Exam 6: Taxable Income From Business Operations

Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.

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.

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

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2016, and received a check in full payment from the client on January 12, 2017. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2016.

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

Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.

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.

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?

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. Begirruing allowarce for bad debts \ 950,000 Actual write-offs of accourts receivable during the year (899,600) Addition to allowarce \ 845,000 Erding allowarce for bad debts \ Which of the following statements is true?

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

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

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

Assuming a 30% marginal tax rate, compute the after-tax cost of the following business expenses. a. $12,300 meals and entertainment. b. $42,000 rent on factory equipment. c. $8,050 premium for key-person life insurance.

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?

Zephex is a calendar year corporation. On December 1, 2016, Zephex received a $12,000 check from a tenant that leases office space owned by Zephex. This payment was rent for the four-month period from December 1, 2016, through March 31, 2017. On December 2, 2016, Zephex billed a client $38,250 for services rendered to the client in November. The client did not pay the bill until January 14, 2017. a. If Zephex is a cash basis taxpayer, how much 2016 income should it recognize with respect to the above transactions? b. If Zephex is an accrual basis taxpayer, how much 2016 book income should it report and how much 2016 taxable income should it recognize with respect to the above transactions?

Keagan Company, a calendar year taxpayer, incurred $1,490 of long-distance telephone charges in December 2016 and mailed a check to the telephone company on January 4, 2017. If Poole is an accrual basis taxpayer, it reports a $1,490 tax deduction in 2017.

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements 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 does not result in a permanent book/tax difference?

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