Deck 5: Corporate Operations

Question 1

A nonqualified stock option will create a permanent book-tax difference in a given year if it accrues during the year but is exercised in a later year.

Answer 1

False
Explanation: A deductible temporary difference (deferred tax asset) is created in the year the option accrues and is recorded as an expense for book purposes.

Question 2

Corporations calculate adjusted gross income (AGI) in the same way as individuals.

Answer 2

False
Explanation: Corporations do not calculate AGI.

Question 3

For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.

Answer 3

True

Question 4

Bingo Corporation incurred a $10 million net operating loss in 2019. Bingo reported taxable income of $12 million in 2020. Bingo can offset the entire $10 million NOL carryover against taxable income in 2020.

Question 5

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.

Question 6

A corporation may carry a net capital loss back two years and forward 20 years.

Question 7

In general, all C corporations can elect to use either the accrual or cash method of accounting.

Question 8

In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. Adams has a favorable temporary book-tax difference for that year.

Question 9

Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

Question 10

A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.

Question 11

A corporation may carry a net capital loss back three years and forward five years.

Question 12

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

Question 13

For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

Question 14

For incentive stock options, the value of the options that accrue in a given year always creates a permanent, unfavorable book-tax difference.

Question 15

Net operating losses generally create permanent book-tax differences.

Question 16

Corporations may carry a net operating loss sustained in 2019 back two years and forward 20 years.

Question 17

Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

Question 18

C corporations with annual average gross receipts of $25 million or more are allowed to use the cash method of accounting for at least the first two years of their existence.

Question 19

Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

Question 20

For tax purposes, a corporation may deduct the entire amount of a net capital loss in the year incurred.

Question 21

Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability).

Question 22

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while capital loss carrybacks are not.

Question 23

Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

Question 24

An affiliated group must file a consolidated tax return.

Question 25

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

Question 26

A C corporation reports its taxable income or loss on Form 1065.

Question 27

Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

Question 28

The dividends received deduction is subject to a limitation based on modified taxable income.

Question 29

Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.

Question 30

The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.

Question 31

For 2018, accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.

Question 32

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2018. GenerUs made the payment to FoodBank on February 2, 2019. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2018 tax return.

Question 33

Volos Company (a calendar-year corporation) began operations in March of 2016 and was not profitable through December of 2017. Volos has been profitable for the first quarter of 2018 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2018 because it had no tax liability for the 2017 tax year and has been in business for at least 12 months.

Question 34

Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).

Question 35

The dividends received deduction cannot create a net operating loss. The deduction can reduce income to zero but not below zero.

Question 36

A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.

Question 37

Taxable income of the all C corporations is subject to a flat 21% tax rate.

Question 38

Net capital loss carryovers are deductible against capital gains in determining a corporation's net operating loss for the year.

Question 39

Calendar-year corporations that request an extension for filing their 2018 tax returns will have a tax return due date of October 15.

Question 40

Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation's stock.

Question 41

iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense?

A) Permanent; favorable.
B) Permanent; unfavorable.
C) Temporary; favorable.
D) Temporary; unfavorable.

Question 42

AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and expensing for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale?

A) Permanent; favorable.
B) Permanent; unfavorable.
C) Temporary; favorable.
D) Temporary; unfavorable.

Question 43

Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)?

A) Financial-no expense; tax-no deduction.
B) Financial-no expense; tax-deduct bargain element at exercise.
C) Financial-expense value over vesting period; tax-no deduction.
D) Financial-expense value over vesting period; tax-deduct bargain element at exercise.

Question 44

WFO Corporation has gross receipts according to the following schedule:
If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

A) Year 3.
B) Year 4.
C) Year 5.
D) Year 6.
E) None of the choices are correct.

Question 45

Large corporations (corporations with more than $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

Question 46

Which of the following does NOT create a permanent book-tax difference?

A) Organizational and start-up expenses.
B) Key employee death benefit income.
C) Fines and penalties expenses.
D) Municipal bond interest income.

Question 47

Minimum tax credits generated by the pre-2018 corporate alternative minimum tax can be carried forward to offset regular tax in post-2017 years.

Question 48

Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

A) $2,000 unfavorable.
B) $2,000 favorable.
C) $10,000 unfavorable.
D) $10,000 favorable.
E) None of the choices are correct.

Question 49

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

A) Temporary book-tax differences affect the computation of taxable income whereas permanent differences do not.
B) All corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C) Temporary book-tax differences will reverse in future years whereas permanent differences will not.
D) Neither temporary nor permanent book-tax differences will reverse in future years.

Question 50

TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Inc. is the beneficiary. What is the nature of the book-tax difference created by this expense?

A) Permanent; favorable.
B) Permanent; unfavorable.
C) Temporary; favorable.
D) Temporary; unfavorable.

Question 51

For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.

Question 52

Which of the following statements regarding nonqualified stock options (NQOs) is False?

A) Book-tax differences associated with NQOs may be either permanent or temporary.
B) If the value of the options that accrue is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable.
C) No expense recognition is required for NQOs for financial accounting purposes.
D) All stock option-related book-tax differences are temporary.

Question 53

Which of the following does NOT create a temporary book-tax difference?

A) Deferred compensation.
B) Bad-debt expense.
C) Depreciation expense.
D) Dividends received deduction.

Question 54

Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?

A) A owns less than 20 percent of the stock of B.
B) A owns at least 20 but not more than 50 percent of the stock of B.
C) A owns more than 50 percent of the stock of B.
D) Cannot be determined.

Question 55

Corporation A receives a dividend from Corporation B. Corporation A includes the dividend in its gross income for tax and financial accounting purposes (no book-tax difference). If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own?

A) A owns less than 20 percent of the stock of B.
B) A owns at least 20 but not more than 50 percent of the stock of B.
C) A owns more than 50 percent of the stock of B.
D) Cannot be determined.

Question 56

Over what time period do corporations amortize purchased goodwill for tax purposes?

A) 180 months.
B) 150 months.
C) 60 months.
D) None of the choices are correct.

Question 57

Which of the following statements regarding book-tax differences associated with purchased goodwill is False?

A) It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.
B) In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book-tax difference will be unfavorable.
C) Temporary book-tax differences associated with goodwill are always favorable.
D) If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognized.

Question 58

Which of the following describes the correct treatment of incentive stock options (ISOs)?

A) Financial accounting-no expense; tax-no deduction.
B) Financial accounting-no expense; tax-deduct bargain element at exercise.
C) Financial-expense value over vesting period; tax-no deduction.
D) Financial-expense value over vesting period; tax-deduct bargain element at exercise.

Question 59

Which of the following statements regarding book-tax differences is True?

A) Corporations are not required to report book-tax differences on their income tax returns.
B) Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
C) Income excludable for tax purposes usually creates a temporary book-tax difference.
D) None of the choices are True.

Question 60

Which of the following is not calculated in the corporate income tax formula?

A) Gross income.
B) Adjusted gross income.
C) Taxable income.
D) Regular tax liability.

Question 61

Which of the following is deductible in calculating the charitable contribution limit modified taxable income?

A) Net capital loss carrybacks.
B) Dividends received deduction.
C) NOL carryovers.
D) Charitable contributions.

Question 62

Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is True?

A) Corporations may not carry over or carry back excess charitable contributions.
B) Corporations can carry excess charitable contributions over to a future year or back to a prior year.
C) Corporations can carry excess charitable contributions over to a future year but not back to a prior year.
D) Corporations can carry excess charitable contributions back to a prior year but not over to a future year.

Question 63

Tatoo Inc. reported a net capital loss of $13,000 in 2018. The company had a net capital gain of $4,300 in 2016 and $3,000 in 2015. In 2017, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of Tatoo's capital loss carryover remaining after it applies the carryback?

A) $4,700.
B) $5,700.
C) $8,700.
D) $13,000.

Question 64

Which of the following statements regarding charitable contributions is False?

A) Only contributions made to qualified charitable organizations are deductible.
B) Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions).
C) Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.
D) The amount deductible for non-cash contributions is always the adjusted basis of the property donated.

Question 65

If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book-tax difference is created?

A) Permanent; favorable.
B) Permanent; unfavorable.
C) Temporary; favorable.
D) Temporary; unfavorable.

Question 66

Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of $72,000. Its charitable contributions for the year were $7,500. What is Remsco's current-year charitable contribution deduction and contribution carryover?

A) $6,000 current-year deduction; $1,500 carryover.
B) $7,500 current-year deduction; $0 carryover.
C) $1,200 current-year deduction; $6,300 carryover.
D) $7,200 current-year deduction; $300 carryover.

Question 67

In January 2017, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company did not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2018, the company experienced a surge in its stock price, and Ms. Svaro exercised the options. The total bargain element at the time of exercise was $60,000. For 2018, what is the book-tax difference due to the options exercised?

A) 10,000 unfavorable.
B) 10,000 favorable.
C) 50,000 unfavorable.
D) 60,000 favorable.

Question 68

Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $10,000 in cash. Second, it could give stock it initially purchased two years ago for $8,000 but is now worth $12,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes?

A) Cash > Stock > Inventory.
B) Stock > Cash > Inventory.
C) Inventory > Stock > Cash.
D) Inventory > Cash > Stock.

Question 69

For corporations, which of the following regarding net capital losses is True?

A) A corporation that experiences a net capital loss has a favorable book-tax difference in the year of the loss.
B) A corporation that experiences a net capital loss in year 4 first carries the loss back to year 3, then year 2, and then year 1 before carrying it forward.
C) Net capital loss carrybacks are deductible in determining a corporation's net operating loss.
D) Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used before they expire.

Question 70

Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?

A) $11,000 unfavorable.
B) $11,000 favorable.
C) $16,000 unfavorable.
D) $16,000 favorable.

Question 71

Which of the following statements regarding capital gains and losses is False?

A) In terms of tax treatment, corporations generally prefer capital gains to ordinary income.
B) Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.
C) C corporations can carry back net capital losses three years and they can carry them forward for five years.
D) Corporations must apply capital loss carrybacks and carryovers in a particular order.

Question 72

Which of the following statements regarding net operating losses generated in 2019 is True?

A) Corporations can carry NOLs back two years and forward up to 20 years.
B) A corporation can carryover the NOL indefinitely.
C) A corporation can carry NOLs back two years and forward indefinitely.
D) When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover.
E) None of these is a True statement.

Question 73

Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years-half in 2018 (the year of issue) and half in 2019. One thousand options are exercised in 2019 with a bargain element on each option of $6. What is the 2019 book-tax difference associated with the stock options?

A) $14,000 unfavorable.
B) $6,000 favorable.
C) $24,000 unfavorable.
D) $24,000 favorable.
E) None of the choices are correct.

Question 74

Which of the following statements regarding the dividends and/or the dividends received deduction (DRD) is True?

A) Dividends are taxed at preferential rates for corporations as well as for individuals.
B) The DRD can increase the net operating loss of a corporation.
C) Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock.
D) The DRD allows corporations to deduct the amount of dividends that they distribute.

Question 75

Which of the following statements regarding incentive stock options (ISOs) is False?

A) ISO-related compensation expense create permanent book-tax differences.
B) Book-tax differences related to ISO-related compensation expense is always unfavorable.
C) The ISO-related compensation expense is recorded for book purposes as the ISO vests.
D) Book-tax differences associated with ISO-related compensation expenses can be either permanent or temporary.

Question 76

In January 2018, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2018, the company experienced a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2018, what is the nature of the book-tax difference due to the options exercised?

A) Favorable and temporary.
B) Favorable and permanent.
C) Unfavorable and temporary.
D) Unfavorable and permanent.
E) Not enough information to determine.

Question 77

Which of the following is deductible in calculating DRD modified taxable income?

A) Charitable contribution deduction.
B) Net capital loss carrybacks.
C) NOL carryovers.
D) Dividends received deduction.

Question 78

Which of the following is not required to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity?

A) Approval of the payment from the board of directors.
B) Approval from the IRS prior to making the contribution.
C) Payment made within three and one-half months of the tax year-end.
D) All of the choices are necessary.

Question 79

Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

A) Charitable contribution deduction.
B) Net capital loss carryback.
C) Net operating loss carryover from other years.
D) Both A and C are deductible in computing the current year NOL.

Question 80

BTW Corporation has taxable income in the current year that can be offset with an NOL carryover from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year?

A) Permanent; favorable.
B) Permanent; unfavorable.
C) Temporary; favorable.
D) Temporary; unfavorable.