Exam 6: Taxable Income from Business Operations

Addis Company operates a large retail men's clothing store. Because Addis has merchandise inventory, it must use: 

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

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?  

Hitz Company, a calendar year, accrual basis taxpayer, recorded $1,735 accrued interest expense and $1,735 accrued interest payable when it closed its books on December 31. The interest relates to a loan from First State Bank and accrued over the last two months of the year. Which of the following statements is true? 

Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2018. On December 28, Marchal's tax department calculated that the corporation's actual 2018 state income tax liability was $67,140. Consequently, Marchal accrued a $6,140 liability for state income tax payable at year end. a. Compute Marchal's 2018 state income tax expense per books. b. If Marchal has not adopted the recurring item exception as its method of accounting for state income taxes, compute Marchal's 2018 federal deduction for state income tax.

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

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.  

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

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

Tonto Inc. has used a calendar year as its taxable year since its incorporation in 1990. Tonto has an excellent business reason for changing to a fiscal year ending May 31. Which of the following statements is true?  

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2017, Randall made the following cash payments. To what extent can Randall deduct the payments in 2018? a. $50,000 for a two-year warehouse lease beginning on March 1, 2019. b. $95,000 of inventory items held for sale to customers. c. $1,800 to purchase a new refrigerator for the employees' lounge. The refrigerator was delivered on February 1, 2019. d. $5,000 compensation to a consultant who spent two weeks in January 2019 analyzing Randall's payroll system. e. $22,000 property tax to the local government for the first six months of 2019.

Mundo Company is a calendar year, accrual basis taxpayer. In June 2018, Mundo received a $72,000 cash payment from a tenant who leases space in a commercial office building that Mundo owns. The payment was rent for the 24-month period beginning on July 1, 2018. As a result of the payment, Mundo should report:  

Mr Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2018. Mr Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2019. Mr Stern does not recognize the interest as income in 2018.  

Southlawn Inc.'s taxable income is computed as follows: Book income before tax $\quad$$\quad$$\quad$ $2,405,600 Net permanent differences $\quad$$\quad$ (512,000 ) Net temporary differences $\quad$$\quad$ (189,000 ) Taxable income $\quad$$\quad$$\quad$$\quad$$\quad$ $1,704,600 -Southlawn's tax rate is 21%. Which of the following statements is true?

Accurate measurement of taxable income is the only objective of the federal income tax laws.  

On December 19, 2018, 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, 2019. Which of the following statements is false? 

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

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: 

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? 

Keagan Company, a calendar year taxpayer, incurred $1,490 of long-distance telephone charges in December 2018 and mailed a check to the telephone company on January 4, 2019. If Poole is an accrual basis taxpayer, it reports a $1,490 tax deduction in 2019.