Question 1

Which of the following statements about tax expense per books and tax payable is false?

Accepted Answer

A)  If a corporation has no temporary differences between book income and taxable income, tax expense per books equals tax payable. 
B)  If a corporation has no permanent differences between book income and taxable income, tax expense per books equals tax payable. 
C)  Tax expense per books and tax payable are calculated from the same rate schedule. 
D)  Firms compute total tax expense for financial statement purposes based on book income adjusted for permanent book/tax differences. 
A)  If a corporation has no temporary differences between book income and taxable income, tax expense per books equals tax payable. 
B)  If a corporation has no permanent differences between book income and taxable income, tax expense per books equals tax payable. 
C)  Tax expense per books and tax payable are calculated from the same rate schedule. 
D)  Firms compute total tax expense for financial statement purposes based on book income adjusted for permanent book/tax differences.

Question 2

Which of the following statements about the NOL deduction is false?

Accepted Answer

A)  The deduction prevents the tax distortion that could result from an inflexible one-year reporting period. 
B)  The deduction can reduce taxable income to zero in carryforward years. 
C)  The deduction has value based on the NPV of its related tax savings. 
D)  None of these choices are false. 
A)  The deduction prevents the tax distortion that could result from an inflexible one-year reporting period. 
B)  The deduction can reduce taxable income to zero in carryforward years. 
C)  The deduction has value based on the NPV of its related tax savings. 
D)  None of these choices are false.

Question 3

Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?

Accepted Answer

A)  Jethro recognizes $1,000 income because of the settlement. 
B)  Jethro recognizes no income because of the settlement. 
C)  Jethro can deduct the $9,000 payment. 
D)  Jethro can deduct a $1,000 bad debt expense. 
A)  Jethro recognizes $1,000 income because of the settlement. 
B)  Jethro recognizes no income because of the settlement. 
C)  Jethro can deduct the $9,000 payment. 
D)  Jethro can deduct a $1,000 bad debt expense.

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

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2020, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following is true?

Accepted Answer

A)  As a cash basis taxpayer, Eaton can deduct the $4,800 expense in 2020. 
B)  Eaton can deduct $600 in 2020, and the remaining $4,200 in 2021. 
C)  Eaton can deduct $600 in 2020, $2,400 in 2021, and $1,800 in 2022. 
D)  None of these choices are true. 
A)  As a cash basis taxpayer, Eaton can deduct the $4,800 expense in 2020. 
B)  Eaton can deduct $600 in 2020, and the remaining $4,200 in 2021. 
C)  Eaton can deduct $600 in 2020, $2,400 in 2021, and $1,800 in 2022. 
D)  None of these choices are true.

Question 6

Southlawn Inc.'s taxable income is computed as follows: $\begin{array}{llr}
  \text {  Book income before tax} &\$2,405,600\
 \text {Net permanent differences  } &(512,000)\
 \text {  Net temporary differences} &(189,000)\
 \text {  Taxable income} &\$1,704,600
\end{array}$

Southlawn's tax rate is 21%. Which of the following statements is true?

Accepted Answer

A)  The permanent differences caused a $107,520 net increase in Southlawn's deferred tax liabilities. 
B)  The permanent differences caused a $107,520 net decrease in Southlawn's deferred tax liabilities. 
C)  The temporary differences caused a $39,690 net increase in Southlawn's deferred tax liabilities. 
D)  The temporary differences caused a $39,690 net decrease in Southlawn's deferred tax liabilities. 
A)  The permanent differences caused a $107,520 net increase in Southlawn's deferred tax liabilities. 
B)  The permanent differences caused a $107,520 net decrease in Southlawn's deferred tax liabilities. 
C)  The temporary differences caused a $39,690 net increase in Southlawn's deferred tax liabilities. 
D)  The temporary differences caused a $39,690 net decrease in Southlawn's deferred tax liabilities.

Question 7

Welch Inc. has used a fiscal year ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false?

Accepted Answer

A)  Welch's final tax return will be a short-period return. 
B)  Welch's final tax return will include its income from October 1 to March 31. 
C)  Welch's final tax return will include its income from January 1 to March 31. 
D)  None of these choices are false. 
A)  Welch's final tax return will be a short-period return. 
B)  Welch's final tax return will include its income from October 1 to March 31. 
C)  Welch's final tax return will include its income from January 1 to March 31. 
D)  None of these choices are false.

Question 8

According to the GAAP principle of conservatism, firms should delay the realization of uncertain revenues and gains and accelerate the realization of uncertain expenses and losses.

Accepted Answer

A) True 
 B)False

Question 9

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. $\begin{array}{llr}
  \text {  Beginning allowance for bad debts} &\$950,000\
 \text {  Actual write-offs of accounts receivable during the year} &(899,600)\
 \text {  Addition to allowance} &845,000\
 \text { Ending allowance for bad debts } &\$895,400\
\end{array}$
 Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

Accepted Answer

A)  $54,600 permanent excess of book income over taxable income. 
B)  $54,600 permanent excess of taxable income over book income. 
C)  $54,600 temporary excess of taxable income over book income. 
D)  $54,600 temporary excess of book income over taxable income. 
A)  $54,600 permanent excess of book income over taxable income. 
B)  $54,600 permanent excess of taxable income over book income. 
C)  $54,600 temporary excess of taxable income over book income. 
D)  $54,600 temporary excess of book income over taxable income.

Question 10

Ladow Inc. incurred a $32,000 net operating loss in 2020. If Ladow's 2021 taxable income was $38,000 before NOLs, compute Ladow's 2021 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

Addis Company operates a large retail men's clothing store that has annual gross receipts of $30 million. Because Addis has merchandise inventory, it must use:

Accepted Answer

A)  The accrual method as its overall method of accounting. 
B)  The accrual method to account only for sales of merchandise. 
C)  The accrual method to account only for purchases of merchandise. 
D)  The accrual method to account for both sales and purchases of merchandise. 
A)  The accrual method as its overall method of accounting. 
B)  The accrual method to account only for sales of merchandise. 
C)  The accrual method to account only for purchases of merchandise. 
D)  The accrual method to account for both sales and purchases of merchandise.

Question 12

Keagan Company, a calendar year taxpayer, incurred $1,490 of long-distance telephone charges in December 2020 and mailed a check to the telephone company on January 4, 2021. If Keagan is an accrual basis taxpayer, it reports a $1,490 tax deduction in 2021.

Accepted Answer

A) True 
 B)False

Question 13

According to your textbook, business managers prefer to:

Accepted Answer

A)  Report as much income as possible for book and tax purposes. 
B)  Report as much income as possible for book purposes and as little income as possible for tax purposes. 
C)  Report as little income as possible for book and tax purposes. 
D)  Report the same amount of income for book and tax purposes. 
A)  Report as much income as possible for book and tax purposes. 
B)  Report as much income as possible for book purposes and as little income as possible for tax purposes. 
C)  Report as little income as possible for book and tax purposes. 
D)  Report the same amount of income for book and tax purposes.

Question 14

On December 12, 2020, Hook Company, a calendar year, cash basis business, mailed a $5,600 bill to Mrs. Gilder for professional services rendered during the month of November. Mrs. Gilder dropped off her $5,600 check at Hook's office on December 28, but the company secretary did not deposit the check in Hook's bank account until January 3. Which of the following statements is true?

Accepted Answer

A)  According to the constructive receipt doctrine, Hook must recognize $5,600 income in 2020. 
B)  According to the substance over form doctrine, Hook does not recognize $5,600 income until 2021. 
C)  As a cash basis taxpayer, Hook does not recognize $5,600 income until 2021. 
D)  As a cash basis taxpayer, Hook can elect to recognize $5,600 income in either 2020 or 2021. 
A)  According to the constructive receipt doctrine, Hook must recognize $5,600 income in 2020. 
B)  According to the substance over form doctrine, Hook does not recognize $5,600 income until 2021. 
C)  As a cash basis taxpayer, Hook does not recognize $5,600 income until 2021. 
D)  As a cash basis taxpayer, Hook can elect to recognize $5,600 income in either 2020 or 2021.

Question 15

If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.

Accepted Answer

A) True 
 B)False

Question 16

Goff Inc.'s taxable income is computed as follows: $$\begin{array} { l c } 
\text { Book income before tax } & \$ 1,016,200 \
\text { Net permanent differences } & 77,530 \
\text { Net temporary differences } & 475,200 \
\text { Taxable income } & \$ 1,569,330
\end{array}$$ Goff's tax rate is 21%. Which of the following statements is true?

Accepted Answer

A)  The permanent differences caused a $16,365 net increase in Goff's deferred tax liabilities. 
B)  The permanent differences caused a $16,365 net increase in Goff's deferred tax assets. 
C)  The temporary differences caused a $99,792 net increase in Goff's deferred tax assets. 
D)  The temporary differences caused a $99,792 net increase in Goff's deferred tax liabilities. 
A)  The permanent differences caused a $16,365 net increase in Goff's deferred tax liabilities. 
B)  The permanent differences caused a $16,365 net increase in Goff's deferred tax assets. 
C)  The temporary differences caused a $99,792 net increase in Goff's deferred tax assets. 
D)  The temporary differences caused a $99,792 net increase in Goff's deferred tax liabilities.

Question 17

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?

Accepted Answer

A)  Jackey can deduct the $44,200 accrued rent expense. 
B)  Jackey can deduct the $44,200 expense in the year of payment. 
C)  The accrued rent expense results in a permanent book/tax difference. 
D)  The accrued rent expense results in a temporary book/tax difference. 
A)  Jackey can deduct the $44,200 accrued rent expense. 
B)  Jackey can deduct the $44,200 expense in the year of payment. 
C)  The accrued rent expense results in a permanent book/tax difference. 
D)  The accrued rent expense results in a temporary book/tax difference.

Question 18

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2020 and mailed a check to the telephone company on January 4, 2021. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2021.

Accepted Answer

A) True 
 B)False

Question 19

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

Accepted Answer

A) True 
 B)False

Question 20

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

Accepted Answer

A) True 
 B)False

Which of the following statements about tax expense per books and tax payable is false?

Which of the following statements about the NOL deduction is false?

Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?

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

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2020, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following 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 Southlawn's tax rate is 21%. Which of the following statements is true?

Welch Inc. has used a fiscal year ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false?

According to the GAAP principle of conservatism, firms should delay the realization of uncertain revenues and gains and accelerate the realization of uncertain expenses and losses.

Ladow Inc. incurred a $32,000 net operating loss in 2020. If Ladow's 2021 taxable income was $38,000 before NOLs, compute Ladow's 2021 NOL deduction.

Addis Company operates a large retail men's clothing store that has annual gross receipts of $30 million. Because Addis has merchandise inventory, it must use:

Keagan Company, a calendar year taxpayer, incurred $1,490 of long-distance telephone charges in December 2020 and mailed a check to the telephone company on January 4, 2021. If Keagan is an accrual basis taxpayer, it reports a $1,490 tax deduction in 2021.

According to your textbook, business managers prefer to:

If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.

Goff Inc.'s taxable income is computed as follows: Book income before tax \ 1,016,200 Net permanent differences 77,530 Net temporary differences 475,200 Taxable income \ 1,569,330 Goff's tax rate is 21%. Which of the following statements is true?

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2020 and mailed a check to the telephone company on January 4, 2021. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2021.

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

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 tax expense per books and tax payable is false?

Which of the following statements about the NOL deduction is false?

Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?

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

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2020, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following 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 Southlawn's tax rate is 21%. Which of the following statements is true?

Welch Inc. has used a fiscal year ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false?

According to the GAAP principle of conservatism, firms should delay the realization of uncertain revenues and gains and accelerate the realization of uncertain expenses and losses.

Ladow Inc. incurred a $32,000 net operating loss in 2020. If Ladow's 2021 taxable income was $38,000 before NOLs, compute Ladow's 2021 NOL deduction.

Addis Company operates a large retail men's clothing store that has annual gross receipts of $30 million. Because Addis has merchandise inventory, it must use:

Keagan Company, a calendar year taxpayer, incurred $1,490 of long-distance telephone charges in December 2020 and mailed a check to the telephone company on January 4, 2021. If Keagan is an accrual basis taxpayer, it reports a $1,490 tax deduction in 2021.

According to your textbook, business managers prefer to:

If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.

Goff Inc.'s taxable income is computed as follows: Book income before tax \ 1,016,200 Net permanent differences 77,530 Net temporary differences 475,200 Taxable income \ 1,569,330 Goff's tax rate is 21%. Which of the following statements is true?

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2020 and mailed a check to the telephone company on January 4, 2021. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2021.

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

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