Exam 6: Taxable Income From Business Operations

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

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

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

If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.

On December 19, 2013, Logo Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mr. Craig, who is Logo's CFO. Logo paid the $50,000 to Mr. Craig on April 25, 2014. Which of the following statements is true?

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).

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

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.

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

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.

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

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.

Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide professional services. Rukel completed the services on November 30, 2013, and immediately sent Bendom a bill for $37,750. Bendom paid the bill on January 4, 2014. Which of the following statements is false?

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

Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2013. On December 28, Marchal's tax department calculated that the corporation's actual 2013 state income tax liability was $67,140. Consequently, Marchal accrued a $6,140 liability for state income tax payable at year end. a. Compute Marchal's 2013 state income tax expense per books. b. If Marchal has not adopted the recurring item exception as its method of accounting for state income taxes, compute Marchal's 2013 federal deduction for state income tax.

Ladow Inc. incurred a $32,000 net operating loss in 2013. Ladow's 2011 taxable income was $28,000, and its 2012 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.

Federal and state political lobbying expenses are nondeductible.

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2013. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2014. Mr. Stern does not recognize the interest as income in 2013.

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