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

Porter Inc. incurred a $20,000 expense only $13,400 of which was deductible. 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 3

Ladow Inc. incurred a $32,000 net operating loss in 2018. If Ladow's 2019 taxable income was $38,000 before NOLs, compute Ladow's 2019 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 4

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 5

Which of the following statements concerning the cash method of accounting is true?

Accepted Answer

A)  A cash basis taxpayer who is in constructive receipt of an income item must recognize that income, even if the item is not in the taxpayer's actual possession. 
B)  A cash basis taxpayer can deduct the purchase cost of business equipment. 
C)  A cash basis taxpayer does not recognize gross income on receipt of an economic benefit unless that benefit consists of money. 
D)  A cash basis taxpayer can deduct interest when it is paid, regardless of the time period for which the interest is charged. 
A)  A cash basis taxpayer who is in constructive receipt of an income item must recognize that income, even if the item is not in the taxpayer's actual possession. 
B)  A cash basis taxpayer can deduct the purchase cost of business equipment. 
C)  A cash basis taxpayer does not recognize gross income on receipt of an economic benefit unless that benefit consists of money. 
D)  A cash basis taxpayer can deduct interest when it is paid, regardless of the time period for which the interest is charged.

Question 6

BugLess Inc, a calendar year, accrual basis corporation, provides pest extermination services to its customers. In October 2018, BugLess contracted with Mr Cass to provide monthly service calls for 24 months. Each service call costs $60, and Mr Cass prepaid $1,440 when he signed the contract. BugLess made three service calls to Mr Cass' home in 2018. As a result of the contract, BugLess should report:

Accepted Answer

A)  $1,440 taxable income in 2018. 
B)  $180 taxable income in 2018, $720 taxable income in 2019, and $540 taxable income in 2020. 
C)  $180 taxable income in 2018, and $1,260 taxable income in 2019. 
D)  None of the above 
A)  $1,440 taxable income in 2018. 
B)  $180 taxable income in 2018, $720 taxable income in 2019, and $540 taxable income in 2020. 
C)  $180 taxable income in 2018, and $1,260 taxable income in 2019. 
D)  None of the above

Question 7

If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements about the all-events test is false?

Accepted Answer

A)  An accrued expense is not deductible unless the liability for the expense is fixed. 
B)  An accrued expense is not deductible unless the amount of the expense is determinable with reasonable accuracy. 
C)  An accrued expense is not deductible unless economic performance with respect to the liability has occurred. 
D)  None of the above is false. 
A)  An accrued expense is not deductible unless the liability for the expense is fixed. 
B)  An accrued expense is not deductible unless the amount of the expense is determinable with reasonable accuracy. 
C)  An accrued expense is not deductible unless economic performance with respect to the liability has occurred. 
D)  None of the above is false.

Question 9

Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

Accepted Answer

A) True 
 B)False

Question 10

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)  If a corporation has no permanent differences between book income and taxable income, tax expense per books equals tax payable and tax expense per books and tax payable are calculated from the same rate schedule. 
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)  If a corporation has no permanent differences between book income and taxable income, tax expense per books equals tax payable and tax expense per books and tax payable are calculated from the same rate schedule.

Question 11

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
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 12

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

Accepted Answer

A)  A permanent book/tax difference affects only the year in which it occurs. 
B)  A temporary book/tax difference affects two or more tax years. 
C)  Temporary book/tax differences arising in the current tax year will reverse in the future in one or more tax years. 
D)  The tax cost or benefit of a permanent book/tax difference is recouped over time. 
A)  A permanent book/tax difference affects only the year in which it occurs. 
B)  A temporary book/tax difference affects two or more tax years. 
C)  Temporary book/tax differences arising in the current tax year will reverse in the future in one or more tax years. 
D)  The tax cost or benefit of a permanent book/tax difference is recouped over time.

Question 13

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 14

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2018, and received a check in full payment from the client on January 12, 2019. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2018.

Accepted Answer

A) True 
 B)False

Question 15

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)  Under the cash method, annual taxable income equals annual net cash inflow. 
B)  The revenue from a sale of goods is recognized when payment is received. 
C)  An expense is recognized when the expense is paid. 
D)  None of the above is false. 
A)  Under the cash method, annual taxable income equals annual net cash inflow. 
B)  The revenue from a sale of goods is recognized when payment is received. 
C)  An expense is recognized when the expense is paid. 
D)  None of the above is false.

Question 18

Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.

Accepted Answer

A) True 
 B)False

Question 19

For its first taxable year, UY Products Inc. generated a $124,950 net operating loss. The loss resulted in a deferred tax liability that will reverse over future years in which UY is allowed an NOL carryforward deduction.

Accepted Answer

A) True 
 B)False

Question 20

On December 19, 2018, 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, 2019. 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 2018. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2018 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2018. 
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 2018 or 2019. 
A)  If Mr. Craig and Logo are not related parties, Logo can deduct the accrued expense in 2018. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2018 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2018. 
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 2018 or 2019.

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

Porter Inc. incurred a $20,000 expense only $13,400 of which was deductible. Which of the following is true?

Ladow Inc. incurred a $32,000 net operating loss in 2018. If Ladow's 2019 taxable income was $38,000 before NOLs, compute Ladow's 2019 NOL deduction.

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

Which of the following statements concerning the cash method of accounting is true?

If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.

Which of the following statements about the all-events test is false?

Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

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

Which of the following statements regarding book/tax differences 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.

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2018, and received a check in full payment from the client on January 12, 2019. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2018.

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

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

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

Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.

For its first taxable year, UY Products Inc. generated a $124,950 net operating loss. The loss resulted in a deferred tax liability that will reverse over future years in which UY is allowed an NOL carryforward deduction.

On December 19, 2018, 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, 2019. 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

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?

Porter Inc. incurred a $20,000 expense only $13,400 of which was deductible. Which of the following is true?

Ladow Inc. incurred a $32,000 net operating loss in 2018. If Ladow's 2019 taxable income was $38,000 before NOLs, compute Ladow's 2019 NOL deduction.

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

Which of the following statements concerning the cash method of accounting is true?

If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.

Which of the following statements about the all-events test is false?

Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

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

Which of the following statements regarding book/tax differences 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.

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2018, and received a check in full payment from the client on January 12, 2019. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2018.

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

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

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

Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.

For its first taxable year, UY Products Inc. generated a $124,950 net operating loss. The loss resulted in a deferred tax liability that will reverse over future years in which UY is allowed an NOL carryforward deduction.

On December 19, 2018, 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, 2019. 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

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