Question 1

Donatoni Corporation owns 40% of Market, Inc. voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $21,000 dividends-received deduction.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following items is not used to compute the Domestic Production Activities Deduction?

Accepted Answer

A)  Overseas sales of domestic products 
B)  Taxable income 
C)  Compensation paid to US workforce 
D)  Net income from qualified domestic production activity

Question 3

Corporations are required to pay their federal tax liability in four quarterly estimated tax installments.

Accepted Answer

A) True 
 B)False

Question 4

Palm Corporation has book income of $424,000. Book income reflects $200,000 income tax expense and $55,000 depreciation expense. Tax depreciation expense computed under MACRS is $65,000. Palm received $25,000 of prepaid rent not included in book income. Based only on these items, compute Palm's taxable income.

Accepted Answer

A)  $639,000 
B)  $609,000 
C)  $659,000 
D)  $589,000

Question 5

The dividends-received deduction is equal to 80% of any dividends-received by a corporate taxpayer.

Accepted Answer

A) True 
 B)False

Question 6

The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement.

Accepted Answer

A) True 
 B)False

Question 7

Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true?

Accepted Answer

A)  The income from the collection and distribution of food and the income from grocery store are taxable. 
B)  No income from either of the activities is taxable. 
C)  Only the income from the collection and distribution of food is taxable. 
D)  Only the income from the grocery store is taxable.

Question 8

Eagle, Inc. made a contribution to the Boy Scouts of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000.

Accepted Answer

A) True 
 B)False

Question 9

The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket.

Accepted Answer

A) True 
 B)False

Question 10

For a consolidated group of corporations, Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.

Accepted Answer

A) True 
 B)False

Question 11

Joanna has a 35% marginal tax rate and owns 100% of the stock of Loman Corporation. This year, Loman generated $400,000 of taxable income, paid $136,000 of corporate income tax, and paid a $50,000 dividend to Joanna. Suppose that the federal income tax system has been amended to allow shareholders to gross up dividend income by the corporate tax paid with respect to the dividend and credit this tax against their individual tax. Further assume that dividends-received by individuals are not eligible for a preferential tax rate. Calculate Joanna's reported dividend income and her tax due on the dividend.

Accepted Answer

A)  Dividend income, $75,758; tax due, $757 
B)  Dividend income, $67,000; tax due, $5,450 
C)  Dividend income, $50,000; tax due, $17,500 
D)  Dividend income, $50,000; tax due, $500

Question 12

Which of the following statements regarding the tax treatment of corporate dividends is true?

Accepted Answer

A)  All shareholders receiving dividend payments from U.S. corporations are entitled to a dividends-received deduction. 
B)  Dividends-received from foreign corporations are eligible for the dividends-received deduction. 
C)  Corporations are entitled to deduct dividend payments to shareholders in calculating corporate taxable income. 
D)  Dividend payments between members of an affiliated group of corporations filing a consolidated return are tax exempt.

Question 13

The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income.

Accepted Answer

A) True 
 B)False

Question 14

WEK Inc. is a New York corporation with manufacturing operations in the United States and in 12 foreign countries. This year, its taxable income from domestic manufacturing was $1,239,000, and its taxable income from foreign manufacturing was $1,773,000. WEK had no other sources of taxable income. WEK paid $487,000 compensation to its U.S. workers and $599,200 compensation to its foreign workers. Compute WEK's taxable income.

Accepted Answer

A)  $3,012,000 
B)  $2,852,430 
C)  $2,900,490 
D)  $1,127,490

Question 15

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of equipment. Based only on these items, compute Airfreight's taxable income.

Accepted Answer

A)  $370,000 
B)  $395,000 
C)  $345,000 
D)  $420,000

Question 16

For its current tax year, Volcano, Inc. reported the following: $$\begin{array} { l r } 
\text { Regular taxable income } & \$ 400,000 \
\text { Regular tax liability } & 136,000 \
\text { AMTI in excess of exemption } & 812,000
\end{array}$$ Compute Volcano's alternative minimum tax.

Accepted Answer

A)  $136,000 
B)  $162,400 
C)  $26,400 
D)  $298,400

Question 17

Aloha, Inc. had the following results for its first two years of operation: $$\begin{array} { l r r } 
& 2015 & 2016 \
\text { Regular tax liability } & \$ 230,000 & \$ 331,200 \
\text { Tentative minimum tax } & \$ 250,000 & \$ 258,000
\end{array}$$ Which of the following statements is true?

Accepted Answer

A)  There is no AMT credit carryover from 2015 to 2016. 
B)  There is an AMT credit carryover from 2015 to 2016. 
C)  There is an AMT credit carryover from 2016 to 2017. 
D)  There is an AMT credit carryback from 2016 to 2015.

Question 18

Corporations report their taxable income and calculate the federal income tax on Form 1040.

Accepted Answer

A) True 
 B)False

Question 19

Hearth, Inc. reported $30,000 of depreciation expense on its financial statements. For federal income tax purposes, it deducted depreciation of $35,000. This book/tax difference would result in an increase to net income per books on the Schedule M-1 or M-3.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements regarding the taxation of corporate profits is true?

Accepted Answer

A)  Dividends payments are deductible in computing corporate taxable income. 
B)  The tax treatment of corporate dividends creates a bias in favor of debt financing. 
C)  Corporations cannot deduct interest payments in computing corporate taxable income. 
D)  Corporations with high debt-to-equity ratios have less burdensome cash flow commitments and lower risk of insolvency.

Exam 11: The Corporate Taxpayer

Donatoni Corporation owns 40% of Market, Inc. voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $21,000 dividends-received deduction.

Which of the following items is not used to compute the Domestic Production Activities Deduction?

Corporations are required to pay their federal tax liability in four quarterly estimated tax installments.

The dividends-received deduction is equal to 80% of any dividends-received by a corporate taxpayer.

The stock of closely held corporations is typically restricted as to transferability by some type of buy-sell agreement.

Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true?

Eagle, Inc. made a contribution to the Boy Scouts of $25,000 during its current tax year. The corporation's taxable income before any charitable contribution deduction was $200,000. The corporation has a current charitable contribution deduction of $25,000.

The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes. An example of this treatment is the requirement to share the 15% tax bracket.

For a consolidated group of corporations, Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group.

Which of the following statements regarding the tax treatment of corporate dividends is true?

The purpose of Schedule M-1 is to explain the differences between financial statement income and taxable income.

Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of equipment. Based only on these items, compute Airfreight's taxable income.

For its current tax year, Volcano, Inc. reported the following: $\begin{array} { l r } \text { Regular taxable income } & \$ 400,000 \\\text { Regular tax liability } & 136,000 \\\text { AMTI in excess of exemption } & 812,000\end{array}$ Compute Volcano's alternative minimum tax.

Aloha, Inc. had the following results for its first two years of operation: $\begin{array} { l r r } & 2015 & 2016 \\\text { Regular tax liability } & \$ 230,000 & \$ 331,200 \\\text { Tentative minimum tax } & \$ 250,000 & \$ 258,000\end{array}$ Which of the following statements is true?

Corporations report their taxable income and calculate the federal income tax on Form 1040.

Hearth, Inc. reported $30,000 of depreciation expense on its financial statements. For federal income tax purposes, it deducted depreciation of $35,000. This book/tax difference would result in an increase to net income per books on the Schedule M-1 or M-3.

Which of the following statements regarding the taxation of corporate profits is true?