Exam 5: Corporate Operations

In January 2018, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company did 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 2019, the company experienced a surge in its stock price, and Ms. Svaro exercised the options. The total bargain element at the time of exercise was $60,000. For 2019, what is the book-tax difference due to the options exercised?

An affiliated group must file a consolidated tax return.

Which of the following statements regarding charitable contributions is false?

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

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).

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?

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

Netgate Corporation's gross regular tax liability for 2019 was $189,000. What was its taxable income?

C corporations with annual average gross receipts of $26 million or more are allowed to use the cash method of accounting for at least the first two years of their existence.

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

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?

In 2019, 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?

Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2019 of $(64,000). It had net capital gains of $21,500 in 2018, $45,000 in 2017, $10,000 in 2016 (but suffered a net operating loss in 2016), and $8,000 of net capital gain in 2015. What is the net capital gain in 2018 after the carryback is applied?

In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters: (Use Exhibit 16-10) What amount of estimated tax payments would Auto Rent pay each quarter to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

Which of the following statements regarding net operating losses generated in 2020 is true?

Corporations are not allowed to deduct charitable contributions in excess of 10 percent of the corporation's taxable income (before the charitable contribution and certain other deductions).

Volos Company (a calendar-year corporation) began operations in March of 2017 and was not profitable through December of 2018. Volos has been profitable for the first quarter of 2019 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2019 because it had no tax liability for the 2018 tax year and has been in business for at least 12 months.

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?

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

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