Exam 6: Taxable Income From Business Operations

Keagan Company, a calendar year taxpayer, incurred $1,490 of long-distance telephone charges in December 2012 and mailed a check to the telephone company on January 4, 2013. If Poole is an accrual basis taxpayer, it reports a $1,490 tax deduction in 2013.

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?

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2012, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following is true?

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:

On December 12, 2012, 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?

Rydel Inc. was incorporated on August 9 and elected to use a calendar year for tax purposes. Rydel must annualize the income reported on its first tax return for the short period from August 9 to December 31.

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

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.

Krasco Inc.'s auditors prepared the following reconciliation between book and taxable income. The corporation has a 34% tax rate. a. Compute Krasco's tax expense per books and tax payable. b. Compute Krasco's net increase in deferred tax assets or deferred tax liabilities (identify which) for the year.

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2012, and received a check in full payment from the client on January 12, 2013. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2012.

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.

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.

B&B Inc.'s taxable income is computed as follows. B&B's tax rate is 34%. 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?

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

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

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

Tonto Inc. has used a calendar year as its taxable year since its incorporation in 1990. Tonto has an excellent business reason for changing to a fiscal year ending May 31. Which of the following statements is true?

Southlawn Inc.'s taxable income is computed as follows. Using a 34% rate, compute Southlawn's tax expense per books and tax payable.

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