Question 1

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

Question 2

Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 accrued salary and wage expense at the end of 2012. Murray paid the entire amount of the accrued liability on January 13, 2013. Murray can deduct the entire $946,000 accrued expense in 2012.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Which of the following statements about an NOL deduction is false?

Accepted Answer

A)  A taxpayer who deducts an NOL against taxable income for a previous year receives an immediate benefit in the form of a tax refund. 
B)  The value of an NOL carryforward deducted next year is more than the value of an NOL carryforward deducted in five years. 
C)  The value of an NOL carryforward deduction depends on the taxpayer's discount rate and future marginal tax rate. 
D)  None of the above is false.

Question 5

Which of the following statements about short-period returns is true?

Accepted Answer

A)  If a taxpayer must file a short-period return because the IRS granted permission for a change in the taxpayer's year, the tax for the year must be based on annualized income. 
B)  The tax on a short-period return must be based on annualized income only if the taxpayer failed to obtain permission from the IRS to change its taxable year. 
C)  The tax on every short-period return must be based on annualized income. 
D)  None of the above is true.

Question 6

If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.

Accepted Answer

A) True 
 B)False

Question 7

Welch Inc. has used a fiscal ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false?

Accepted Answer

A)  Welch's final tax return will be a short-period return. 
B)  Welch's final tax return will include its income from October 1 to March 31. 
C)  Welch must annualize its taxable income on its final tax return. 
D)  None of the above is false.

Question 8

Which of the following statements most accurately defines taxable income from business operations?

Accepted Answer

A)  Gross income from the sales of goods or performance of services less allowable deductions. 
B)  Gross income from whatever source derived less allowable deductions. 
C)  Revenues from business transactions less expenses. 
D)  Gross income from whatever source derived less expenses.

Question 9

A temporary difference between book income and taxable income results when an item of income reflected on the books is never included in taxable income.

Accepted Answer

A) True 
 B)False

Question 10

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?

Accepted Answer

A)  Bad debt expense per books is $845,000, and the deduction for bad debts is $899,600. 
B)  Bad debt expense per books is $899,600, and the deduction for bad debts is $845,000. 
C)  Bad debt expense per books and the deduction for bad debts is $899,600. 
D)  Bad debt expense per books and the deduction for bad debts is $895,400.

Question 11

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.

Question 12

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 13

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 14

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 15

Ladow Inc. incurred a $32,000 net operating loss in 2012. Ladow's 2010 taxable income was $28,000, and its 2011 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.

Accepted Answer

A)  $5,760 
B)  $10,880 
C)  $12,480 
D)  None of the above

Question 16

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2012. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2013. Mr. Stern does not recognize the interest as income in 2012.

Accepted Answer

A) True 
 B)False

Exam 6: Taxable Income From Business Operations

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.

Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 accrued salary and wage expense at the end of 2012. Murray paid the entire amount of the accrued liability on January 13, 2013. Murray can deduct the entire $946,000 accrued expense in 2012.

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 statements about an NOL deduction is false?

Which of the following statements about short-period returns is true?

If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.

Welch Inc. has used a fiscal ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false?

Which of the following statements most accurately defines taxable income from business operations?

A temporary difference between book income and taxable income results when an item of income reflected on the books is never included in taxable income.

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?

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?

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.

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

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

Ladow Inc. incurred a $32,000 net operating loss in 2012. Ladow's 2010 taxable income was $28,000, and its 2011 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Ladow's refund from an NOL carryback deduction.