Question 1

Which of the following statements about the cash method of accounting is false?

Accepted Answer

A) Under the cash method,annual taxable income equals annual net cash inflow. 
B) The revenue from a sale of goods is recognized when payment is received. 
C) An expense is recognized when the expense is paid. 
D) None of the above is false. 
A) Under the cash method,annual taxable income equals annual net cash inflow. 
B) The revenue from a sale of goods is recognized when payment is received. 
C) An expense is recognized when the expense is paid. 
D) None of the above is false.

Question 2

Taxable income is defined as gross income minus allowable deductions and credits.

Accepted Answer

A) True 
 B)False

Question 3

An unfavorable temporary book/tax difference generates a deferred tax asset.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following methods of accounting is never permissible for computing taxable income?

Accepted Answer

A) Cash receipts and disbursements method 
B) Accrual method 
C) Hybrid method that combines the cash and accrual methods 
D) All of the above are permissible methods of accounting. 
A) Cash receipts and disbursements method 
B) Accrual method 
C) Hybrid method that combines the cash and accrual methods 
D) All of the above are permissible methods of accounting.

Question 5

If an accrual basis taxpayer receives a prepayment of rent income,the receipt results in an unfavorable temporary book/tax difference.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements describes a permanent book/tax difference?

Accepted Answer

A) An expense reported on the current income statement but deducted on next year's tax return 
B) A revenue item included in current taxable income but not reported on the income statement until next year 
C) An expense (or loss)is realized for book purposes but never recognized for tax purposes 
D) A revenue item reported on the current income statement but not included in taxable income until an indefinite future year 
A) An expense reported on the current income statement but deducted on next year's tax return 
B) A revenue item included in current taxable income but not reported on the income statement until next year 
C) An expense (or loss)is realized for book purposes but never recognized for tax purposes 
D) A revenue item reported on the current income statement but not included in taxable income until an indefinite future year

Question 7

RRK,a calendar year,accrual basis taxpayer,is involved in a legal dispute over an alleged trademark violation.At the end of the year,RRK's accountant recorded a $750,000 accrued expense for the estimated settlement cost of the dispute.Which of the following statements is true?

Accepted Answer

A) RRK can deduct the $750,000 accrued expense. 
B) RRK can't deduct the $750,000 accrued expense because the liability fails the all-events test. 
C) RRK can never deduct the $750,000 expense. 
D) RRK can deduct the accrued expense only if the dispute is settled within eight and one-half months after the close of the taxable year. 
A) RRK can deduct the $750,000 accrued expense. 
B) RRK can't deduct the $750,000 accrued expense because the liability fails the all-events test. 
C) RRK can never deduct the $750,000 expense. 
D) RRK can deduct the accrued expense only if the dispute is settled within eight and one-half months after the close of the taxable year.

Question 8

PPQ Inc.wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes.PPQ can't make this change without receiving permission from the IRS.

Accepted Answer

A) True 
 B)False

Question 9

Keagan Company,a calendar year taxpayer,incurred $1,490 of long-distance telephone charges in December 2019 and mailed a check to the telephone company on January 4,2020.If Poole is an accrual basis taxpayer,it reports a $1,490 tax deduction in 2020.

Accepted Answer

A) True 
 B)False

Question 10

Ladow Inc.incurred a $32,000 net operating loss in 2019.If Ladow's 2020 taxable income was $38,000 before NOLs,compute Ladow's 2020 NOL deduction.

Accepted Answer

A) $0 
B) $25,600 
C) $30,400 
D) $32,000 
A) $0 
B) $25,600 
C) $30,400 
D) $32,000

Question 11

Which of the following statements about the accrual method of accounting is false?

Accepted Answer

A) The accrual method is the required method of accounting under GAAP. 
B) Every publicly held corporation must use the accrual method of accounting to prepare financial statements. 
C) The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical. 
D) Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income. 
A) The accrual method is the required method of accounting under GAAP. 
B) Every publicly held corporation must use the accrual method of accounting to prepare financial statements. 
C) The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical. 
D) Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income.

Question 12

Porter Inc.incurred a $20,000 expense only $13,400 of which was deductible.Which of the following is true?

Accepted Answer

A) This transaction resulted in a $6,600 unfavorable difference between book income and taxable income. 
B) This transaction resulted in a $6,600 favorable difference between book income and taxable income. 
C) If this transaction resulted in a temporary book/tax difference,it had no effect on Porter's deferred tax accounts. 
D) If this transaction resulted in a permanent book/tax difference,it had no effect on the computation of Porter's tax expense per books. 
A) This transaction resulted in a $6,600 unfavorable difference between book income and taxable income. 
B) This transaction resulted in a $6,600 favorable difference between book income and taxable income. 
C) If this transaction resulted in a temporary book/tax difference,it had no effect on Porter's deferred tax accounts. 
D) If this transaction resulted in a permanent book/tax difference,it had no effect on the computation of Porter's tax expense per books.

Question 13

Derik Inc.,a calendar year,accrual basis corporation,accrued $278,000 vacation pay expense and a corresponding liability at the end of 2019.Derik paid $22,000 of the accrued liability to employees who took vacation between January 1 and March 15,2020.How much of the accrued vacation pay expense is deductible in 2019?

Accepted Answer

A) None of the accrued expense is deductible in 2019. 
B) $22,000. 
C) $256,000. 
D) The entire accrued expense is deductible in 2019. 
A) None of the accrued expense is deductible in 2019. 
B) $22,000. 
C) $256,000. 
D) The entire accrued expense is deductible in 2019.

Question 14

Marz Services Inc.is a personal service corporation with $60 million average annual gross receipts.Marz must use the accrual method of accounting for tax purposes.

Accepted Answer

A) True 
 B)False

Question 15

On December 19,2019,Acme Inc.,an accrual basis corporation,accrued $50,000 compensation expense for a routine year-end bonus payable to Mrs.Tabor,who is Acme's CFO.Acme paid the $50,000 to Mrs.Tabor on January 15,2020.Which of the following statements is false?

Accepted Answer

A) If Mrs.Tabor owns no stock in Acme (i.e.is not a related party),Acme can deduct the accrued expense in 2019. 
B) Mrs.Tabor includes her $50,000 bonus in 2020 gross income. 
C) If Mrs.Tabor owns 75 percent of Acme's stock (i.e.is a related party),Acme can't deduct the expense until 2020. 
D) If Mrs.Tabor owns 75 percent of Acme's stock (i.e.is a related party),Acme can never deduct the bonus expense. 
A) If Mrs.Tabor owns no stock in Acme (i.e.is not a related party),Acme can deduct the accrued expense in 2019. 
B) Mrs.Tabor includes her $50,000 bonus in 2020 gross income. 
C) If Mrs.Tabor owns 75 percent of Acme's stock (i.e.is a related party),Acme can't deduct the expense until 2020. 
D) If Mrs.Tabor owns 75 percent of Acme's stock (i.e.is a related party),Acme can never deduct the bonus expense.

Question 16

Which of the following statements regarding book/tax differences is false?

Accepted Answer

A) A permanent book/tax difference affects only the year in which it occurs. 
B) A temporary book/tax difference affects two or more tax years. 
C) Temporary book/tax differences arising in the current tax year will reverse in the future in one or more tax years. 
D) The tax cost or benefit of a permanent book/tax difference is recouped over time. 
A) A permanent book/tax difference affects only the year in which it occurs. 
B) A temporary book/tax difference affects two or more tax years. 
C) Temporary book/tax differences arising in the current tax year will reverse in the future in one or more tax years. 
D) The tax cost or benefit of a permanent book/tax difference is recouped over time.

Question 17

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

Accepted Answer

A) Valley can use the NOL only as a carryforward deduction. 
B) Valley can use the NOL only as a carryback deduction. 
C) Valley can elect to use the NOL as a carryforward deduction. 
D) None of the above is true. 
A) Valley can use the NOL only as a carryforward deduction. 
B) Valley can use the NOL only as a carryback deduction. 
C) Valley can elect to use the NOL as a carryforward deduction. 
D) None of the above is true.

Question 18

JKL Inc.and Matthew Inc.enter into a business transaction.The two corporations are related parties for tax purposes.Which of the following statements is true?

Accepted Answer

A) JKL and Matthew must account for the transaction using the same method of accounting. 
B) The IRS has the right to reallocate income from the transaction to prevent distortion. 
C) The cash method of accounting must be used to account for such transactions. 
D) JKL and Matthew must request permission from the IRS to engage in the related party transaction. 
A) JKL and Matthew must account for the transaction using the same method of accounting. 
B) The IRS has the right to reallocate income from the transaction to prevent distortion. 
C) The cash method of accounting must be used to account for such transactions. 
D) JKL and Matthew must request permission from the IRS to engage in the related party transaction.

Question 19

Murray Inc.,a calendar year,accrual basis corporation,accrued $946,000 salary and wage expense at the end of 2019.Murray paid the entire amount of the accrued liability on January 13,2020.Murray can deduct the entire $946,000 accrued expense in 2019.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following does not result in a permanent book/tax difference?

Accepted Answer

A) Tax-exempt interest on state and local bonds 
B) NOL carryforwards 
C) Business entertainment expenses 
D) Lobbying expenses 
A) Tax-exempt interest on state and local bonds 
B) NOL carryforwards 
C) Business entertainment expenses 
D) Lobbying expenses

Which of the following statements about the cash method of accounting is false?

Taxable income is defined as gross income minus allowable deductions and credits.

An unfavorable temporary book/tax difference generates a deferred tax asset.

Which of the following methods of accounting is never permissible for computing taxable income?

If an accrual basis taxpayer receives a prepayment of rent income,the receipt results in an unfavorable temporary book/tax difference.

Which of the following statements describes a permanent book/tax difference?

RRK,a calendar year,accrual basis taxpayer,is involved in a legal dispute over an alleged trademark violation.At the end of the year,RRK's accountant recorded a $750,000 accrued expense for the estimated settlement cost of the dispute.Which of the following statements is true?

PPQ Inc.wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes.PPQ can't make this change without receiving permission from the IRS.

Keagan Company,a calendar year taxpayer,incurred $1,490 of long-distance telephone charges in December 2019 and mailed a check to the telephone company on January 4,2020.If Poole is an accrual basis taxpayer,it reports a $1,490 tax deduction in 2020.

Ladow Inc.incurred a $32,000 net operating loss in 2019.If Ladow's 2020 taxable income was $38,000 before NOLs,compute Ladow's 2020 NOL deduction.

Which of the following statements about the accrual method of accounting is false?

Porter Inc.incurred a $20,000 expense only $13,400 of which was deductible.Which of the following is true?

Marz Services Inc.is a personal service corporation with $60 million average annual gross receipts.Marz must use the accrual method of accounting for tax purposes.

On December 19,2019,Acme Inc.,an accrual basis corporation,accrued $50,000 compensation expense for a routine year-end bonus payable to Mrs.Tabor,who is Acme's CFO.Acme paid the $50,000 to Mrs.Tabor on January 15,2020.Which of the following statements is false?

Which of the following statements regarding book/tax differences is false?

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

JKL Inc.and Matthew Inc.enter into a business transaction.The two corporations are related parties for tax purposes.Which of the following statements is true?

Murray Inc.,a calendar year,accrual basis corporation,accrued $946,000 salary and wage expense at the end of 2019.Murray paid the entire amount of the accrued liability on January 13,2020.Murray can deduct the entire $946,000 accrued expense in 2019.

Which of the following does not result in a permanent book/tax difference?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

Exam 6: Taxable Income From Business Operations

Which of the following statements about the cash method of accounting is false?

Taxable income is defined as gross income minus allowable deductions and credits.

An unfavorable temporary book/tax difference generates a deferred tax asset.

Which of the following methods of accounting is never permissible for computing taxable income?

If an accrual basis taxpayer receives a prepayment of rent income,the receipt results in an unfavorable temporary book/tax difference.

Which of the following statements describes a permanent book/tax difference?

RRK,a calendar year,accrual basis taxpayer,is involved in a legal dispute over an alleged trademark violation.At the end of the year,RRK's accountant recorded a $750,000 accrued expense for the estimated settlement cost of the dispute.Which of the following statements is true?

PPQ Inc.wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes.PPQ can't make this change without receiving permission from the IRS.

Keagan Company,a calendar year taxpayer,incurred $1,490 of long-distance telephone charges in December 2019 and mailed a check to the telephone company on January 4,2020.If Poole is an accrual basis taxpayer,it reports a $1,490 tax deduction in 2020.

Ladow Inc.incurred a $32,000 net operating loss in 2019.If Ladow's 2020 taxable income was $38,000 before NOLs,compute Ladow's 2020 NOL deduction.

Which of the following statements about the accrual method of accounting is false?

Porter Inc.incurred a $20,000 expense only $13,400 of which was deductible.Which of the following is true?

Marz Services Inc.is a personal service corporation with $60 million average annual gross receipts.Marz must use the accrual method of accounting for tax purposes.

On December 19,2019,Acme Inc.,an accrual basis corporation,accrued $50,000 compensation expense for a routine year-end bonus payable to Mrs.Tabor,who is Acme's CFO.Acme paid the $50,000 to Mrs.Tabor on January 15,2020.Which of the following statements is false?

Which of the following statements regarding book/tax differences is false?

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

JKL Inc.and Matthew Inc.enter into a business transaction.The two corporations are related parties for tax purposes.Which of the following statements is true?

Murray Inc.,a calendar year,accrual basis corporation,accrued $946,000 salary and wage expense at the end of 2019.Murray paid the entire amount of the accrued liability on January 13,2020.Murray can deduct the entire $946,000 accrued expense in 2019.

Which of the following does not result in a permanent book/tax difference?

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters