Question 1

Which of the following businesses is prohibited from using the cash receipts and disbursement method of accounting for tax purposes?

Accepted Answer

A)  Partnership with two individual partners with $9 million average annual gross receipts 
B)  Personal service corporation with $8 million average annual gross receipts 
C)  Corporation with $3 million average annual gross receipts 
D)  None of the businesses are prohibited from using the cash method 
A)  Partnership with two individual partners with $9 million average annual gross receipts 
B)  Personal service corporation with $8 million average annual gross receipts 
C)  Corporation with $3 million average annual gross receipts 
D)  None of the businesses are prohibited from using the cash method

Question 2

B&B Inc.'s taxable income is computed as follows: $\begin{array}{llr}
  \text {  Book income betore tax} &\$9,882,590\
 \text { Net permanent differences} &447,600\
 \text {  Net temporary differences} &(802,100)\
 \text {  Taxable income} &\$9,528,090
\end{array}$
 Using a 21% rate, compute B&B's tax expense per books and tax payable.

Accepted Answer

A)  Tax expense per books $2,000,899; tax payable $2,169,340. 
B)  Tax expense per books $2,169,340; tax payable $2,000,899. 
C)  Tax expense per books $2,169,340; tax payable $2,169,340. 
D)  Tax expense per books $2,000,899; tax payable $2,000,899. 
A)  Tax expense per books $2,000,899; tax payable $2,169,340. 
B)  Tax expense per books $2,169,340; tax payable $2,000,899. 
C)  Tax expense per books $2,169,340; tax payable $2,169,340. 
D)  Tax expense per books $2,000,899; tax payable $2,000,899.

Question 3

On December 19, 2020, Logo Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mr. Craig, who is Logo's CFO. Logo paid the $50,000 to Mr. Craig on April 25, 2021. Which of the following statements is true?

Accepted Answer

A)  If Mr. Craig and Logo are not related parties, Logo can deduct the accrued expense in 2020. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2020 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2020. 
D)  If Mr. Craig and Logo are not related parties, Mr. Craig can elect to include the $50,000 bonus in gross income in either 2020 or 2021. 
A)  If Mr. Craig and Logo are not related parties, Logo can deduct the accrued expense in 2020. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2020 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2020. 
D)  If Mr. Craig and Logo are not related parties, Mr. Craig can elect to include the $50,000 bonus in gross income in either 2020 or 2021.

Question 4

Village Inc. has average gross receipts of $100 million annually. In 2019, Village incurred $25 million of net business interest and has adjusted taxable income of $42 million. Village's current deduction for business interest is:

Accepted Answer

A)  $0 
B)  $12.6 million 
C)  $21 million 
D)  $25 million 
A)  $0 
B)  $12.6 million 
C)  $21 million 
D)  $25 million

Question 5

Shey is single and operates two businesses. This year, business A generated $300,000 of taxable profit. Business B generated a $(625,000) loss. How much of Shey's business loss is not currently deductible due to the excess business loss limitation?

Accepted Answer

A)  $(625,000) 
B)  $(325,000) 
C)  $(66,000) 
D)  $0 
A)  $(625,000) 
B)  $(325,000) 
C)  $(66,000) 
D)  $0

Question 6

Porter Inc. reported a $20,000 expense on its current year financial statements. Only $13,400 of this amount was deductible on Porter's current year tax return. 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 7

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 8

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

Accepted Answer

A)  The receipt has no effect on current year book income. 
B)  The receipt has no effect on current year taxable income. 
C)  Ipenex must recognize $17,500 taxable income under the tax benefit rule. 
D)  Ipenex credited the receipt to its allowance for bad debts. 
A)  The receipt has no effect on current year book income. 
B)  The receipt has no effect on current year taxable income. 
C)  Ipenex must recognize $17,500 taxable income under the tax benefit rule. 
D)  Ipenex credited the receipt to its allowance for bad debts.

Question 9

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2020, Randall made the following cash payments. To what extent can Randall deduct the payments in 2020?$50,000 for a two-year warehouse lease beginning on March 1, 2021.$95,000 of inventory items held for sale to customers.$1,800 to purchase a new refrigerator for the employees' lounge. The refrigerator was delivered on February 1, 2021.$5,000 compensation to a consultant who spent two weeks in January 2021 analyzing Randall's payroll system.$22,000 property tax to the local government for the first six months of 2021.

Accepted Answer

None of the payment is deducti

Question 10

The after-tax cost of a dollar of business meal expense is 79 cents for a taxpayer with a 21% marginal tax rate.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements concerning the principle of accounting conservatism is true?

Accepted Answer

A)  According to the GAAP principle of conservatism, financial statements should report expenses and losses in the earliest reasonable year. 
B)  The GAAP principle of conservatism tries to prevent the overstatement of book income and the understatement of taxable income. 
C)  According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the earliest reasonable year. 
D)  According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the same year as they are reported on the taxpayers' financial statements. 
A)  According to the GAAP principle of conservatism, financial statements should report expenses and losses in the earliest reasonable year. 
B)  The GAAP principle of conservatism tries to prevent the overstatement of book income and the understatement of taxable income. 
C)  According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the earliest reasonable year. 
D)  According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the same year as they are reported on the taxpayers' financial statements.

Question 12

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. $\begin{array}{l}
\text { Beginning allowance for bad debts }&\$950,000 \
\text { Actual write-offs of accounts receivable during the } \
\text { year } &(899,600)\
\text { Addition to allowance } &845,000\
\text { Ending allowance for bad debts }&\$895,400
\end{array}$ Which of the following statements is true?

Accepted Answer

A)  Bad debt expense per books is $845,000, and the deduction for bad debts is $899,600. 
B)  Bad debt expense per books is $899,600, and the deduction for bad debts is $845,000. 
C)  Bad debt expense per books and the deduction for bad debts is $899,600. 
D)  Bad debt expense per books and the deduction for bad debts is $895,400. 
A)  Bad debt expense per books is $845,000, and the deduction for bad debts is $899,600. 
B)  Bad debt expense per books is $899,600, and the deduction for bad debts is $845,000. 
C)  Bad debt expense per books and the deduction for bad debts is $899,600. 
D)  Bad debt expense per books and the deduction for bad debts is $895,400.

Question 13

A taxpayer that operates more than one business may use a different method of accounting for each business.

Accepted Answer

A) True 
 B)False

Question 14

Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2020.
 $\begin{array}{lll}
\text { March 11 } & \text { Balance due of } 2019 \text { tax } & \$ 1,600 \
\text { April } 2 & \text { Estimated } 2020 \text { tax payment } & \$ 15,250 \
\text { June } 2 & \text { Estimated } 2020 \text { tax payment } & \$ 15,250 \
\text { September } 3 & \text { Estimated } 2020 \text { tax payment } & \$ 15,250 \
\text { December 2 } & \text { Estimated } 2020 \text { tax payment } & \$ 15,250
\end{array}$ On December 28, Marchal's tax department calculated that the corporation's actual 2020 state income tax liability was $67,140. Consequently, Marchal accrued a $6,140 liability for state income tax payable at year end.Compute Marchal's 2020 state income tax expense per books.If Marchal has not adopted the recurring item exception as its method of accounting for state income taxes, compute Marchal's 2020 federal deduction for state income tax.

Accepted Answer

Marchal's state income tax exp

Question 15

Village Inc. has average gross receipts of $100 million annually. This year, Village incurred $25 million of net business interest and has adjusted taxable income of $42 million. Village's current deduction for business interest is:

Accepted Answer

A)  $0 
B)  $7.5 million 
C)  $12.6 million 
D)  $25 million 
A)  $0 
B)  $7.5 million 
C)  $12.6 million 
D)  $25 million

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

When an individual taxpayer begins a new business as a sole proprietorship and wants to keep records on a fiscal year basis, permission to change taxable years is not required because this is a new business.

Accepted Answer

A) True 
 B)False

Question 18

Toro Inc. has average gross receipts of $30 million annually. This year, Toro incurred $5 million of net business interest and has adjusted taxable income of $12 million. Toro's current deduction for business interest is:

Accepted Answer

A)  $1.5 million 
B)  $3.6 million 
C)  $5 million 
D)  $0 
A)  $1.5 million 
B)  $3.6 million 
C)  $5 million 
D)  $0

Question 19

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2020. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2021. Mr. Stern does not recognize the interest as income in 2020.

Accepted Answer

A) True 
 B)False

Question 20

CSQ Inc. reported $1,339,700 book income before tax this year. CSQ had $46,600 favorable permanent differences and $103,500 unfavorable temporary differences between book income and taxable income. Assuming a 21 percent tax rate, which of the following statements is true?

Accepted Answer

A)  CSQ's tax payable is $271,551. 
B)  CSQ's tax expense per books is $271,551. 
C)  CSQ's tax payable is $281,337. 
D)  CSQ's tax expense per books is $293,286. 
A)  CSQ's tax payable is $271,551. 
B)  CSQ's tax expense per books is $271,551. 
C)  CSQ's tax payable is $281,337. 
D)  CSQ's tax expense per books is $293,286.

Which of the following businesses is prohibited from using the cash receipts and disbursement method of accounting for tax purposes?

B&B Inc.'s taxable income is computed as follows: Book income betore tax \9 ,882,590 Net permanent differences 447,600 Net temporary differences (802,100) Taxable income \9 ,528,090 Using a 21% rate, compute B&B's tax expense per books and tax payable.

On December 19, 2020, Logo Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mr. Craig, who is Logo's CFO. Logo paid the $50,000 to Mr. Craig on April 25, 2021. Which of the following statements is true?

Village Inc. has average gross receipts of $100 million annually. In 2019, Village incurred $25 million of net business interest and has adjusted taxable income of $42 million. Village's current deduction for business interest is:

Shey is single and operates two businesses. This year, business A generated $300,000 of taxable profit. Business B generated a $(625,000) loss. How much of Shey's business loss is not currently deductible due to the excess business loss limitation?

Porter Inc. reported a $20,000 expense on its current year financial statements. Only $13,400 of this amount was deductible on Porter's current year tax return. Which of the following 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.

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

The after-tax cost of a dollar of business meal expense is 79 cents for a taxpayer with a 21% marginal tax rate.

Which of the following statements concerning the principle of accounting conservatism is true?

A taxpayer that operates more than one business may use a different method of accounting for each business.

Village Inc. has average gross receipts of $100 million annually. This year, Village incurred $25 million of net business interest and has adjusted taxable income of $42 million. Village's current deduction for business interest is:

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

When an individual taxpayer begins a new business as a sole proprietorship and wants to keep records on a fiscal year basis, permission to change taxable years is not required because this is a new business.

Toro Inc. has average gross receipts of $30 million annually. This year, Toro incurred $5 million of net business interest and has adjusted taxable income of $12 million. Toro's current deduction for business interest is:

CSQ Inc. reported $1,339,700 book income before tax this year. CSQ had $46,600 favorable permanent differences and $103,500 unfavorable temporary differences between book income and taxable income. Assuming a 21 percent tax rate, which of the following statements is true?

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 businesses is prohibited from using the cash receipts and disbursement method of accounting for tax purposes?

B&B Inc.'s taxable income is computed as follows: Book income betore tax \9 ,882,590 Net permanent differences 447,600 Net temporary differences (802,100) Taxable income \9 ,528,090 Using a 21% rate, compute B&B's tax expense per books and tax payable.

On December 19, 2020, Logo Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mr. Craig, who is Logo's CFO. Logo paid the $50,000 to Mr. Craig on April 25, 2021. Which of the following statements is true?

Village Inc. has average gross receipts of $100 million annually. In 2019, Village incurred $25 million of net business interest and has adjusted taxable income of $42 million. Village's current deduction for business interest is:

Shey is single and operates two businesses. This year, business A generated $300,000 of taxable profit. Business B generated a $(625,000) loss. How much of Shey's business loss is not currently deductible due to the excess business loss limitation?

Porter Inc. reported a $20,000 expense on its current year financial statements. Only $13,400 of this amount was deductible on Porter's current year tax return. Which of the following 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.

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

The after-tax cost of a dollar of business meal expense is 79 cents for a taxpayer with a 21% marginal tax rate.

Which of the following statements concerning the principle of accounting conservatism is true?

A taxpayer that operates more than one business may use a different method of accounting for each business.

Village Inc. has average gross receipts of $100 million annually. This year, Village incurred $25 million of net business interest and has adjusted taxable income of $42 million. Village's current deduction for business interest is:

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

When an individual taxpayer begins a new business as a sole proprietorship and wants to keep records on a fiscal year basis, permission to change taxable years is not required because this is a new business.

Toro Inc. has average gross receipts of $30 million annually. This year, Toro incurred $5 million of net business interest and has adjusted taxable income of $12 million. Toro's current deduction for business interest is:

CSQ Inc. reported $1,339,700 book income before tax this year. CSQ had $46,600 favorable permanent differences and $103,500 unfavorable temporary differences between book income and taxable income. Assuming a 21 percent tax rate, which of the following statements is true?

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