Exam 6: Taxable Income From Business Operations

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.

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?

BugLess Inc, a calendar year, accrual basis corporation, provides pest extermination services to its customers. In October 2015, 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 2015. As a result of the contract, BugLess should report:

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

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?

Southlawn Inc.'s taxable income is computed as follows. Using a 34% rate, compute Southlawn's tax expense per books and tax payable.

GH&F is a calendar year, accrual basis taxpayer. In October 2015, GH&F received a $18,000 cash payment from a tenant who leases space in a commercial office building that GH&F owns. The payment was rent for the 18-month period beginning on November 1, 2015. As a result of the payment, GH&F should report:

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.

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?

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

Which of the following statements concerning the cash method of accounting is true?

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

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.

Krasco Inc.'s auditors prepared the following reconciliation between book and taxable income. The corporation has a 34% tax rate. a. Compute Krasco's tax expense per books and tax payable. b. Compute Krasco's net increase in deferred tax assets or deferred tax liabilities (identify which) for the year.

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

Federal and state political lobbying expenses are nondeductible.

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

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2015, Randall made the following cash payments. To what extent can Randall deduct the payments in 2015? a. $50,000 for a two-year warehouse lease beginning on March 1, 2016. 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, 2016. d. $5,000 compensation to a consultant who spent two weeks in January 2016 analyzing Randall's payroll system. e. $22,000 property tax to the local government for the first six months of 2016.

Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?

Which of the following statements about short-period returns is true?