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

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 3

BugLess Inc, a calendar year, accrual basis corporation, provides pest extermination services to its customers. In October 2012, BugLess contracted with Mr. Cass to provide monthly service calls for 24 months. Each service call costs $60, and Mr. Cass prepaid $1,440 when he signed the contract. BugLess made three service calls to Mr. Cass' home in 2012. As a result of the contract, BugLess should report:

Accepted Answer

A)  $1,440 taxable income in 2012. 
B)  $180 taxable income in 2012, $720 taxable income in 2013, and $540 taxable income in 2014. 
C)  $180 taxable income in 2012, and $1,260 taxable income in 2013. 
D)  None of the above 
A)  $1,440 taxable income in 2012. 
B)  $180 taxable income in 2012, $720 taxable income in 2013, and $540 taxable income in 2014. 
C)  $180 taxable income in 2012, and $1,260 taxable income in 2013. 
D)  None of the above

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

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

Accepted Answer

A) True 
 B)False

Question 6

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year.   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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

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

Accepted Answer

A)  $54,600 permanent excess of book income over taxable income. 
B)  $54,600 permanent excess of taxable income over book income. 
C)  $54,600 temporary excess of taxable income over book income. 
D)  $54,600 temporary excess of book income over taxable income. 
A)  $54,600 permanent excess of book income over taxable income. 
B)  $54,600 permanent excess of taxable income over book income. 
C)  $54,600 temporary excess of taxable income over book income. 
D)  $54,600 temporary excess of book income over taxable income.

Question 11

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 12

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

Accepted Answer

A)  The accrual method is the required method of accounting under GAAP. 
B)  Every publicly held corporation must use the accrual method of accounting to prepare financial statements. 
C)  The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical. 
D)  Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income. 
A)  The accrual method is the required method of accounting under GAAP. 
B)  Every publicly held corporation must use the accrual method of accounting to prepare financial statements. 
C)  The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical. 
D)  Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income.

Question 13

Derik Inc., a calendar year, accrual basis corporation, accrued $278,000 vacation pay expense and a corresponding liability at the end of 2012. Derik paid $22,000 of the accrued liability to employees who took vacation between January 1 and March 15, 2013. How much of the accrued vacation pay expense is deductible in 2012?

Accepted Answer

A)  None of the accrued expense is deductible in 2012. 
B)  $22,000. 
C)  $256,000. 
D)  The entire accrued expense is deductible in 2012. 
A)  None of the accrued expense is deductible in 2012. 
B)  $22,000. 
C)  $256,000. 
D)  The entire accrued expense is deductible in 2012.

Question 14

If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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.

Question 17

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 18

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

According to your textbook, business managers prefer to:

Accepted Answer

A)  Report as much income as possible for book and tax purposes. 
B)  Report as much income as possible for book purposes and as little income as possible for tax purposes. 
C)  Report as little income as possible for book and tax purposes. 
D)  Report the same amount of income for book and tax purposes. 
A)  Report as much income as possible for book and tax purposes. 
B)  Report as much income as possible for book purposes and as little income as possible for tax purposes. 
C)  Report as little income as possible for book and tax purposes. 
D)  Report the same amount of income for book and tax purposes.

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

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?

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

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. Which of the following statements is true?

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

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

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.

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

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.

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

If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.

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?

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

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

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

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.

According to your textbook, business managers prefer to:

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.

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?

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

Monro Inc. uses the accrual method of accounting. Here is a reconciliation of Monro's allowance for bad debts for the current year. Which of the following statements is true?

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

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

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.

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

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.

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

If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.

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?

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

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

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

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.

According to your textbook, business managers prefer to:

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