

Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock.

D. The DRD allows corporations to deduct the amount of dividends that they distribute. 93. Which of the following is deductible in calculating DRD modified taxable income?

A. Charitable contribution deductionB. NOL carrybacksC. NOL carryoversD. Dividends received deduction

94. Jazz Corporation owns 50% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz

Corporation. Jazz Corp.'s taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0B. $7,000C. $8,000D. $10,000


Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0.B. $5,600.C. $7,000.D. $8,000.E. None of these.


Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0.B. $2,800.C. $4,200.D. $7,000.E. None of these.

97. Which of the following is not a type of controlled group as defined in the Internal Revenue Code?

A. Parent-subsidiary.B. Brother-sister.C. Combined.D. All of these are types of controlled groups.

98. TireShop, Inc. owns 85 percent of Rubber Supply Co.'s voting stock throughout the tax year. TireShop

and Rubber Supply would be considered as what kind of controlled group? A. Parent-subsidiaryB. Brother-sisterC. CombinedD. None of these

99. Together, Kurt and Esmeralda own 60 percent of three corporations: RAZ, DVA, and TRE. The three

corporations would be considered as what kind of controlled group for tax purposes? A. Parent-subsidiary.B. Brother-sister.C. Combined.D. The three corporations would not be considered to be a controlled group for tax purposes.

100.Which of the following statements regarding controlled groups is false? A.

The purpose of the controlled group rules is to essentially treat the group as though it were one entity for purposes of determining certain tax benefits.

B.

Having several entities treated as a controlled group is advantageous for tax purposes because each corporation in the group is allowed to use the 15% tax bracket in the corporate tax rate schedule in computing its regular income tax liability.

C.

Lauren owns 100% of Corporation A stock and 100% of Corporation B stock. Corporation A and Corporation B form a controlled group.

D.

Corporation A owns 100% of Corporation B. Corporation A and Corporation B form a controlled group.

101.Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?

A.

In general, smaller corporations are required to complete Schedule M-1 while larger corporations are required to complete Schedule M-3.

B. Schedule M-3 lists more book-tax differences than M-1.C. Both Schedule M-1 and M-3 reconcile to a corporation's bottom line taxable income.D.

Schedule M-1 does not distinguish between temporary and permanent book-tax differences while Schedule M-3 does.

102.Which of the following statements is false regarding consolidated tax returns?

A. An affiliated group can file a consolidated tax return only if it elects to do so.B.

To file a consolidated tax return, one corporation must own at least 50% of the stock of another corporation.

C.

For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member.

D.

For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.

103.What is the unextended due date of the tax return of a calendar-year corporation?

A. February 15.B. March 15.C. April 15.D. September 15.

104.Which of the following is not an acceptable method of determining the required annual payment of

federal income tax for corporations? A. 100 percent of the prior year's tax liability (with a few exceptions)B. 100 percent of the current year's tax liabilityC. 100 percent of the estimated current year tax liability using the annualized income methodD.

All of these are acceptable methods of determining the required annual payment of federal income tax for corporations

105.Which of the following statements is false regarding corporate estimated tax payments?

A.

The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.

B.

Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000 (including the alternative minimum tax).

C.

Even though a corporation extends its tax return it still must pay its tax liability for the year by two and one half months after year end.

D.

Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.

106.Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income as of the end of the third quarter? A. $300,000B. $320,000C. $400,000D. $480,000

107.Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would

like to use its prior year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true? A.

Rapidpro may use the prior year tax liability to determine its first and second quarter estimated tax payments only since it is a large corporation.

B.

To avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).

C.

To avoid penalty, the third quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its third quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).

D. None of these is true. 108.Which of the following statements regarding the alternative minimum tax is false?

A.

Corporations compute the AMT by multiplying their AMT base by 35 percent and subtracting their regular tax liability.

B. Small corporations are exempt from the AMT.C. All first-year corporations are exempt from the AMT.D. None of these is false (choose if you believe All of these are true).

109.Which of the following is not an AMT adjustment?

A. Adjustment for depreciationB. Adjustment of gain or loss on sale of depreciable assetsC. Adjustment for adjusted current earnings (ACE)D. Adjustment for domestic production activities deduction

110.In the current year, FurnitureKing Corporation recognized $32,000 of income from an installment sale

it made in a previous tax year. If installment sales are the only difference between ACE and alternative minimum taxable income (before the ACE adjustment), what is the amount and nature of the ACE adjustment for the current tax year? A. $24,000 favorableB. $24,000 unfavorableC. $32,000 favorableD. $32,000 unfavorable

111.XPO Corporation has a minimum tax credit of $51,000 from 2011. If its 2012 tentative minimum tax is

$211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2013? A. $51,000B. $39,000C. $12,000D. $0

112.Flywest Airlines, Inc. has regular taxable income of $190 million. It also has $10 million of AMT

preference items, a $5 million unfavorable depreciation adjustment, and a $2 million favorable ACE adjustment. What is Flywest's alternative minimum tax income (AMTI)? A. $177 millionB. $183 millionC. $197 millionD. $203 million

113.Z Corporation has AMTI of $250,000, which exceeds the AMT exemption phase-out threshold by $100,000. What is Z's tentative minimum tax? A. $47,000B. $45,000C. $40,000D. $30,000

114.Which of the following statements regarding AMT is true?

A.

Only very profitable companies (AMTI greater than $1 million) have their AMT exemption phased out.

B. The AMT exemption is phased out dollar for dollar as AMTI increases.C. Minimum tax credits are generated whenever regular tax liability exceeds tentative minimum tax.D. Minimum tax credits can be carried forward indefinitely.

115.Assume a corporation is not required to pay AMT in the current year but will pay AMT next year. Also

assume the corporation's regular marginal tax rate is 35 percent. Which tax planning strategy would minimize its after-tax cost of a charitable contribution it is considering paying to a qualified charity? A. Pay the contribution this year.B. Wait until next year to pay the contribution.C. The after-tax cost of the contribution will be the same no matter which year it makes the contribution.D. None of these.

116.In 2012, AutoUSA Inc. received $4,600,000 of book income, including $20,000 of interest income from

tax-exempt municipal bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $350,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return? Assume AutoUSA pays taxes at a flat 34 percent rate and disregard the alternative minimum tax.

117.For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2012. It also

expensed $12,000 of radio station filing fines paid to the FCC the same year. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?

118.In 2012, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of meals and entertainment expenditures. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the book-tax difference is temporary and what amount is permanent?

119.In 2012, Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book purposes, but for tax

purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book-tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book-tax difference is permanent and what amount is temporary?

120.Atom Ventures Inc. (AV) owns stock in the Primo and Faraday corporations. The following summarizes

information relating to AV's investment in Primo and Faraday as follows:

Assuming that AV follows the general rules for reporting its income from these investments, what is the amount of AV's book-tax difference associated with the investment in these corporations (disregarding the dividends received deduction)? Is it favorable or unfavorable? Is it permanent or temporary?

121.On January 1, 2010, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2011, the auditors of Credit Inc. determined that the goodwill had been impaired by $50,000 and Credit Inc. wrote down the book value of the goodwill by $50,000. During 2012, the goodwill was not impaired. In 2013, goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book-tax difference associated with the purchased goodwill 2011, 2012, and 2013? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

122.On January 1, 2011, GrowCo issued 50,000 nonqualified stock options (NQOs) valued at $1 per option.

Each option entitles the owner to purchase one share of stock for $4. These options vest at 20 percent per year for five years beginning in 2011. By the end of 2012, 20,000 of the options had vested. At the end of 2012, these options were exercised when the stock price is $6.25. What is the total value of the book-tax difference associated with the stock options for 2012? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary? (Note that ASC 718 (a codification of FAS 123R) applies to these transactions.)

123.On January 1, 2004 [before the adoption of ASC 718 (a codification of FAS 123R)], Net Optimizers

Inc. granted 1,000 nonqualified stock options (NQOs) valued at $.05 per option. Each option entitles the owner to purchase one share of stock for $1. These options vest at 10 percent per year for ten years. On December 31, 2012, 300 options are exercised when the stock price is $5. In 2012, what is the book-tax difference associated with the stock options? Is it favorable or unfavorable? Is it permanent or temporary?

124.Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on

January 1, 2012 with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning in 2012). Each option allows the holder to purchase one share of stock at $8. On January 1, 2013, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2013 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

125.Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2012 of $64,000. It had net capital gains of $21,500 in 2011, $45,000 in 2010, $10,000 in 2009 (but suffered a net operating loss in 2009), and $8,000 of net capital gain in 2008. What is the net capital gain in 2011 after the carryback is applied?

126.In 2009, Smith Traders Inc. reported taxable income of $100,000. In 2010, it reported taxable income

of $15,000. In 2011, it reported taxable income of $95,000. In 2012, Smith Traders experienced a net operating loss of $25,000. What amount of refund can Smith Traders receive if it does not elect to forgo the carry back (see the corporate income tax schedule)?

127.During 2012, Hughes Corporation sold a portfolio of stock it had held for five years at a loss of $200,000.

It also sold some investment land and recognized a capital gain of $180,000. In 2010, Hughes reported a net capital gain of $12,000 and in 2011 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2013?

128.In 2012, Webtel Corporation donated $50,000 to a qualifying charity. For the year, it reported taxable

income of $310,000, which included the following: the $50,000 charitable contribution (before limitation), a $100,000 dividends received deduction, and a $20,000 net operating loss carryover. What is Webtel Corp's charitable contribution deduction?

129.In 2012, Datasoft Inc. received $350,000 in dividends from CSLabs Inc. Datasoft's taxable income before

the dividends received deduction and $20,000 charitable contribution deduction is $300,000. What is Datasoft's DRD assuming it owns 15 percent of the CSLabs Inc. stock?

130.AB Inc. received a dividend from CD Corporation and is able to claim a dividends received deduction without limitation. AB owns 10 percent of CD. What is AB's marginal tax rate (to the nearest tenth of a percent) on the dividends received (after taking the DRD into account) assuming its ordinary marginal tax rate is 34%?

131.In 2012, LuxAir Inc. (LA) has book income of $160,000. Included in this figure is income generated from

ownership in Jet Repair Corporation (JRC), of which LA owns 30 percent. JRC has $270,000 in earnings for the year and pays $32,000 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD) are its only book-tax differences, what is LA's tax liability for 2012 (see corporate tax schedule)?

132.Netgate Corporation's gross regular tax liability for 2012 was $95,375. What was its taxable income?

133.For 2012, SRH's taxable income is $35,000 and JHH's taxable income is $45,000. Together, Scott and

Jackson Howard own 100 percent of both corporations. What is the combined tax liability of the two corporations?

134.AR Systems Inc. (AR) had $120,000 of tax liability last year. It anticipates a current-year tax liability of

$500,000. Assuming AR is considered a large corporation for purposes of estimating tax liability, what are the minimum estimated tax payments it should make to avoid underpayment penalties? Ignore the annualized income method.

135.In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters:

What amount of estimated tax payments would Auto Rent pay each quarter in order to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

136.IndusTree Inc. received $1,800,000 from the sale of a property in 2012. The property's adjusted basis

for regular tax purposes was $200,000 at the time of the sale. The property's adjusted basis for AMT purposes was $290,000. What is the amount of the AMT adjustment due to the sale of the asset? Does it increase or decrease AMTI?

137.ValuCo gives you the following information:

What is its ACE adjustment for the year? Is it favorable or unfavorable?

138.TerraWise Inc. reported the following information for 2012:

What is TerraWise Inc.'s AMTI?

139.QDP Corporation's AMTI is $569,000 for 2012. Its regular tax liability is $110,000. What is its AMT?

140.VitalJuice Corporation reports the following schedule of prior year taxes it owed:

What is VitalJuice's tax liability for Year 4?

Chapter 16 Key 1. FALSE 2. FALSE 3. FALSE 4. FALSE 5. TRUE 6. FALSE 7. TRUE 8. FALSE 9. TRUE 10. FALSE 11. TRUE 12. TRUE 13. FALSE 14. FALSE 15. FALSE 16. FALSE 17. TRUE 18. TRUE 19. FALSE 20. FALSE 21. TRUE 22. FALSE 23. TRUE 24. TRUE 25. TRUE 26. TRUE 27. TRUE 28. TRUE 29. FALSE 30. FALSE 31. TRUE 32. TRUE 33. TRUE 34. FALSE 35. FALSE 36. FALSE

37. FALSE 38. FALSE 39. FALSE 40. TRUE 41. FALSE 42. TRUE 43. FALSE 44. FALSE 45. TRUE 46. FALSE 47. TRUE 48. FALSE 49. TRUE 50. FALSE 51. TRUE 52. TRUE 53. TRUE 54. TRUE 55. B 56. D 57. A 58. D 59. B 60. C 61. B 62. B 63. D 64. A 65. B 66. A 67. A 68. C 69. C 70. A 71. D 72. B 73. D 74. D

75. A 76. D 77. B 78. B 79. D 80. D 81. B 82. C 83. A 84. B 85. D 86. B 87. B 88. C 89. D 90. D 91. C 92. B 93. A 94. C 95. B 96. D 97. D 98. A 99. B 100. B 101. C 102. B 103. B 104. D 105. B 106. A 107. B 108. A 109. D 110. A 111. C 112. D

113. A 114. D 115. A

116. $16,800 refund.

117. $3,000, favorable book-tax difference. Entire difference is permanent book-tax difference.

118. $225,000 favorable, permanent book-tax difference.

119. $86,000, unfavorable, temporary book-tax difference.

120. $93,750, favorable, temporary book tax difference, computed as follows:

121. 2011: $32,000 unfavorable, temporary book tax difference; 2012: $18,000 favorable, temporary book-tax difference; 2013: $0 book-tax difference.

The permanent difference is $25,000 which is the difference between the bargain element per share of $2.25 minus the $1 value per share as estimated for book purposes multiplied by the number of shares exercised [(2.25 - 1) × 20,000]. The remaining $10,000 difference is temporary. In 2011, the recording of the vested stock option expense of $10,000 created a temporary unfavorable book-tax difference.

122. $35,000, favorable. $25,000 of the adjustment is permanent and the remaining $10,000 is temporary.

123. $1,200, favorable, permanent book-tax difference.

124. $137,500 unfavorable, permanent book-tax difference.

125. $2,500 capital gain, computed as follows:

126. $5,650, computed as follows:




130. 10. 2 percent [34% × (100% - 70%)].


132. $287,500.

133. $15,450; SRC and JHH are a brother-sister control group. Both are more than 50-percent owned by five or fewer persons. Consequently, their incomes must be combined when applying the tax rate schedule. $15,450 = $13,750 + [34% × ($80,000 - $75,000)].

134. Q1: $30,000, Q2: $220,000, Q3: $125,000, Q4: $125,000; AR should use last year's tax liability to determine its quarterly payments. However, because it is a large corporation, it is allowed to use the prior year's tax liability to determine the first quarter payment only. The second quarter payment must catch up the cumulative payments to 50 percent of the current year tax liability.

135. First quarter $510,000; ($1,500,000 × 4 = $6,000,000 × 34% × 25%); Second quarter $510,000 ($6,000,000 × 34% × 50% - $510,000); Third quarter $408,000 ($2,800,000 × 2 × 34% × 75% - $1,020,000); Fourth quarter $204,000 ($3,600,000 × 1.33333 × 34% - $1,428,000). 136. $90,000; the gain recognized for regular tax purposes is $1,600,000 ($1,800,000 amount realized - $200,000 adjusted basis). The gain recognized for AMT purposes is $1,510,000 ($1,800,000 amount realized - $290,000 adjusted basis). The difference of $90,000 is favorable and decreases AMTI because less gain is recognized under AMT rules than regular tax rules. 137. $55,500, unfavorable; two of the three items given are included in the ACE adjustment: interest from tax-exempt bonds funding a public activity and the 70 percent dividends received deduction. The eighty percent dividends received deduction is not included in the ACE adjustment. The sum of the $14,000 interest and the $60,000 seventy-percent DRD is multiplied by 75 percent to get the ACE adjustment.

138. $5,900,000, computed as follows:

139. $3,800. QDP's AMT exemption is completely phased-out, so its tentative minimum tax is $113,800 ($569,000 × 20 percent). The difference between tentative minimum tax and regular tax liability is AMT: $3,800 = $113,800 - $110,000. 140. $750,000. VitalJuice generates a minimum tax credit in Year 2 of $100,000 ($900,000 - $800,000). It generates a $50,000 minimum tax credit in Year 3. In Year 4, the $150,000 minimum tax credit carryover can be applied to reduce regular tax liability to $750,000 ($900,000 - $150,000).

Chapter 16 Summary Category # of Questions

AACSB: Analytic 37

AACSB: Reflective thinking 126

AICPA BB: Critical thinking 140

Blooms: Analyze 63

Blooms: Apply 51

Blooms: Remember 35

Learning Objective: 16-01 Describe the corporate income tax formula; compare and contrast the corporate to the individual tax formula; and discuss tax considerations relating to corporations accounting periods and accounting methods.

8

Learning Objective: 16-02 Identify common book-tax differences; distinguish between permanent and temporary differences; and compute a corporations taxable income and regular tax liability.

88

Learning Objective: 16-03 Describe a corporations tax return reporting and estimated tax payment obligations. 22

Learning Objective: 16-04 Explain how to calculate a corporations alternative minimum tax liability. 23

Level of Difficulty: 1 Easy 44

Level of Difficulty: 2 Medium 70

Level of Difficulty: 3 Hard 26

Spilker - Chapter 16 140

Chapter 16

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