Exam 6: Taxable Income From Business Operations

Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.

The principle of conservatism reflected by GAAP is identical to the principle of conservatism reflected in the tax law.

Ladow Inc. incurred a $32,000 net operating loss in 2021. If Ladow's 2022 taxable income was $38,000 before NOLs, compute Ladow's 2021 NOL deduction.

Lawes Company, a cash basis business, mailed a $24,500 invoice to MWQ Partnership for professional services rendered. MWQ offered to pay the invoice by transferring 250 shares of ConAgri common stock to Lawes. The shares are selling on the NYSE at $98 per share. If Lawes accepts the shares in payment, it recognizes:

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

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

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. Beginning allowance for bad debts \ 61,150 Actual write-offs of accounts receivable during the year (80,000) Addition to allowance 88,500 Ending allowance for bad debts \ 69,650 Because of the difference between the GAAP and the tax rules for accounting for bad debts, Monro Inc. has an:

Stack Inc. owns a $1 million insurance policy on the life of Mary Stack, the corporate CEO. The corporation is the policy beneficiary. Stack's annual premium on the policy is $3,160. Which of the following statements is true?

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

For tax purposes, income is recognized when all events have occurred that fix the taxpayer's right to receive the income and the amount of income can be determined with reasonable accuracy.

At the end of the current taxable year, Gong Company accrued an expense for an account payable to Mexance Inc. Even if Gong and Mexance are related parties, Gong can deduct the accrued expense in the current year if Mexance also uses the accrual method of accounting for tax purposes.

Tax expense per books is based on:

Bolton Inc., a calendar year taxpayer, generated a $296,400 net operating loss in 2021. Bolton can carry the loss back five years and forward 20 years for tax purposes.

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?

Southlawn Inc.'s taxable income is computed as follows: Book income before tax \2 ,405,600 Net permanent differences (512,000) Net temporary differences (189,000) Taxable income \1 ,704,600 Using a 21% rate, compute Southlawn's tax expense per books and tax payable.

The tax law does not allow deductions for estimated expenses that result in an allowance or reserve for financial statement purposes.

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

Goff Inc.'s taxable income is computed as follows: Book income before tax 1, 016,200 Net permanent differences 77,930 Net temporary differences 475,200 Taxable income \ 1,569,330 Using a 21% rate, compute Goff's tax expense per books and tax payable.

Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?

Beginning in 2021, which of the following taxpayers is subject to the excess business loss limitation?