Exam 6: Taxable Income From Business Operations

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:

Toro Inc. received permission from the IRS to change its taxable year from a fiscal year ending July 31 to a calendar year. Consequently, Toro filed a short-period return for the five-month period from August 1 through December 31. The taxable income reported on the return was $65,000. Use the corporate tax rates in Appendix C of the text to compute Toro's tax on this income (to the nearest dollar).

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.

On December 19, 2015, Acme Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mrs. Tabor, who is Acme's CFO. Acme paid the $50,000 to Mrs. Tabor on January 15, 2016. Which of the following statements is false?

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

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

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2015 and mailed a check to the telephone company on January 4, 2016. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2016.

Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. Which of the following statements is true?

On December 12, 2015, Hook Company, a calendar year, cash basis business, mailed a $5,600 bill to Mrs. Gilder for professional services rendered during the month of November. Mrs. Gilder dropped off her $5,600 check at Hook's office on December 28, but the company secretary did not deposit the check in Hook's bank account until January 3. Which of the following statements is true?

Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.

Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide professional services. Rukel completed the services on November 30, 2015, and immediately sent Bendom a bill for $37,750. Bendom paid the bill on January 4, 2016. Which of the following statements is false?

Two years ago, Ipenex Inc., an accrual basis taxpayer, wrote off a $17,500 account receivable as uncollectible. This year, Ipenex received an entirely unexpected check for $17,500 from the debtor. Which of the following statements is false?

Marchal Inc., a calendar year, accrual basis taxpayer, made the following state income tax payments during 2015. a. Compute Marchal's 2015 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 2015 federal deduction for state income tax.

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

Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2015, 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?

Valley Inc. incurred a $71,400 net operating loss this year. Which of the following statements is true?

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.

Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.

Addis Company operates a retail men's clothing store. Because Addis has merchandise inventory, it must use:

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?