Question 1

Mr.Stern,a cash basis taxpayer,was notified by his bank that he earned $1,193 of interest on his savings account in 2019.Mr.Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26,2020.Mr.Stern does not recognize the interest as income in 2019.

Accepted Answer

A) True 
 B)False

Question 2

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.

Question 3

Poole Company,a calendar year taxpayer,incurred $589 of long-distance telephone charges in December 2019 and mailed a check to the telephone company on January 4,2020.If Poole is a cash basis taxpayer,it reports a $589 tax deduction in 2020.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements about tax policy objectives regarding business expenses is false?

Accepted Answer

A) Lobbying expenses are not deductible because Congress does not want to subsidize political activities. 
B) By disallowing a tax deduction,Congress increases the after-tax cost of undesirable expenditures. 
C) The tax treatment of meals and entertainment expenses is intended to make the law more equitable. 
D) The business interest expense limitation increases the disparity between the tax treatment of debt and equity financing.

Question 5

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:

Accepted Answer

A) $54,600 permanent excess of book income over taxable income. 
B) $54,600 permanent excess of taxable income over book income. 
C) $54,600 temporary excess of taxable income over book income. 
D) $54,600 temporary excess of book income over taxable income.

Question 6

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 7

According to the GAAP principle of conservatism,firms should delay the realization of uncertain revenues and gains and accelerate the realization of uncertain expenses and losses.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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:

Accepted Answer

A) $8,500 permanent excess of book income over taxable income. 
B) $8,500 permanent excess of taxable income over book income. 
C) $8,500 temporary excess of taxable income over book income. 
D) $8,500 temporary excess of book income over taxable income.

Question 10

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?

Accepted Answer

A) The receipt has no effect on current year book income. 
B) The receipt has no effect on current year taxable income. 
C) Ipenex must recognize $17,500 taxable income under the tax benefit rule. 
D) Ipenex credited the receipt to its allowance for bad debts.

Question 11

Eaton Inc.is a calendar year,cash basis taxpayer.On October 1,2019,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?

Accepted Answer

A) As a cash basis taxpayer,Eaton can deduct the $4,800 expense in 2019. 
B) Eaton can deduct $600 in 2019,and the remaining $4,200 in 2020. 
C) Eaton can deduct $600 in 2019,$2,400 in 2020,and $1,800 in 2021. 
D) None of the above is true.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

A corporation can't have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.

Accepted Answer

A) True 
 B)False

Question 14

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 14,2019,the board of directors authorized a $45,000 year-end bonus for Mr.Carre,which was paid to him on February 1,2020.In which year can JC Inc.deduct the bonus?

Accepted Answer

A) 2019. 
B) 2020. 
C) JC Inc.can deduct only $14,850 (33%)of the bonus in 2019. 
D) The related party accrued expense is deductible in the year Mr.Carre includes the bonus payment in gross income.JC Inc.can never deduct the bonus.

Question 15

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

Accepted Answer

A) Rent expense 
B) Interest expense 
C) Client entertainment 
D) Salary expense

Question 16

Mundo Company is a calendar year,accrual basis taxpayer.In June 2019,Mundo received a $72,000 cash payment from a tenant who leases space in a commercial office building that Mundo owns.The payment was rent for the 24-month period beginning on July 1,2019.As a result of the payment,Mundo should report:

Accepted Answer

A) $6,000 book income and taxable income 
B) $72,000 book income and taxable income 
C) No book income and $72,000 taxable income 
D) None of the above

Question 17

Poole Services,a calendar year taxpayer,billed a client for $1,675 of services on November 30,2019,and received a check in full payment from the client on January 12,2020.If Poole is a cash basis taxpayer,it reports $1,675 taxable income in 2019.

Accepted Answer

A) True 
 B)False

Question 18

Goff Inc.'s taxable income is computed as follows:  Goff's tax rate is 21%.Which of the following statements is true?

Accepted Answer

A) The permanent differences caused a $16,365 net increase in Goff's deferred tax liabilities. 
B) The permanent differences caused a $16,365 net increase in Goff's deferred tax assets. 
C) The temporary differences caused a $99,792 net increase in Goff's deferred tax assets. 
D) The temporary differences caused a $99,792 net increase in Goff's deferred tax liabilities.

Question 19

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?

Accepted Answer

A) Jethro recognizes $1,000 income because of the settlement. 
B) Jethro recognizes no income because of the settlement. 
C) Jethro can deduct the $9,000 payment. 
D) Jethro can deduct a $1,000 bad debt expense.

Question 20

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

Accepted Answer

A) Sole proprietorship with $8 million average annual gross receipts 
B) Corporation with $50 million average annual gross receipts 
C) Partnership of individuals with $20 million average annual gross receipts 
D) Personal service corporation with $50 million average annual gross receipts

Exam 6: Taxable Income From Business Operations

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:

Poole Company,a calendar year taxpayer,incurred $589 of long-distance telephone charges in December 2019 and mailed a check to the telephone company on January 4,2020.If Poole is a cash basis taxpayer,it reports a $589 tax deduction in 2020.

Which of the following statements about tax policy objectives regarding business expenses 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:

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.

According to the GAAP principle of conservatism,firms should delay the realization of uncertain revenues and gains and accelerate the realization of uncertain expenses and losses.

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

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:

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?

Eaton Inc.is a calendar year,cash basis taxpayer.On October 1,2019,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?

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

A corporation can't have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.

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

Poole Services,a calendar year taxpayer,billed a client for $1,675 of services on November 30,2019,and received a check in full payment from the client on January 12,2020.If Poole is a cash basis taxpayer,it reports $1,675 taxable income in 2019.

Goff Inc.'s taxable income is computed as follows: Goff's tax rate is 21%.Which of the following statements is true?

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