Question 1

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

Accepted Answer

A) True 
 B)False

Question 2

Bolton Inc., a calendar year taxpayer, generated a $296,400 net operating loss this year. Bolton can carry the loss back five years and forward 20 years for tax purposes.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements about tax expense per books and tax payable is false?

Accepted Answer

A) If a corporation has no temporary differences between book income and taxable income, tax expense per books equals tax payable. 
B) If a corporation has no permanent differences between book income and taxable income, tax expense per books equals tax payable. 
C) Tax expense per books and tax payable are calculated from the same rate schedule. 
D) Statements B.and C.are false.

Question 5

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

Accepted Answer

A) Valley can use the NOL only as a carryforward deduction. 
B) Valley can use the NOL only as a carryback deduction. 
C) Valley can elect to use the NOL as a carryforward deduction. 
D) None of the above is true.

Question 6

Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Tabco Inc., a calendar year, accrual basis corporation, accrued $48,800 wage and salary expense and a corresponding liability at the end of 2013. How much of the accrued expense is deductible in 2013?

Accepted Answer

A) None of the accrued expense is deductible in 2013. 
B) The entire accrued expense is deductible in 2013. 
C) The amount of the accrued expense paid by September 15, 2014, is deductible in 2013. 
D) The amount of the accrued expense paid by March 15, 2014, is deductible in 2013.

Question 9

Rydel Inc. was incorporated on August 9 and elected to use a calendar year for tax purposes. Rydel must annualize the income reported on its first tax return for the short period from August 9 to December 31.

Accepted Answer

A) True 
 B)False

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

Which of the following statements about the all-events test is false?

Accepted Answer

A) An accrued expense is not deductible unless the liability for the expense is fixed. 
B) An accrued expense is not deductible unless the amount of the expense is determinable with reasonable accuracy. 
C) An accrued expense is not deductible unless economic performance with respect to the liability has occurred. 
D) None of the above is false.

Question 12

A permanent difference between book income and taxable income affects only one taxable year.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following methods of accounting is never permissible for computing taxable income?

Accepted Answer

A) Cash receipts and disbursements method 
B) Accrual method 
C) Hybrid method that combines the cash and accrual methods 
D) All of the above are permissible methods of accounting.

Question 14

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 15

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 16

Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 accrued salary and wage expense at the end of 2013. Murray paid the entire amount of the accrued liability on January 13, 2014. Murray can deduct the entire $946,000 accrued expense in 2013.

Accepted Answer

A) True 
 B)False

Question 17

On December 19, 2013, 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, 2014. Which of the following statements is false?

Accepted Answer

A) If Mrs.Tabor owns no stock in Acme (i.e.is not a related party), Acme can deduct the accrued expense in 2013. 
B) Mrs.Tabor includes her $50,000 bonus in 2014 gross income. 
C) If Mrs.Tabor owns 75 percent of Acme's stock (i.e.is a related party), Acme can't deduct the expense until 2014. 
D) If Mrs.Tabor owns 75 percent of Acme's stock (i.e.is a related party), Acme can never deduct the bonus expense.

Question 18

Which of the following statements concerning the principle of accounting conservatism is true?

Accepted Answer

A) According to the GAAP principle of conservatism, financial statements should report expenses and losses in the earliest reasonable year. 
B) The GAAP principle of conservatism tries to prevent the overstatement of book income and the understatement of taxable income. 
C) According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the earliest reasonable year. 
D) According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the same year as they are reported on the taxpayers' financial statements.

Question 19

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 20

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

Accepted Answer

A) Bad debt expense per books and the deduction for bad debts is $69,650. 
B) Bad debt expense per books and the deduction for bad debts is $88,500. 
C) Bad debt expense per books is $80,000, and the deduction for bad debts is $88,500. 
D) Bad debt expense per books is $88,500, and the deduction for bad debts is $80,000.

Exam 6: Taxable Income From Business Operations

Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.

Bolton Inc., a calendar year taxpayer, generated a $296,400 net operating loss this year. Bolton can carry the loss back five years and forward 20 years for tax purposes.

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

Which of the following statements about tax expense per books and tax payable is false?

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

Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

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?

Tabco Inc., a calendar year, accrual basis corporation, accrued $48,800 wage and salary expense and a corresponding liability at the end of 2013. How much of the accrued expense is deductible in 2013?

Rydel Inc. was incorporated on August 9 and elected to use a calendar year for tax purposes. Rydel must annualize the income reported on its first tax return for the short period from August 9 to December 31.

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?

Which of the following statements about the all-events test is false?

A permanent difference between book income and taxable income affects only one taxable year.

Which of the following methods of accounting is never permissible for computing taxable income?

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?

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?

Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 accrued salary and wage expense at the end of 2013. Murray paid the entire amount of the accrued liability on January 13, 2014. Murray can deduct the entire $946,000 accrued expense in 2013.

On December 19, 2013, 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, 2014. Which of the following statements is false?

Which of the following statements concerning the principle of accounting conservatism is true?

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