Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Taxable income is defined as gross income minus allowable deductions and credits.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  The accrual method is the required method of accounting under GAAP. 
B)  Every publicly held corporation must use the accrual method of accounting to prepare financial statements. 
C)  The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical. 
D)  Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income. 
A)  The accrual method is the required method of accounting under GAAP. 
B)  Every publicly held corporation must use the accrual method of accounting to prepare financial statements. 
C)  The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical. 
D)  Corporations with more than $5 million average annual gross receipts are required to use the accrual method to compute taxable income.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

CSQ Inc. reported $1,339,700 book income before tax this year. CSQ had $46,600 favorable permanent differences and $103,500 unfavorable temporary differences between book income and taxable income. Assuming a 35 percent tax rate, which of the following statements is true?

Accepted Answer

A)  CSQ's tax payable is $448,980. 
B)  CSQ's tax expense per books is $452,585. 
C)  CSQ's tax payable is $505,120. 
D)  CSQ's tax expense per books is $485,205. 
A)  CSQ's tax payable is $448,980. 
B)  CSQ's tax expense per books is $452,585. 
C)  CSQ's tax payable is $505,120. 
D)  CSQ's tax expense per books is $485,205.

Question 7

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

Accepted Answer

A)  This deduction is a tax preference. 
B)  This deduction is intended to help U.S. businesses compete in the global marketplace. 
C)  This deduction improves the measurement of taxable business income. 
D)  This deduction creates a permanent difference between book income and taxable income. 
A)  This deduction is a tax preference. 
B)  This deduction is intended to help U.S. businesses compete in the global marketplace. 
C)  This deduction improves the measurement of taxable business income. 
D)  This deduction creates a permanent difference between book income and taxable income.

Question 8

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true?

Accepted Answer

A)  JKL and Matthew must account for the transaction using the same method of accounting. 
B)  The IRS has the right to reallocate income from the transaction to prevent distortion. 
C)  The cash method of accounting must be used to account for such transactions. 
D)  JKL and Matthew must request permission from the IRS to engage in the related party transaction. 
A)  JKL and Matthew must account for the transaction using the same method of accounting. 
B)  The IRS has the right to reallocate income from the transaction to prevent distortion. 
C)  The cash method of accounting must be used to account for such transactions. 
D)  JKL and Matthew must request permission from the IRS to engage in the related party transaction.

Question 9

Pozzi Company, a cash basis business, received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago. The payment consisted of a $15,000 principal payment and $1,930 interest. On receipt of the cash, Pozzi recognizes:

Accepted Answer

A)  No taxable income. 
B)  $1,930 taxable income. 
C)  $15,000 taxable income. 
D)  $16,930 taxable income. 
A)  No taxable income. 
B)  $1,930 taxable income. 
C)  $15,000 taxable income. 
D)  $16,930 taxable income.

Question 10

On December 19, 2015, 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, 2016. Which of the following statements is true?

Accepted Answer

A)  If Mr. Craig and Logo are not related parties, Logo can deduct the accrued expense in 2015. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2015 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2015. 
D)  If Mr. Craig and Logo are not related parties, Mr. Craig can elect to include the $50,000 bonus in gross income in either 2015 or 2016. 
A)  If Mr. Craig and Logo are not related parties, Logo can deduct the accrued expense in 2015. 
B)  If Mr. Craig and Logo are related parties, Mr. Craig must include his $50,000 bonus in 2015 gross income. 
C)  Regardless of whether Logo and Mr. Craig are related parties, Logo can't deduct the accrued compensation expense in 2015. 
D)  If Mr. Craig and Logo are not related parties, Mr. Craig can elect to include the $50,000 bonus in gross income in either 2015 or 2016.

Question 11

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Accepted Answer

A) True 
 B)False

Question 12

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

Accepted Answer

A) True 
 B)False

Question 13

This year, Garfield Inc. generated a $25,000 net operating loss. Which of the following statements is false?

Accepted Answer

A)  If Garfield can carry the entire NOL back to deduct against prior year taxable income, the NOL will have no deferred tax consequences. 
B)  If Garfield can't use any of the NOL as a carryback deduction, the NOL will result in a deferred tax liability. 
C)  Garfield can elect to give up the carryback of the NOL. 
D)  If Garfield can't use any of the NOL as a carryback deduction, it can carry the NOL forward for 20 years. 
A)  If Garfield can carry the entire NOL back to deduct against prior year taxable income, the NOL will have no deferred tax consequences. 
B)  If Garfield can't use any of the NOL as a carryback deduction, the NOL will result in a deferred tax liability. 
C)  Garfield can elect to give up the carryback of the NOL. 
D)  If Garfield can't use any of the NOL as a carryback deduction, it can carry the NOL forward for 20 years.

Question 14

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?

Accepted Answer

A)  Jackey can deduct the $44,200 accrued rent expense. 
B)  Jackey can deduct the $44,200 expense in the year of payment. 
C)  The accrued rent expense results in a permanent book/tax difference. 
D)  The accrued rent expense results in a temporary book/tax difference. 
A)  Jackey can deduct the $44,200 accrued rent expense. 
B)  Jackey can deduct the $44,200 expense in the year of payment. 
C)  The accrued rent expense results in a permanent book/tax difference. 
D)  The accrued rent expense results in a temporary book/tax difference.

Question 15

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

Accepted Answer

A)  Business meal and entertainment expense 
B)  Domestic production activities deduction 
C)  Premiums paid on key-person life insurance policies 
D)  All of the above result in a permanent book/tax difference. 
A)  Business meal and entertainment expense 
B)  Domestic production activities deduction 
C)  Premiums paid on key-person life insurance policies 
D)  All of the above result in a permanent book/tax difference.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

Accepted Answer

A) True 
 B)False

Question 18

Derik Inc., a calendar year, accrual basis corporation, accrued $278,000 vacation pay expense and a corresponding liability at the end of 2015. Derik paid $22,000 of the accrued liability to employees who took vacation between January 1 and March 15, 2016. How much of the accrued vacation pay expense is deductible in 2015?

Accepted Answer

A)  None of the accrued expense is deductible in 2015. 
B)  $22,000. 
C)  $256,000. 
D)  The entire accrued expense is deductible in 2015. 
A)  None of the accrued expense is deductible in 2015. 
B)  $22,000. 
C)  $256,000. 
D)  The entire accrued expense is deductible in 2015.

Question 19

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

Accepted Answer

A)  Tax expense per books $345,508; tax payable $372,004 
B)  Tax expense per books $345,508; tax payable $533,572 
C)  Tax expense per books $507,076; tax payable $372,004 
D)  Tax expense per books $372,004; tax payable $533,572 
A)  Tax expense per books $345,508; tax payable $372,004 
B)  Tax expense per books $345,508; tax payable $533,572 
C)  Tax expense per books $507,076; tax payable $372,004 
D)  Tax expense per books $372,004; tax payable $533,572

Question 20

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

Accepted Answer

A)  Tax expense per books $3,360,081; tax payable $3,239,551 
B)  Tax expense per books $3,512,265; tax payable $3,239,551 
C)  Tax expense per books $3,512,265; tax payable $3,512,265 
D)  Tax expense per books $3,087,367; tax payable $3,087,367 
A)  Tax expense per books $3,360,081; tax payable $3,239,551 
B)  Tax expense per books $3,512,265; tax payable $3,239,551 
C)  Tax expense per books $3,512,265; tax payable $3,512,265 
D)  Tax expense per books $3,087,367; tax payable $3,087,367

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

Taxable income is defined as gross income minus allowable deductions and credits.

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

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.

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.

CSQ Inc. reported $1,339,700 book income before tax this year. CSQ had $46,600 favorable permanent differences and $103,500 unfavorable temporary differences between book income and taxable income. Assuming a 35 percent tax rate, which of the following statements is true?

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

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true?

Pozzi Company, a cash basis business, received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago. The payment consisted of a $15,000 principal payment and $1,930 interest. On receipt of the cash, Pozzi recognizes:

On December 19, 2015, 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, 2016. Which of the following statements is true?

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

This year, Garfield Inc. generated a $25,000 net operating loss. Which of the following statements is false?

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?

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

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

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

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

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

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, Llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters

Exam 6: Taxable Income From Business Operations

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

Taxable income is defined as gross income minus allowable deductions and credits.

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

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.

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.

CSQ Inc. reported $1,339,700 book income before tax this year. CSQ had $46,600 favorable permanent differences and $103,500 unfavorable temporary differences between book income and taxable income. Assuming a 35 percent tax rate, which of the following statements is true?

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

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true?

Pozzi Company, a cash basis business, received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago. The payment consisted of a $15,000 principal payment and $1,930 interest. On receipt of the cash, Pozzi recognizes:

On December 19, 2015, 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, 2016. Which of the following statements is true?

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

This year, Garfield Inc. generated a $25,000 net operating loss. Which of the following statements is false?

Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?

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

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

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

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

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

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, Partnerships, Llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Investment and Personal Financial Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters