Question 1

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 2

Taxable income is defined as gross income minus allowable deductions and credits.

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

A)  RRK can deduct the $750,000 accrued expense. 
B)  RRK can't deduct the $750,000 accrued expense because the liability fails the all-events test. 
C)  RRK can never deduct the $750,000 expense. 
D)  RRK can deduct the accrued expense only if the dispute is settled within eight and one-half months after the close of the taxable year. 
A)  RRK can deduct the $750,000 accrued expense. 
B)  RRK can't deduct the $750,000 accrued expense because the liability fails the all-events test. 
C)  RRK can never deduct the $750,000 expense. 
D)  RRK can deduct the accrued expense only if the dispute is settled within eight and one-half months after the close of the taxable year.

Question 4

Valley Inc. incurred a $71,400 net operating loss this year. Which of the following statements is true?

Accepted Answer

A)  Valley can use the NOL only as a carryforward deduction. 
B)  Valley can use the NOL only as a carryback deduction. 
C)  Valley can elect to use the NOL as a carryforward deduction. 
D)  None of the above is true. 
A)  Valley can use the NOL only as a carryforward deduction. 
B)  Valley can use the NOL only as a carryback deduction. 
C)  Valley can elect to use the NOL as a carryforward deduction. 
D)  None of the above is true.

Question 5

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?

Accepted Answer

A)  Jackey can deduct the $44,200 accrued rent expense. 
B)  Jackey can deduct the $44,200 expense in the year of payment. 
C)  The accrued rent expense results in a permanent book/tax difference. 
D)  The accrued rent expense results in a temporary book/tax difference. 
A)  Jackey can deduct the $44,200 accrued rent expense. 
B)  Jackey can deduct the $44,200 expense in the year of payment. 
C)  The accrued rent expense results in a permanent book/tax difference. 
D)  The accrued rent expense results in a temporary book/tax difference.

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

B&B Inc.'s taxable income is computed as follows. $$\begin{array} { l r } 
\text { Book income before tax } & \mathbf { \$ 9 , 8 8 2 , 5 9 0 } \
\text { Net permarnent differences } & 447,600 \
\text { Net temporary differences } & ( 802,100) \
\text { Taxable income } & \$ 9,528,090
\end{array}$$ Using a 34% rate, compute B&B's tax expense per books and tax payable.

Accepted Answer

A)  Tax expense per books $3,360,081; tax payable $3,239,551 
B)  Tax expense per books $3,512,265; tax payable $3,239,551 
C)  Tax expense per books $3,512,265; tax payable $3,512,265 
D)  Tax expense per books $3,087,367; tax payable $3,087,367 
A)  Tax expense per books $3,360,081; tax payable $3,239,551 
B)  Tax expense per books $3,512,265; tax payable $3,239,551 
C)  Tax expense per books $3,512,265; tax payable $3,512,265 
D)  Tax expense per books $3,087,367; tax payable $3,087,367

Question 8

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

Accepted Answer

A)  A deduction for the payment of a fine or penalty would be a subsidy for bad behavior. 
B)  The payment of a fine or penalty is not an ordinary business expense. 
C)  The payment of a fine or penalty is not an expense for financial reporting purposes. 
D)  A deduction for the payment of a fine or penalty would distort the measurement of taxable income. 
A)  A deduction for the payment of a fine or penalty would be a subsidy for bad behavior. 
B)  The payment of a fine or penalty is not an ordinary business expense. 
C)  The payment of a fine or penalty is not an expense for financial reporting purposes. 
D)  A deduction for the payment of a fine or penalty would distort the measurement of taxable income.

Question 9

Pim Inc. operates a business with a natural annual operating cycle ending August 31. Which of the following can Pim adopt as its taxable year?

Accepted Answer

A)  A calendar year. 
B)  Fiscal year ending June 30. 
C)  Fiscal year ending August 31. 
D)  Pim can adopt a calendar year or any fiscal year as its taxable year. 
A)  A calendar year. 
B)  Fiscal year ending June 30. 
C)  Fiscal year ending August 31. 
D)  Pim can adopt a calendar year or any fiscal year as its taxable year.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements describes a permanent book/tax difference?

Accepted Answer

A)  An expense reported on the current income statement but deducted on next year's tax return 
B)  A revenue item included in current taxable income but not reported on the income statement until next year 
C)  An expense that is never deductible 
D)  A revenue item reported on the current income statement but not included in taxable income until an indefinite future year 
A)  An expense reported on the current income statement but deducted on next year's tax return 
B)  A revenue item included in current taxable income but not reported on the income statement until next year 
C)  An expense that is never deductible 
D)  A revenue item reported on the current income statement but not included in taxable income until an indefinite future year

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2016, Randall made the following cash payments. To what extent can Randall deduct the payments in 2016?
a. $50,000 for a two-year warehouse lease beginning on March 1, 2017.
b. $95,000 of inventory items held for sale to customers.
c. $1,800 to purchase a new refrigerator for the employees' lounge. The refrigerator was delivered on February 1, 2017.
d. $5,000 compensation to a consultant who spent two weeks in January 2017 analyzing Randall's payroll system.
e. $22,000 property tax to the local government for the first six months of 2017.

Accepted Answer

a. None of the payment is deductible in

Question 15

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 16

A taxpayer that operates more than one business may use a different method of accounting for each business.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

On December 19, 2016, 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, 2017. 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 2016. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2016 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2016. 
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 2016 or 2017. 
A)  If Mr. Craig and Logo are not related parties, Logo can deduct the accrued expense in 2016. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2016 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2016. 
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 2016 or 2017.

Question 19

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 20

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.

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

Taxable income is defined as gross income minus allowable deductions and credits.

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?

Valley Inc. incurred a $71,400 net operating loss this year. Which of the following statements is true?

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. 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.

B&B Inc.'s taxable income is computed as follows. Book income before tax Net permarnent differences 447,600 Net temporary differences (802,100) Taxable income \ 9,528,090 Using a 34% rate, compute B&B's tax expense per books and tax payable.

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

Pim Inc. operates a business with a natural annual operating cycle ending August 31. Which of the following can Pim adopt as its taxable year?

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

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Which of the following statements describes a permanent book/tax difference?

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

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

A taxpayer that operates more than one business may use a different method of accounting for each business.

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

On December 19, 2016, 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, 2017. Which of the following statements is true?

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

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

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

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

Taxable income is defined as gross income minus allowable deductions and credits.

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?

Valley Inc. incurred a $71,400 net operating loss this year. Which of the following statements is true?

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. 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.

B&B Inc.'s taxable income is computed as follows. Book income before tax Net permarnent differences 447,600 Net temporary differences (802,100) Taxable income \ 9,528,090 Using a 34% rate, compute B&B's tax expense per books and tax payable.

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

Pim Inc. operates a business with a natural annual operating cycle ending August 31. Which of the following can Pim adopt as its taxable year?

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

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Which of the following statements describes a permanent book/tax difference?

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

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

A taxpayer that operates more than one business may use a different method of accounting for each business.

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

On December 19, 2016, 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, 2017. Which of the following statements is true?

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

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

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