Exam 6: Taxable Income from Business Operations

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. Beginning allowance for bad debts $ 61,150 Actual write-offs of accounts receivable during the year (80,000 ) Addition to allowance 88,500 Ending allowance for bad debts $ 69,650 Which of the following statements is true?

Molton Inc., which operates a chain of retail toy stores, prepares GAAP based financial statements. Molton must use the allowance method to account for business bad debts for both book and tax purposes. 

Goff Inc.'s taxable income is computed as follows: Book income before tax $\quad$$\quad$$\quad$ $ 1,016,200 Net permanent differences $\quad$$\quad$$\quad$ 77,930 Net temporary differences $\quad$$\quad$$\quad$ 475,200 Taxable income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 1,569,330 -Using a 21% rate, compute Goff's tax expense per books and tax payable.

Which of the following businesses can't use the cash receipts and disbursement method of accounting for tax purposes? 

RRK, a calendar year, accrual basis taxpayer, is involved in a legal dispute over an alleged trademark violation. At the end of the year, RRK's accountant recorded a $750,000 accrued expense for the estimated settlement cost of the dispute. Which of the following statements is true?  

Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 salary and wage expense at the end of 2018. Murray paid the entire amount of the accrued liability on January 13, 2019. Murray can deduct the entire $946,000 accrued expense in 2018.  

Timm Inc., a calendar year, accrual basis taxpayer, is being sued by a customer who was injured when she tripped over a loose carpet in Timm's retail store. Timm's auditors required the corporation to accrue a $500,000 contingent liability and current year expense. Which of the following statements is true? 

Which of the following business expenses always results in a difference between taxable income and book income?  

A cash basis taxpayer must account for any prepayment of interest expense under the accrual method.  

Goff Inc.'s taxable income is computed as follows: Book income before tax $\quad$$\quad$$\quad$ $ 1,016,200 Net permanent differences $\quad$$\quad$$\quad$ 77,930 Net temporary differences $\quad$$\quad$$\quad$ 475,200 Taxable income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 1,569,330 -Goff's tax rate is 21%. Which of the following statements is true?

Stack Inc. owns a $1 million insurance policy on the life of Mary Stack, the corporate CEO. The corporation is the policy beneficiary. Stack's annual premium on the policy is $3,160. Which of the following statements is true?  

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 -Using a 21% rate, compute Southlawn's tax expense per books and tax payable.

A permanent difference between book income and taxable income affects only one taxable year.  

Which of the following does not result in a permanent book/tax difference?  

Welch Inc. has used a fiscal 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?