Exam 6: Taxable Income from Business Operations

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

Which of the following statements about methods of accounting is false? 

An accrual basis taxpayer must account for the expense of a legal settlement resulting from a tort under the cash method. 

An accrual basis taxpayer that accrues a liability at year-end for unpaid state income tax can deduct the accrued tax expense in the computation of federal taxable income. 

Political lobbying expenses are nondeductible. 

Derik Inc., a calendar year, accrual basis corporation, accrued $278,000 vacation pay expense and a corresponding liability at the end of 2018. Derik paid $22,000 of the accrued liability to employees who took vacation between January 1 and March 15, 2019. How much of the accrued vacation pay expense is deductible in 2018? 

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

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2018 and mailed a check to the telephone company on January 4, 2019. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2019. 

Krasco Inc.'s auditors prepared the following reconciliation between book and taxable income. The corporation has a 21% tax rate. Book income before tax $\quad$$\quad$$\quad$ $ 8,288,900 Net permanent differences $\quad$$\quad$ (35,770 ) Net temporary differences $\quad$$\quad$ 112,400 Taxable income $\quad$$\quad$$\quad$$\quad$$\quad$ $ 8,365,530 a. Compute Krasco's tax expense per books and tax payable. b. Compute Krasco's net increase in deferred tax assets or deferred tax liabilities (identify which) for the year.

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2018, 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?  

Which of the following statements about tax policy objectives regarding business expenses is false? 

Tax expense per books is based on: 

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

Assuming a 21% marginal tax rate, compute the after-tax cost of the following business expenses. a. $12,300 business meals. b. $42,000 rent on factory equipment. c. $8,050 business entertainment.

According to your textbook, business managers prefer to:  

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

Eddy Corporation engaged in a transaction that generated $100,000 book income but only $81,000 taxable income. Which of the following is true?  

Income tax expense per books is based on book income adjusted for all book/tax differences.  

Why does the federal tax law disallow a business deduction for a fine or penalty paid to any government? 

Slumar, an accrual basis, calendar year corporation, reported $7,289,200 net income before tax on its financial statement prepared in accordance with GAAP. The corporate records reveal the following information. The allowance for bad debts on January 1 was $104,700. Write-offs for the year totaled $113,228, and the addition to the allowance for the year was $105,000. Slumar incurred $22,000 of entertainment costs and $32,000 of business meals. At its December 16 meeting, Slumar's board of directors authorized a $100,000 salary bonus for the corporation's CEO. Slumar paid the bonus to the CEO on January 4. The CEO owns 62% of Slumar's outstanding stock. Slumar was incorporated last year. On its first tax return, it reported a $334,712 net operating loss. Compute Slumar's taxable income.