Exam 6: Taxable Income From Business Operations

An accrual basis taxpayer that accrues a liability at year-end for unpaid state income tax can deduct the accrued tax expense in the computation of federal taxable income.

Pozzi Company, a cash basis business, received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago. The payment consisted of a $15,000 principal payment and $1,930 interest. On receipt of the cash, Pozzi recognizes:

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?

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 \ Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:

A temporary difference between book income and taxable income results when an item of income reflected on the books is never included in taxable income.

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

Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.

Which of the following statements about the constructive receipt doctrine is false?

For tax purposes, income is recognized when all events have occurred that fix the taxpayer's right to receive the income and the amount of income can be determined with reasonable accuracy.

Which of the following statements about the NOL deduction is false?

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

Marz Services Inc. is a personal service corporation with $60 million average annual gross receipts. Marz must use the accrual method of accounting for tax purposes.

An accrual basis taxpayer must account the expense of a legal settlement resulting from a tort under the cash method.

Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 salary and wage expense at the end of 2016. Murray paid the entire amount of the accrued liability on January 13, 2017. Murray can deduct the entire $946,000 accrued expense in 2016.

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.

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?

Toro Inc. received permission from the IRS to change its taxable year from a fiscal year ending July 31 to a calendar year. Consequently, Toro filed a short-period return for the five-month period from August 1 through December 31. The taxable income reported on the return was $65,000. Use the corporate tax rates in Appendix C of the text to compute Toro's tax on this income (to the nearest dollar).

CSQ Inc. reported $1,339,700 book income before tax this year. CSQ had $46,600 favorable permanent differences and $103,500 unfavorable temporary differences between book income and taxable income. Assuming a 35 percent tax rate, which of the following statements is true?

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2016. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2017. Mr. Stern does not recognize the interest as income in 2016.

Mr. John Carre owns 67% of the stock of JC Inc. and is employed as the corporation's CEO. The corporation is a calendar year, accrual basis taxpayer. On December 14, 2016, the board of directors authorized a $45,000 year-end bonus for Mr. Carre, which was paid to him on February 1, 2017. In which year can JC Inc. deduct the bonus?