Exam 6: Taxable Income From Business Operations

An accrual basis taxpayer that accrues a liability at year-end for unpaid state income tax can deduct the accrued tax expense in the computation of federal taxable income.

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

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 regarding book/tax differences is false?

At the end of its taxable year, Gong Company accrued an expense for an account payable to Mexance Inc. Even if Gong and Mexance are related parties, Gong can deduct the accrued expense if Mexance also uses the accrual method of accounting for tax purposes.

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

BugLess Inc, a calendar year, accrual basis corporation, provides pest extermination services to its customers. In October 2013, 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 2013. As a result of the contract, BugLess should report:

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

Eddy Corporation engaged in a transaction that generated $100,000 book income but only $81,000 taxable income. Which of the following is true?

Derik Inc., a calendar year, accrual basis corporation, accrued $278,000 vacation pay expense and a corresponding liability at the end of 2013. Derik paid $22,000 of the accrued liability to employees who took vacation between January 1 and March 15, 2014. How much of the accrued vacation pay expense is deductible in 2013?

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2013, Randall made the following cash payments. To what extent can Randall deduct the payments in 2013? a. $50,000 for a two-year warehouse lease beginning on March 1, 2014. 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, 2014. d. $5,000 compensation to a consultant who spent two weeks in January 2014 analyzing Randall's payroll system. e. $22,000 property tax to the local government for the first six months of 2014.

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

Income tax expense per books is based on book income adjusted for all book/tax differences.

Lawes Company, a cash basis business, mailed a $24,500 invoice to MWQ Partnership for professional services rendered. MWQ offered to pay the invoice by transferring 250 shares of ConAgri common stock to Lawes. The shares are selling on the NYSE at $98 per share. If Lawes accepts the shares in payment, it recognizes:

Slumar, an accrual basis, calendar year corporation, reported $7,289,200 net income before tax on its financial statement prepared in accordance with GAAP. The corporate records reveal the following information. The allowance for bad debts on January 1 was $104,700. Write-offs for the year totaled $113,228, and the addition to the allowance for the year was $105,000. Slumar earned $3,072,800 net income from its U.S. manufacturing activity and $4,101,700 from its foreign manufacturing activity. At its December 16 meeting, Slumar's board of directors authorized a $100,000 salary bonus for the corporation's CEO. Slumar paid the bonus to the CEO on January 4. The CEO owns 62% of Slumar's outstanding stock. Slumar was incorporated last year. On its first tax return, it reported a $334,712 net operating loss. Compute Slumar's taxable income.

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