Question 1

A taxpayer that operates more than one business may use a different method of accounting for each business.

Accepted Answer

A) True 
 B)False

Question 2

GH&F is a calendar year,accrual basis taxpayer.In October 2017,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 1,2017.As a result of the payment,GH&F should report:

Accepted Answer

A) $2,000 book income and taxable income 
B) $2,000 book income and $18,000 taxable income 
C) $18,000 book income and taxable income 
D) None of the above

Question 3

RRK,a calendar year,accrual basis taxpayer,is involved in a legal dispute over an alleged trademark violation.At the end of the year,RRK's accountant recorded a $750,000 accrued expense for the estimated settlement cost of the dispute.Which of the following statements is true?

Accepted Answer

A) RRK can deduct the $750,000 accrued expense. 
B) RRK can't deduct the $750,000 accrued expense because the liability fails the all-events test. 
C) RRK can never deduct the $750,000 expense. 
D) RRK can deduct the accrued expense only if the dispute is settled within eight and one-half months after the close of the taxable year.

Question 4

Tonto Inc.has used a calendar year as its taxable year since its incorporation in 1990.Tonto has an excellent business reason for changing to a fiscal year ending May 31.Which of the following statements is true?

Accepted Answer

A) Because it has a good business reason,Tonto can change to a fiscal year ending May 31 without IRS permission. 
B) If Tonto changes to a fiscal year ending May 31,it must file a short-period return for the seven-month period from June 1 to December 31 of the year of change. 
C) If Tonto changes to a fiscal year ending May 31,it must file a short-period return for the five-month period from January 1 to May 31 of the year of change. 
D) Because it has a good business reason,Tonto can change to a fiscal year ending May 31 without IRS permission and if Tonto changes to a fiscal year ending May 31,it must file a short-period return for the seven-month period from June 1 to December 31 of the year of change.

Question 5

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

Accepted Answer

A) The accrual method as its overall method of accounting. 
B) The accrual method to account only for sales of merchandise. 
C) The accrual method to account only for purchases of merchandise. 
D) The accrual method to account for both sales and purchases of merchandise.

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.

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

Eaton Inc.is a calendar year,cash basis taxpayer.On October 1,2017,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 2017. 
B) Eaton can deduct $600 in 2017,and the remaining $4,200 in 2018. 
C) Eaton can deduct $600 in 2017,$2,400 in 2018,and $1,800 in 2019. 
D) None of the above is true.

Question 9

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 10

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

Accepted Answer

A) True 
 B)False

Question 11

HHF Corporation received permission from the IRS to change its taxable year from a fiscal year ending August 31 to a calendar year.Consequently,HHF filed a short-period return for the four-month period from September 1 through December 31.The taxable income reported on the return was $56,000.Use the corporate tax rates in Appendix C of the text to compute HHF's tax on this income (to the nearest dollar).

Accepted Answer

A) $9,000 
B) $14,000 
C) $16,257 
D) $48,770

Question 12

Zephex is a calendar year corporation.On December 1,2017,Zephex received a $12,000 check from a tenant that leases office space owned by Zephex.This payment was rent for the four-month period from December 1,2017,through March 31,2018.On December 2,2017,Zephex billed a client $38,250 for services rendered to the client in November.The client did not pay the bill until January 14,2018.
a.If Zephex is a cash basis taxpayer,how much 2017 income should it recognize with respect to the above transactions?
b.If Zephex is an accrual basis taxpayer,how much 2017 book income should it report and how much 2017 taxable income should it recognize with respect to the above transactions?

Accepted Answer

The answer of Zephex is a calendar year corporation.On December...

Question 13

Which of the following statements describes a permanent book/tax difference?

Accepted Answer

A) An expense reported on the current income statement but deducted on next year's tax return 
B) A revenue item included in current taxable income but not reported on the income statement until next year 
C) An expense that is never deductible 
D) A revenue item reported on the current income statement but not included in taxable income until an indefinite future year

Question 14

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

Accepted Answer

A) A deduction for the payment of a political contribution would be a subsidy for bad behavior. 
B) A deduction for the payment of a political contribution would subsidize partisan political activities. 
C) The payment of a political contribution is not an expense for financial reporting purposes. 
D) A deduction for the payment of a fine or penalty would distort the measurement of taxable income.

Question 15

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.

Accepted Answer

The answer of Krasco Inc.'s auditors prepared the following reconciliation...

Question 16

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

Accepted Answer

A) The permanent differences caused a $174,080 net increase in Southlawn's deferred tax liabilities. 
B) The permanent differences caused a $174,080 net decrease in Southlawn's deferred tax liabilities. 
C) The temporary differences caused a $64,260 net increase in Southlawn's deferred tax liabilities. 
D) The temporary differences caused a $64,260 net decrease in Southlawn's deferred tax liabilities.

Question 17

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 18

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

Accepted Answer

A) A deduction for the payment of a fine or penalty would be a subsidy for bad behavior. 
B) The payment of a fine or penalty is not an ordinary business expense. 
C) The payment of a fine or penalty is not an expense for financial reporting purposes. 
D) A deduction for the payment of a fine or penalty would distort the measurement of taxable income.

Question 19

Tax expense per books is based on:

Accepted Answer

A) Before-tax book income 
B) Before-tax book income adjusted for permanent differences 
C) Before-tax book income adjusted for temporary differences 
D) Before-tax book income adjusted for both permanent and temporary differences

Question 20

Marchal Inc.,a calendar year,accrual basis taxpayer,made the following state income tax payments during 2017.  On December 28,Marchal's tax department calculated that the corporation's actual 2017 state income tax liability was $67,140.Consequently,Marchal accrued a $6,140 liability for state income tax payable at year end.
a.Compute Marchal's 2017 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 2017 federal deduction for state income tax.

Accepted Answer

The answer of Marchal Inc.,a calendar year,accrual basis taxpayer,made the...

Exam 6: Taxable Income From Business Operations

A taxpayer that operates more than one business may use a different method of accounting for each business.

GH&F is a calendar year,accrual basis taxpayer.In October 2017,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 1,2017.As a result of the payment,GH&F should report:

RRK,a calendar year,accrual basis taxpayer,is involved in a legal dispute over an alleged trademark violation.At the end of the year,RRK's accountant recorded a $750,000 accrued expense for the estimated settlement cost of the dispute.Which of the following statements is true?

Tonto Inc.has used a calendar year as its taxable year since its incorporation in 1990.Tonto has an excellent business reason for changing to a fiscal year ending May 31.Which of the following statements is true?

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

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?

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.

Eaton Inc.is a calendar year,cash basis taxpayer.On October 1,2017,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?

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?

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

Which of the following statements describes a permanent book/tax difference?

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

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.

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

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.

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

Tax expense per books is based on: