Question 1

In each of the following independent situations, determine the corporation's income tax liability. Assume that all corporations use a calendar year and that the year involved is 2014.
 $\begin{array}{lr}
& \text { Taxable } \
& \text { Income } \
\text { Violet Corporation } & 63,000 \
\text { Indigo Corporation } & 180,000 \
\text { Orange Corporation } & 510,000 \
\text { Blue Corporation } & 11,100,000 \
\text { Green Corporation (personal service } & 225,000 \
\text { corporation) } &
\end{array}$

Accepted Answer

The answer of In each of the following independent situations,...

Question 2

Almond Corporation, a calendar year C corporation, had taxable income of $900,000, $1.1 million, and $1.2 million for 2011, 2012, and 2013, respectively. Almond's taxable income is $2 million for 2014. Compute the minimum estimated tax payments for 2014 for Almond Corporation.

Accepted Answer

The answer of Almond Corporation, a calendar year C corporation,...

Question 3

A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

Accepted Answer

A) True 
 B)False

Question 4

During the current year, Skylark Company had operating income of $420,000 and operating expenses of $250,000. In addition, Skylark had a long-term capital loss of $20,000, and a charitable contribution of $5,000. How does Toby, the sole owner of Skylark Company, report this information on his individual income tax return under following assumptions?
a. Skylark is an LLC, and Toby does not withdraw any funds from the company during the year.
b. Skylark is an S corporation, and Toby does not withdraw any funds from the company during the year.
c. Skylark is a regular (C) corporation, and Toby does not withdraw any funds from the company during the year.

Accepted Answer

The answer of During the current year, Skylark Company had...

Question 5

Thrush Corporation files Form 1120, which reports taxable income of $200,000. The corporation's tax is $56,250.

Accepted Answer

A) True 
 B)False

Question 6

On December 31, 2014, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

Accepted Answer

A)  In 2014, if the bonus was authorized by the Board of Directors and payment was made on or before March 15, 2015. 
B)  In 2015, if payment was made at any time during that year. 
C)  In 2014, if payment was made on or before March 15, 2015. 
D)  In 2015, but only if payment was made on or before March 15, 2015. 
E)  None of the above.

Question 7

In the current year, Plum Corporation, a computer manufacturer, donated 100 laptop computers to a local university (a qualified educational organization). The computers were constructed by Plum earlier this year, and the university will use the computers for research and research training. Plum's basis in the computers is $35,000, and their fair market value is $120,000. What is Plum's deduction for the contribution of the computers (ignoring the taxable income limitation)?

Accepted Answer

A)  $35,000. 
B)  $70,000. 
C)  $77,500. 
D)  $85,000. 
E)  $120,000.

Question 8

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Accepted Answer

A) True 
 B)False

Question 9

Briefly describe the accounting methods available for adoption by a C corporation.

Accepted Answer

The answer of Briefly describe the accounting methods available for...

Question 10

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Accepted Answer

A) True 
 B)False

Question 11

Flycatcher Corporation, a C corporation, has two equal individual shareholders, Nancy and Pasqual. In the current year, Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder. Regardless of any tax consequences resulting from their interests in Flycatcher, Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket. With respect to the current year, which of the following statements is incorrect?

Accepted Answer

A)  Flycatcher cannot avoid the corporate tax altogether by distributing all $100,000 of net profit as dividends to the shareholders. 
B)  Nancy incurs income tax of $1,500 on her dividend income. 
C)  Pasqual incurs income tax of $1,500 on his dividend income. 
D)  Flycatcher pays corporate tax of $22,250. 
E)  None of the above.

Question 12

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

Accepted Answer

A) True 
 B)False

Question 13

Copper Corporation, a C corporation, had gross receipts of $5 million in 2011, $6 million in 2012, and $3 million in 2013. Gold Corporation, a personal service corporation (PSC), had gross receipts of $4 million in 2011, $7 million in 2012, and $5 million in 2013. Which of the corporations will be allowed to use the cash method of accounting in 2014?

Accepted Answer

A)  Copper Corporation only. 
B)  Gold Corporation only. 
C)  Both Copper Corporation and Gold Corporation. 
D)  Neither Copper Corporation nor Gold Corporation. 
E)  None of the above.

Question 14

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Accepted Answer

A) True 
 B)False

Question 15

Norma formed Hyacinth Enterprises, a proprietorship, in 2014. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2014?

Accepted Answer

A)  Increases Norma's taxable income by $157,000 ($160,000 ordinary business income - $3,000 long­term capital loss). 
B)  Increases Norma's taxable income by $150,000 ($160,000 ordinary business income - $10,000 long­term capital loss). 
C)  Increases Norma's taxable income by $75,000. 
D)  Increases Norma's taxable income by $160,000. 
E)  None of the above.

Question 16

Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

Accepted Answer

A) True 
 B)False

Question 17

In connection with the deduction for startup expenditures, comment on the following:
a. Qualifying expenditures.
b. Election process.
c. Amount of deduction.

Accepted Answer

The answer of In connection with the deduction for startup...

Question 18

Ed, an individual, incorporates two separate businesses that he owns by establishing two new C corporations. Each corporation generates taxable income of $50,000. As a general rule, each corporation will have a tax liability of $11,125.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?

Accepted Answer

A)  A corporation may elect to forgo the carryback period and just carryforward an NOL. 
B)  A corporation may claim a dividends received deduction in computing an NOL. 
C)  An NOL is generally carried back 2 years and forward 20 years. 
D)  Unlike individuals, corporations do not adjust their NOLs for net capital losses or nonbusiness deductions. 
E)  None of the above.

Question 20

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.

Accepted Answer

A) True 
 B)False

Exam 17: Corporations: Introduction and Operating Rules

Almond Corporation, a calendar year C corporation, had taxable income of $900,000, $1.1 million, and $1.2 million for 2011, 2012, and 2013, respectively. Almond's taxable income is $2 million for 2014. Compute the minimum estimated tax payments for 2014 for Almond Corporation.

A personal service corporation must use a calendar year, and is not permitted to use a fiscal year.

Thrush Corporation files Form 1120, which reports taxable income of $200,000. The corporation's tax is $56,250.

On December 31, 2014, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Briefly describe the accounting methods available for adoption by a C corporation.

Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac's tax return for the year in which it begins business.

Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year.

Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax effective form of operating a business.

In connection with the deduction for startup expenditures, comment on the following: a. Qualifying expenditures. b. Election process. c. Amount of deduction.

Ed, an individual, incorporates two separate businesses that he owns by establishing two new C corporations. Each corporation generates taxable income of $50,000. As a general rule, each corporation will have a tax liability of $11,125.

Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?

Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.