Question 1

Which of the following statements about the domestic production activities deduction is false?

Accepted Answer

A)  This deduction is a tax preference. 
B)  This deduction is intended to help U.S. businesses compete in the global marketplace. 
C)  This deduction improves the measurement of taxable business income. 
D)  This deduction creates a permanent difference between book income and taxable income. 
A)  This deduction is a tax preference. 
B)  This deduction is intended to help U.S. businesses compete in the global marketplace. 
C)  This deduction improves the measurement of taxable business income. 
D)  This deduction creates a permanent difference between book income and taxable income.

Question 2

Derik Inc., a calendar year, accrual basis corporation, accrued $278,000 vacation pay expense and a corresponding liability at the end of 2016. Derik paid $22,000 of the accrued liability to employees who took vacation between January 1 and March 15, 2017. How much of the accrued vacation pay expense is deductible in 2016?

Accepted Answer

A)  None of the accrued expense is deductible in 2016. 
B)  $22,000. 
C)  $256,000. 
D)  The entire accrued expense is deductible in 2016. 
A)  None of the accrued expense is deductible in 2016. 
B)  $22,000. 
C)  $256,000. 
D)  The entire accrued expense is deductible in 2016.

Question 3

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

Accepted Answer

A)  The IRS has the right to determine if a taxpayer's method of accounting clearly reflects the taxpayer's income. 
B)  A taxpayer must request permission from the IRS to change its method of accounting for tax purposes. 
C)  A taxpayer engaged in more than one business can use a different method of accounting for each business. 
D)  Taxpayers must use the same method of accounting to compute taxable income as they use to compute financial statement income. 
A)  The IRS has the right to determine if a taxpayer's method of accounting clearly reflects the taxpayer's income. 
B)  A taxpayer must request permission from the IRS to change its method of accounting for tax purposes. 
C)  A taxpayer engaged in more than one business can use a different method of accounting for each business. 
D)  Taxpayers must use the same method of accounting to compute taxable income as they use to compute financial statement income.

Question 4

Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?

Accepted Answer

A)  Unex can deduct the accrued expense only if it makes a written disclosure to the IRS of the contingent liability. 
B)  Unex will be allowed a deduction in the year in which its liability for the settlement becomes fixed and the amount of the settlement can be estimated with reasonable accuracy. 
C)  Unex will be allowed a deduction in the year that it actually pays the settlement to the employee. 
D)  Unex can never deduct any expense in connection with this lawsuit. 
A)  Unex can deduct the accrued expense only if it makes a written disclosure to the IRS of the contingent liability. 
B)  Unex will be allowed a deduction in the year in which its liability for the settlement becomes fixed and the amount of the settlement can be estimated with reasonable accuracy. 
C)  Unex will be allowed a deduction in the year that it actually pays the settlement to the employee. 
D)  Unex can never deduct any expense in connection with this lawsuit.

Question 5

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 6

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 7

PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.

Accepted Answer

A) True 
 B)False

Question 8

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

Accepted Answer

A) True 
 B)False

Question 9

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?

Accepted Answer

A)  Hitz can't deduct the accrued interest expense until the year of payment. 
B)  Hitz can deduct the accrued interest expense this year only if it pays the interest within eight and one-half months after the close of the year. 
C)  Hitz can deduct the accrued interest expense this year. 
D)  Hitz can never deduct the interest expense. 
A)  Hitz can't deduct the accrued interest expense until the year of payment. 
B)  Hitz can deduct the accrued interest expense this year only if it pays the interest within eight and one-half months after the close of the year. 
C)  Hitz can deduct the accrued interest expense this year. 
D)  Hitz can never deduct the interest expense.

Question 10

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

Accepted Answer

A)  The accrual method as its overall method of accounting. 
B)  The accrual method to account only for sales of merchandise. 
C)  The accrual method to account only for purchases of merchandise. 
D)  The accrual method to account for both sales and purchases of merchandise. 
A)  The accrual method as its overall method of accounting. 
B)  The accrual method to account only for sales of merchandise. 
C)  The accrual method to account only for purchases of merchandise. 
D)  The accrual method to account for both sales and purchases of merchandise.

Question 11

An unfavorable temporary book/tax difference generates a deferred tax asset.

Accepted Answer

A) True 
 B)False

Question 12

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. $$\begin{array} { l l } 
\text { Begirruing allowarce for bad debts } & \$ 61,150 \
\text { Actual write-offs of accourts receivable during the year } & ( 80,000 ) \
\text { Addition to allowarce } & \$ \underline { 88,500 } \
\text { Erdirig allowarce for bad debts } & \$ 9,650 \
\hline
\end{array}$$ Which of the following statements is true?

Accepted Answer

A)  Bad debt expense per books and the deduction for bad debts is $69,650. 
B)  Bad debt expense per books and the deduction for bad debts is $88,500. 
C)  Bad debt expense per books is $80,000, and the deduction for bad debts is $88,500. 
D)  Bad debt expense per books is $88,500, and the deduction for bad debts is $80,000. 
A)  Bad debt expense per books and the deduction for bad debts is $69,650. 
B)  Bad debt expense per books and the deduction for bad debts is $88,500. 
C)  Bad debt expense per books is $80,000, and the deduction for bad debts is $88,500. 
D)  Bad debt expense per books is $88,500, and the deduction for bad debts is $80,000.

Question 13

Ladow Inc. incurred a $32,000 net operating loss in 2016. Ladow's 2014 taxable income was $28,000, and its 2015 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.

Accepted Answer

A)  $5,760 
B)  $10,880 
C)  $12,480 
D)  None of the above 
A)  $5,760 
B)  $10,880 
C)  $12,480 
D)  None of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Southlawn Inc.'s taxable income is computed as follows. $$\begin{array} { l r } 
\text { Book income before tax } & \$ 2,405,600 \
\text { Net permarnent differences } & ( 512,000 ) \
\text { Net temporary differences } & ( 189,000 )\
\text { Taxable incorne } & \$ 1,704,600
\end{array}$$ Southlawn's tax rate is 34%. Which of the following statements is true?

Accepted Answer

A)  The permanent differences caused a $174,080 net increase in Southlawn's deferred tax liabilities. 
B)  The permanent differences caused a $174,080 net decrease in Southlawn's deferred tax liabilities. 
C)  The temporary differences caused a $64,260 net increase in Southlawn's deferred tax liabilities. 
D)  The temporary differences caused a $64,260 net decrease in Southlawn's deferred tax liabilities. 
A)  The permanent differences caused a $174,080 net increase in Southlawn's deferred tax liabilities. 
B)  The permanent differences caused a $174,080 net decrease in Southlawn's deferred tax liabilities. 
C)  The temporary differences caused a $64,260 net increase in Southlawn's deferred tax liabilities. 
D)  The temporary differences caused a $64,260 net decrease in Southlawn's deferred tax liabilities.

Question 16

Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide professional services. Rukel completed the services on November 30, 2016, and immediately sent Bendom a bill for $37,750. Bendom paid the bill on January 4, 2017. Which of the following statements is false?

Accepted Answer

A)  If Bendom and Rukel are related parties, Rukel must report $37,750 income on its 2016 tax return regardless of its method of accounting. 
B)  If Rukel uses the accrual method, it must report $37,750 income on its 2016 tax return. 
C)  If Bendom and Rukel are unrelated parties, Bendom can deduct the $37,750 accrued expense on its 2016 tax return. 
D)  If Bendom and Rukel are related parties, Bendom can deduct the $37,750 accrued expense on its 2016 tax return only if Rukel uses the accrual method of accounting. 
A)  If Bendom and Rukel are related parties, Rukel must report $37,750 income on its 2016 tax return regardless of its method of accounting. 
B)  If Rukel uses the accrual method, it must report $37,750 income on its 2016 tax return. 
C)  If Bendom and Rukel are unrelated parties, Bendom can deduct the $37,750 accrued expense on its 2016 tax return. 
D)  If Bendom and Rukel are related parties, Bendom can deduct the $37,750 accrued expense on its 2016 tax return only if Rukel uses the accrual method of accounting.

Question 17

Mundo Company is a calendar year, accrual basis taxpayer. In June 2016, 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, 2016. As a result of the payment, Mundo should report:

Accepted Answer

A)  $6,000 book income and taxable income 
B)  $72,000 book income and taxable income 
C)  No book income and $72,000 taxable income 
D)  None of the above 
A)  $6,000 book income and taxable income 
B)  $72,000 book income and taxable income 
C)  No book income and $72,000 taxable income 
D)  None of the above

Question 18

On December 12, 2016, Hook Company, a calendar year, cash basis business, mailed a $5,600 bill to Mrs. Gilder for professional services rendered during the month of November. Mrs. Gilder dropped off her $5,600 check at Hook's office on December 28, but the company secretary did not deposit the check in Hook's bank account until January 3. Which of the following statements is true?

Accepted Answer

A)  According to the constructive receipt doctrine, Hook must recognize $5,600 income in 2016. 
B)  According to the substance over form doctrine, Hook does not recognize $5,600 income until 2017. 
C)  As a cash basis taxpayer, Hook does not recognize $5,600 income until 2017. 
D)  As a cash basis taxpayer, Hook can elect to recognize $5,600 income in either 2016 or 2017. 
A)  According to the constructive receipt doctrine, Hook must recognize $5,600 income in 2016. 
B)  According to the substance over form doctrine, Hook does not recognize $5,600 income until 2017. 
C)  As a cash basis taxpayer, Hook does not recognize $5,600 income until 2017. 
D)  As a cash basis taxpayer, Hook can elect to recognize $5,600 income in either 2016 or 2017.

Question 19

HHF Corporation received permission from the IRS to change its taxable year from a fiscal year ending August 31 to a calendar year. Consequently, HHF filed a short-period return for the four-month period from September 1 through December 31. The taxable income reported on the return was $56,000. Use the corporate tax rates in Appendix C of the text to compute HHF's tax on this income (to the nearest dollar).

Accepted Answer

A)  $9,000 
B)  $14,000 
C)  $16,257 
D)  $48,770 
A)  $9,000 
B)  $14,000 
C)  $16,257 
D)  $48,770

Question 20

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

Which of the following statements about the domestic production activities deduction is false?

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

Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?

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.

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

PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

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

An unfavorable temporary book/tax difference generates a deferred tax asset.

Ladow Inc. incurred a $32,000 net operating loss in 2016. Ladow's 2014 taxable income was $28,000, and its 2015 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.

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

Southlawn Inc.'s taxable income is computed as follows. Book income before tax \ 2,405,600 Net permarnent differences (512,000) Net temporary differences (189,000) Taxable incorne \ 1,704,600 Southlawn's tax rate is 34%. Which of the following statements is true?

Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide professional services. Rukel completed the services on November 30, 2016, and immediately sent Bendom a bill for $37,750. Bendom paid the bill on January 4, 2017. Which of the following statements is false?

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.

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, Partnerships, Llcs, and S Corporations

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 statements about the domestic production activities deduction is false?

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

Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?

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.

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

PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

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

An unfavorable temporary book/tax difference generates a deferred tax asset.

Ladow Inc. incurred a $32,000 net operating loss in 2016. Ladow's 2014 taxable income was $28,000, and its 2015 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.

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

Southlawn Inc.'s taxable income is computed as follows. Book income before tax \ 2,405,600 Net permarnent differences (512,000) Net temporary differences (189,000) Taxable incorne \ 1,704,600 Southlawn's tax rate is 34%. Which of the following statements is true?

Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide professional services. Rukel completed the services on November 30, 2016, and immediately sent Bendom a bill for $37,750. Bendom paid the bill on January 4, 2017. Which of the following statements is false?

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.

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, Partnerships, Llcs, and S Corporations

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