Exam 6: Taxable Income From Business Operations

Which of the following does not result in a permanent book/tax difference?

Hitz Company, a calendar year, accrual basis taxpayer, recorded $1,735 accrued interest expense and $1,735 accrued interest payable when it closed its books on December 31. The interest relates to a loan from First State Bank and accrued over the last two months of the year. Which of the following statements is true?

Assuming a 30% marginal tax rate, compute the after-tax cost of the following business expenses. a. $12,300 meals and entertainment. b. $42,000 rent on factory equipment. c. $8,050 premium for key-person life insurance.

Timm Inc., a calendar year, accrual basis taxpayer, is being sued by a customer who was injured when she tripped over a loose carpet in Timm's retail store. Timm's auditors required the corporation to accrue a $500,000 contingent liability and current year expense. Which of the following statements is true?

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

Why does the federal tax law disallow a business deduction for political contributions?

Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide professional services. Rukel completed the services on November 30, 2012, and immediately sent Bendom a bill for $37,750. Bendom paid the bill on January 4, 2013. Which of the following statements is false?

Accurate measurement of taxable income is the only objective of the federal income tax laws.

Which of the following statements about the domestic production activities deduction is false?

A corporation can't have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.

Which of the following business expenses always results in a difference between taxable income and book income?

Tabco Inc., a calendar year, accrual basis corporation, accrued $48,800 wage and salary expense and a corresponding liability at the end of 2012. How much of the accrued expense is deductible in 2012?

Which of the following businesses is prohibited from using the cash receipts and disbursement method of accounting for tax purposes?

Bolton Inc., a calendar year taxpayer, generated a $296,400 net operating loss this year. Bolton can carry the loss back five years and forward 20 years for tax purposes.

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).

Which of the following does not result in a permanent book/tax difference?

Southlawn Inc.'s taxable income is computed as follows. Southlawn's tax rate is 34%. Which of the following statements is true?

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

An unfavorable temporary book/tax difference generates a deferred tax asset.

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2012, Randall made the following cash payments. To what extent can Randall deduct the payments in 2012? a. $50,000 for a two-year warehouse lease beginning on March 1, 2013. 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, 2013. d. $5,000 compensation to a consultant who spent two weeks in January 2013 analyzing Randall's payroll system. e. $22,000 property tax to the local government for the first six months of 2013.