Question 1

Assuming a 30% marginal tax rate, compute the after-tax cost of the following business expenses.
a. $12,300 meals and entertainment.
b. $42,000 rent on factory equipment.
c. $8,050 premium for key-person life insurance.

Accepted Answer

a. $10,455 ($12,300 expense - $1,845 tax savings from $6,150 deduction)
b. $29,400 ($42,000 expense - $12,600 tax savings from deduction)
c. $8,050 nondeductible expense

Question 2

Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?

Accepted Answer

A)   Unex can deduct the accrued expense only if it makes a written disclosure to the IRS of the contingent liability.
B)   Unex will be allowed a deduction in the year in which its liability for the settlement becomes fixed and the amount of the settlement can be estimated with reasonable accuracy.
C)   Unex will be allowed a deduction in the year that it actually pays the settlement to the employee.
D)   Unex can never deduct any expense in connection with this lawsuit. C

Question 3

BugLess Inc, a calendar year, accrual basis corporation, provides pest extermination services to its customers. In October 2015, BugLess contracted with Mr. Cass to provide monthly service calls for 24 months. Each service call costs $60, and Mr. Cass prepaid $1,440 when he signed the contract. BugLess made three service calls to Mr. Cass' home in 2015. As a result of the contract, BugLess should report:

Accepted Answer

A)   $1,440 taxable income in 2015.
B)   $180 taxable income in 2015, $720 taxable income in 2016, and $540 taxable income in 2017.
C)   $180 taxable income in 2015, and $1,260 taxable income in 2016.
D)   None of the above C

Question 4

An unfavorable temporary book/tax difference generates a deferred tax asset.

Accepted Answer

A) True 
 B)False

Question 5

Hitz Company, a calendar year, accrual basis taxpayer, recorded $1,735 accrued interest expense and $1,735 accrued interest payable when it closed its books on December 31. The interest relates to a loan from First State Bank and accrued over the last two months of the year. Which of the following statements is true?

Accepted Answer

A)   Hitz can't deduct the accrued interest expense until the year of payment.
B)   Hitz can deduct the accrued interest expense this year only if it pays the interest within eight and one-half months after the close of the year.
C)   Hitz can deduct the accrued interest expense this year.
D)   Hitz can never deduct the interest expense.

Question 6

Southlawn Inc.'s taxable income is computed as follows.  Using a 34% rate, compute Southlawn's tax expense per books and tax payable.

Accepted Answer

A)   Tax expense per books $643,824; tax payable $579,564
B)   Tax expense per books $579,564; tax payable $643,824
C)   Tax expense per books $817,904; tax payable $579,564
D)   None of the above

Question 7

GH&F is a calendar year, accrual basis taxpayer. In October 2015, 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, 2015. 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 8

Marz Services Inc. is a personal service corporation with $60 million average annual gross receipts. Marz must use the accrual method of accounting for tax purposes.

Accepted Answer

A) True 
 B)False

Question 9

Timm Inc., a calendar year, accrual basis taxpayer, is being sued by a customer who was injured when she tripped over a loose carpet in Timm's retail store. Timm's auditors required the corporation to accrue a $500,000 contingent liability and current year expense. Which of the following statements is true?

Accepted Answer

A)   Timm can deduct the $500,000 accrued expense.
B)   Timm can never deduct the $500,000 expense.
C)   Timm can deduct the expense in the year in which the liability becomes fixed and determinable.
D)   Timm can deduct the expense in the year of payment.

Question 10

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 11

Which of the following statements concerning the cash method of accounting is true?

Accepted Answer

A)   A cash basis taxpayer who is in constructive receipt of an income item must recognize that income, even if the item is not in the taxpayer's actual possession.
B)   A cash basis taxpayer can deduct the purchase cost of business equipment.
C)   A cash basis taxpayer does not recognize gross income on receipt of an economic benefit unless that benefit consists of money.
D)   A cash basis taxpayer can deduct interest when it is paid, regardless of the time period for which the interest is charged.

Question 12

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 $15 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

Question 13

Molton Inc., which operates a chain of retail toy stores, prepares GAAP based financial statements. Molton must use the allowance method to account for business bad debts for both book and tax purposes.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

Federal and state political lobbying expenses are nondeductible.

Accepted Answer

A) True 
 B)False

Question 17

Eddy Corporation engaged in a transaction that generated $100,000 book income but only $81,000 taxable income. Which of the following is true?

Accepted Answer

A)   If the $19,000 excess of book income over taxable income is temporary, the transaction has no effect on Eddy's deferred tax accounts.
B)   The $19,000 excess of book income over taxable income is an unfavorable difference.
C)   If the $19,000 excess of book income over taxable income is permanent, the transaction has no effect on Eddy's deferred tax accounts.
D)   None of the above is true.

Question 18

Randall Company uses the calendar year and the cash method of accounting. On December 31, 2015, Randall made the following cash payments. To what extent can Randall deduct the payments in 2015?
a. $50,000 for a two-year warehouse lease beginning on March 1, 2016.
b. $95,000 of inventory items held for sale to customers.
c. $1,800 to purchase a new refrigerator for the employees' lounge. The refrigerator was delivered on February 1, 2016.
d. $5,000 compensation to a consultant who spent two weeks in January 2016 analyzing Randall's payroll system.
e. $22,000 property tax to the local government for the first six months of 2016.

Accepted Answer

The answer of Randall Company uses the calendar year and...

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 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.

Exam 6: Taxable Income From Business Operations

Assuming a 30% marginal tax rate, compute the after-tax cost of the following business expenses. a. $12,300 meals and entertainment. b. $42,000 rent on factory equipment. c. $8,050 premium for key-person life insurance.

Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?

An unfavorable temporary book/tax difference generates a deferred tax asset.

Southlawn Inc.'s taxable income is computed as follows. Using a 34% rate, compute Southlawn's tax expense per books and tax payable.

Marz Services Inc. is a personal service corporation with $60 million average annual gross receipts. Marz must use the accrual method of accounting for tax purposes.

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:

Which of the following statements concerning the cash method of accounting is true?

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

Molton Inc., which operates a chain of retail toy stores, prepares GAAP based financial statements. Molton must use the allowance method to account for business bad debts for both book and tax purposes.

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

Federal and state political lobbying expenses are nondeductible.

Eddy Corporation engaged in a transaction that generated $100,000 book income but only $81,000 taxable income. 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?

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