Exam 6: Taxable Income From Business Operations

Tax expense per books is based on:

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, 2013, the board of directors authorized a $45,000 year-end bonus for Mr. Carre, which was paid to him on February 1, 2014. In which year can JC Inc. deduct the bonus?

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.

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2013, 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?

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?

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?

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.

Which of the following statements about the NOL deduction is false?

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2013 and mailed a check to the telephone company on January 4, 2014. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2014.

Zephex is a calendar year corporation. On December 1, 2013, Zephex received a $12,000 check from a tenant that leases office space owned by Zephex. This payment was rent for the four-month period from December 1, 2013, through March 31, 2014. On December 2, 2013, Zephex billed a client $38,250 for services rendered to the client in November. The client did not pay the bill until January 14, 2014. a. If Zephex is a cash basis taxpayer, how much 2013 income should it recognize with respect to the above transactions? b. If Zephex is an accrual basis taxpayer, how much 2013 book income should it report and how much 2013 taxable income should it recognize with respect to the above transactions?

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

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:

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.

Which of the following statements describes a permanent book/tax difference?

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?

For federal tax purposes, gross income from the sale of tangible goods is reduced by the seller's cost of goods sold.

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

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

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

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.