Exam 6: Taxable Income From Business Operations

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 describes a permanent book/tax difference?

Which of the following statements concerning the cash method of accounting is true?

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.

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

Which of the following statements concerning the principle of accounting conservatism is true?

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. Because of the difference between the GAAP and the tax rules for accounting for bad debts, Monro Inc. has an:

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.

Slumar, an accrual basis, calendar year corporation, reported $7,289,200 net income before tax on its financial statement prepared in accordance with GAAP. The corporate records reveal the following information. The allowance for bad debts on January 1 was $104,700. Write-offs for the year totaled $113,228, and the addition to the allowance for the year was $105,000. Slumar earned $3,072,800 net income from its U.S. manufacturing activity and $4,101,700 from its foreign manufacturing activity. At its December 16 meeting, Slumar's board of directors authorized a $100,000 salary bonus for the corporation's CEO. Slumar paid the bonus to the CEO on January 4. The CEO owns 62% of Slumar's outstanding stock. Slumar was incorporated last year. On its first tax return, it reported a $334,712 net operating loss. Compute Slumar's taxable income.

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 NOL deduction is false?

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

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?

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, 2012, the board of directors authorized a $45,000 year-end bonus for Mr. Carre, which was paid to him on February 1, 2013. In which year can JC Inc. deduct the bonus?

Mundo Company is a calendar year, accrual basis taxpayer. In June 2012, 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, 2012. As a result of the payment, Mundo should report:

Federal and state political lobbying expenses are nondeductible.

Laine Services, a calendar year taxpayer, billed a client for $8,450 of services on November 30, 2012, and received a check in full payment from the client on January 12, 2013. If Poole is an accrual basis taxpayer, it reports $8,450 taxable income in 2012.

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.

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

Tax expense per books is based on: