CHAPTER17REVIEWQUESTIONS - ch2
30 Pages

CHAPTER17REVIEWQUESTIONS - ch2

Course Number: ACC 3551, Spring 2008

College/University: Wilberforce

Word Count: 9106

Rating:

Document Preview

Corporations: Introduction and Operating Rules 1 CHAPTER 17 CORPORATIONS: INTRODUCTION AND OPERATING RULES TRUE/FALSE 1. Jeff is the sole shareholder of a C corporation. In 2007, the corporation sold a capital asset for a gain of $20,000. Jeff is required to report the capital gain on his individual income tax return for 2007, and the gain is subject to a maximum rate of 15%. ANS: F Shareholders do not report...

Unformatted Document Excerpt
Coursehero >> Ohio >> Wilberforce >> ACC 3551

Course Hero has millions of student submitted documents similar to the one
below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Introduction Corporations: and Operating Rules 1 CHAPTER 17 CORPORATIONS: INTRODUCTION AND OPERATING RULES TRUE/FALSE 1. Jeff is the sole shareholder of a C corporation. In 2007, the corporation sold a capital asset for a gain of $20,000. Jeff is required to report the capital gain on his individual income tax return for 2007, and the gain is subject to a maximum rate of 15%. Register to View AnswerShareholders do not report capital gains from a C corporation. PTS: 1 REF: p. 17-6 2. Herman and Henry are equal partners in Badger Enterprises, a calendar year partnership. During the year, Badger Enterprises had $305,000 gross income and $230,000 operating expenses. Badger distributed $20,000 to each of the partners. Herman and Henry each must report $37,500 of income from the partnership. Register to View AnswerThe partnership is not a taxpaying entity. Its profit (loss) and separate items flow through to the partners. The partnerships Form 1065 reports net profit of $75,000 ($305,000 income $230,000 expenses). Herman and Henry both receive a Schedule K-1 reporting net profit of $37,500. Each partner reports net profit of $37,500 on his own return. PTS: 1 REF: Example 2 3. Robin is a 50% shareholder in Robin-Wren, an S corporation. Robin-Wren earned net income of $100,000 during the year, and Robin received a distribution of $35,000 from the corporation. Robin must report a $35,000 dividend on his individual Federal income tax return (Form 1040). Register to View AnswerThe shareholders of an S corporation report their shares of net income or loss, regardless of how much of the income was withdrawn from the corporation. Robin must report income of $50,000. PTS: 1 REF: p. 17-3 174. 2008 Comprehensive Volume/Test Bank Jeff owns a 40% interest in a partnership that earned $200,000 in the current year. He also owns 40% of the stock in an S corporation that earned $200,000 during the year. The corporation did not make any distributions, and the partnership distributed $40,000 to him. Jeff must report $80,000 of income on his individual tax return. 2 Register to View AnswerJeff must report his $80,000 (40% $200,000) share of the partnerships income on his individual tax return. Jeff also reports his $80,000 share of the income earned by the S corporation. The $40,000 distribution does not affect his income. PTS: 1 REF: p. 17-3 | p. 17-4 5. Quail Corporation is a C corporation with net income of $400,000 during 2007. If Quail paid dividends of $140,000 to its shareholders, the corporation must pay tax on $260,000 of net income. Shareholders must report the $140,000 of dividends as income. Register to View AnswerQuail Corporation must pay tax on the $400,000 of corporate net income. Shareholders must pay tax on the $140,000 of dividends received from the corporation. This is commonly referred to as double taxation. PTS: 1 REF: Example 3 6. Coyote Enterprises, an S corporation, had a capital loss of $50,000 during the year. Gerald, who owns 40% of Coyotes stock, may report $20,000 of Coyotes capital loss on his individual Federal income tax return (Form 1040). Register to View AnswerCapital losses of an S corporation pass through from the entity to the partners. PTS: 1 REF: p. 17-3 7. Emma, the sole shareholder of Quail Corporation, has the corporation pay her a salary of $300,000 in 2007. The Tax Court has held that $80,000 represents unreasonable compensation. Assuming Emma is in the 35% bracket in 2007, the Tax Courts holding will reduce the total tax she pays in 2007. Register to View AnswerTo the extent a salary payment is not considered reasonable, the payment is treated as a dividend, which is taxed at a maximum rate of 15%. The Tax Courts holding saves Emma $16,000 [$80,000 (35% 15%)]. PTS: 1 REF: p. 17-5 8. Compensation that is determined to be unreasonable is usually treated as a constructive dividend to the shareholder and is not deductible by the corporation. Register to View AnswerUnreasonable compensation is treated as a constructive dividend to the shareholder and is not deductible by the corporation. PTS: 1 REF: Example 7 | Example 8 Corporations: Introduction and Operating Rules 9. 3 Lou, an employee and sole shareholder of Amarillo Corporation, a C corporation, has the corporation pay him $175,000. Lou is in the 35% tax bracket. His income tax will be the same, regardless of whether Amarillo treats the payments as a dividend or as salary. Register to View AnswerLou must pay tax on his salary at his marginal rate of 35%, while dividends are taxed at a 15% rate. PTS: 1 REF: p. 17-5 10. Thrush Corporation files Form 1120, which reports taxable income of $100,000. The corporations tax is $22,250. Register to View AnswerThe tax is equal to $13,750 + 34% ($100,000 $75,000). PTS: 1 REF: p. 17-5 11. Pedro is the sole owner of Agave Enterprises. In 2007, Agave had net income of $200,000. Pedro will report $200,000 of income from Agave if Agave is a proprietorship, a partnership, or an S corporation. Register to View AnswerIncome from a proprietorship, a partnership, or an S corporation must be reported by the owner(s). PTS: 1 REF: p. 17-3 12. The LLC form of business entity provides limited liability to its members and must pay tax as a partnership. Register to View AnswerAn LLC, which provides limited liability to its members, can elect (under the check-the-box regulations) to be treated as a partnership if structured properly. A partnership is not a tax paying entity. PTS: 1 REF: p. 17-7 13. Saguaro, Inc., a qualified personal service corporation (QPSC) with taxable income of $100,000 in 2007, will save tax as a result of the corporations classification as a QPSC. Register to View AnswerA qualified personal service corporation (QPSC) is taxed on all taxable income at a 35% rate. The tax on $100,000 of income earned by a corporation that is not a QPSC would be $22,250. PTS: 1 REF: p. 17-19 14. Corporations that maintain inventory for sale to customers may use either the cash or accrual method of accounting for determining sales and cost of goods sold. Register to View AnswerCorporations that maintain inventory for sale to customers are required to use the accrual method of accounting for determining sales and cost of goods sold. The cash method may be used for other income and expense items. PTS: 1 REF: p. 17-10 17- 2008 Comprehensive Volume/Test Bank 4 15. On December 31, 2007, Lavender, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 40% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2008. Lavender can deduct the bonus in 2007. Register to View AnswerLavender is allowed a deduction in 2007 because Barry is not a related party. PTS: 1 REF: p. 17-10 | Example 10 16. Fox Corporation had a long-term capital gain of $20,000 in 2007. The maximum amount of tax applicable to the capital gain is $3,000 ($20,000 15%). Register to View AnswerWhile the maximum rate on long-term capital gains of individuals is limited to 15%, there is no maximum rate applicable to long-term capital gains of C corporations. PTS: 1 REF: p. 17-10 | p. 17-11 17. Albatross, a C corporation, had $300,000 net income from operations and a $34,500 short-term capital loss in 2007. Albatross Corporations taxable income is $265,500. Register to View AnswerA corporation cannot deduct a capital loss in the year incurred. Capital losses of corporations must be carried back three years or forward five years and be offset against capital gains in the carryback/forward years. PTS: 1 REF: p. 17-11 18. The passive loss rules apply to noncorporate taxpayers and to personal service corporations but not to closely held C corporations. Register to View AnswerThe passive loss rules apply to noncorporate taxpayers, to personal service corporations, and to closely held C corporations. PTS: 1 REF: p. 17-11 | p. 17-12 19. The passive loss rules apply more favorably to closely held C corporations than to PSCs. Register to View AnswerThe passive loss rules prohibit PSCs from offsetting passive losses against either active or portfolio income. Closely held corporations, however, may offset passive losses against active income. A corporation is closely held if, at any time during the taxable year, more than 50% of the value of the corporations outstanding stock is owned, directly or indirectly, by or for not more than five individuals. PTS: 1 REF: p. 17-11 | Example 13 20. Peach Corporation had $135,000 of active income, $180,000 of portfolio income, and a $155,000 passive loss during the year. If Peach is a PSC, it can deduct the $155,000 passive loss. Register to View AnswerIf Peach is a personal service corporation, the passive loss ($155,000) cannot be offset against other types of income. PTS: 1 REF: p. 17-11 Corporations: Introduction and Operating Rules 21. On December 30, 2007, Debbie, a sole proprietor, pledged to make a $10,000 charitable contribution on or before January 15, 2008. Green Corporation, an accrual basis corporation, made a similar pledge on the same date, and the contribution was authorized by Greens board of directors. Debbie and Green Corporation, both calendar year taxpayers, can deduct these contributions in 2007. 5 Register to View AnswerIndividuals cannot deduct contributions until they are actually made. Therefore, Debbie must wait until 2008 to deduct the contribution, assuming she honors the pledge. Green Corporation, whose board of directors authorized the contribution in 2007, can deduct the contribution in 2007, assuming the pledge is paid on or before March 15, 2008. PTS: 1 REF: p. 17-12 | Example 14 22. Zircon Corporation donated scientific property worth $400,000 to City University (a qualified charitable organization) to be used in research. The basis of the property was $300,000, and Zircon had held it for ten months as inventory. Zircon Corporation may deduct $300,000 as a charitable contribution. Register to View AnswerThe scientific property is ordinary income property (inventory in this case). A corporate donor is allowed to deduct basis plus one-half of the appreciation. The deduction is $350,000 [$300,000 + 50%($400,000 $300,000)]. PTS: 1 REF: p. 17-13 23. On April 8, 2007 Oriole Corporation donated a painting worth $150,000 to the Texas Art Museum, a qualified public charity. The museum sold the painting on April 27, 2007 for $160,000. Oriole Corporation purchased the painting 5 years ago for $75,000. Orioles charitable contribution deduction is $150,000. Register to View AnswerFor a contribution of tangible personalty that is not put to a related use by the donee, the charitable contribution deduction is equal to the donors basis ($75,000 in this case). PTS: 1 REF: Example 17 24. Egret Corporation, a calendar year taxpayer, had an excess charitable contribution for 2006 of $10,000. In 2007, it made a further charitable contribution of $14,000. Its 2007 deduction is limited to $16,000. In applying the 10% limitation, the $10,000 carryover must be used after the current year contribution. Register to View AnswerThe current (2007) contribution must be used first and the carryover (2006) used last. PTS: 1 REF: p. 17-14 | Example 20 25. Dahlia, Inc., donated a painting worth $100,000 to the Washington Art Museum, a qualified charitable organization, which displayed the painting in its impressionist exhibition. Dahlia purchased the painting three years ago for $67,500. Dahlias charitable contribution deduction is $67,500. Register to View AnswerFor a contribution of tangible personalty that is put to a related use by the donee, the charitable contribution deduction is based on fair market value ($200,000). PTS: 1 REF: Example 16 17- 2008 Comprehensive Volume/Test Bank 6 26. A corporate net operating loss can be carried back 3 years and forward 5 years to offset taxable income for those years. Register to View AnswerA corporate net operating loss can be carried back 2 years and forward 20 years to offset taxable income for those years. PTS: 1 REF: p. 17-15 27. Bass Corporation received a dividend of $80,000 from Trout Corporation. Bass owns 15% of the Trout Corporation stock. Assuming it is not subject to the taxable income limitation, Basss dividends received deduction is $64,000. Register to View AnswerThe deduction percentage for less than 20% ownership is 70%. The dividends received deduction would be $56,000 ($80,000 70%). PTS: 1 REF: p. 17-16 28. The dividends received deduction is limited to a percentage of taxable income computed without regard to the NOL deduction, the dividends received deduction, the charitable contributions deduction, and any capital loss carryback to the current tax year. Register to View AnswerThe dividends received deduction is limited to a percentage of taxable income computed without regard to the NOL deduction, the dividends received deduction, and any capital loss carryback to the current tax year. The charitable contributions deduction is not considered in computing the base used for the limitation. PTS: 1 REF: p. 17-16 29. Bluebird Corporation received a $200,000 dividend from Canary Corporation. Bluebird, which owns 80% of Canary Corporation, may take a dividends received deduction of $160,000. Register to View AnswerThe allowable dividends received deduction for a corporation that owns 80% or more of the dividendpaying corporation is 100%. Therefore, Bluebird can take a dividends received deduction of $200,000. PTS: 1 REF: p. 17-16 30. A cash basis corporation that incurs (but does not pay) qualifying organizational expenditures in its first year of operations may include such expenses in the 180-month amortization period. Register to View AnswerAs long as they are incurred, such expenses do not have to be paid in the first year. PTS: 1 REF: p. 17-17 31. A personal service corporation with taxable income of $100,000 will have a tax liability of $35,000. Register to View AnswerA personal service corporation is subject to the 35% rate on all taxable income. PTS: 1 REF: p. 17-19 Corporations: Introduction and Operating Rules 32. Ed, an individual, incorporates two separate businesses that he owns by establishing two new corporations. Each corporation generates taxable income of $50,000. Each corporation will have a tax liability of $7,500. 7 Register to View AnswerSince the corporations would be a controlled group, their taxable income would be combined in applying the corporate income tax rates. The tax on $100,000 would be $22,250. PTS: 1 REF: p. 17-19 | p. 17-20 33. Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporations income tax return. Register to View AnswerREF: p. 17-26 34. A corporation that is not required to file Schedule M-3 is permitted to file a Schedule M-3 voluntarily. Register to View AnswerA corporation may file Schedule M-3 even if it is not required to file the schedule. PTS: 1 REF: p. 17-27 35. A corporation pays $10,000 of life insurance premiums during the current year, of which $3,000 is for coverage of its president, who is the sole shareholder. The corporation is the beneficiary of the policy. The corporations deduction is limited to $7,000. Register to View AnswerThe $3,000 paid for the presidents coverage would not be deductible because the corporation is the beneficiary. PTS: 1 REF: Example 38 36. Corporations that qualify to file Form 1120-A will not be subject to the penalty for failure to make estimated tax payments. Register to View AnswerNo such exception exists. PTS: 1 REF: p. 17-24 | p. 17-25 37. Income that is included in net income per books but not included in taxable income is an addition item on Schedule M-1. Register to View AnswerIncome that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1. PTS: 1 REF: p. 17-26 17- 2008 Comprehensive Volume/Test Bank 8 38. An expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1. Register to View AnswerAn expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1. PTS: 1 REF: p. 17-26 39. Macayo, Inc., received $800,000 life insurance proceeds on the death of its president. The $800,000 will be an addition item on Macayos Schedule M-1. Register to View AnswerThe $800,000 is treated as a subtraction. PTS: 1 REF: Example 38 40. Canary Corporation, which sustained a $5,000 net short-term capital loss during the year, will enter $5,000 as an addition on Schedule M-1. Register to View AnswerA net short-term capital loss is entered as an addition on Schedule M-1. The loss is deductible for book purposes but not for tax purposes. Therefore, the $5,000 capital loss must be added in reconciling from book income to taxable income. PTS: 1 REF: p. 17-26 41. Aqua, Inc., paid $15,000 interest on a loan to purchase tax-exempt bonds. The $15,000 is an addition on Aquas Schedule M-1. Register to View AnswerThe interest is deductible for book purposes but not for tax purposes. PTS: 1 REF: Example 38 42. Bronze, Inc., earned $20,000 interest on tax-exempt bonds. The $20,000 will be entered as a subtraction on Bronzes Schedule M-1. Register to View AnswerThe interest is included in book income but not in taxable income. PTS: 1 REF: Example 38 MULTIPLE CHOICE Corporations: Introduction and Operating Rules 1. 9 Mac is the owner of Maid in Arizona Cleaning Service (MACS). In 2007, the company had gross income of $300,000 and operating expenses of $195,000. In July, MACS sold a capital asset that had been held by the business for two years for a $15,000 loss. During 2007, Mac withdrew $93,000 from the business for his personal living expenses. Assuming MACS is a sole proprietorship, how do these transactions affect Macs taxable income for 2007? a. Increase taxable income by $105,000. b. Increase taxable income by $102,000. c. Increase taxable income by $93,000. d. Increase taxable income by $90,000. e. None of the above. Register to View AnswerMac reports the income and expenses of the business on Schedule C, resulting in net profit (ordinary income) of $105,000 ($300,000 $195,000). He reports all of the $105,000 net profit from the business on Form 1040, where he computes taxable income for the year. The $93,000 that Mac withdrew from the business has no impact on his taxable income. He also reports a $15,000 LTCL on Schedule D of his Form 1040, but his deduction is limited to $3,000. The remaining LTCL of $12,000 ($15,000 $3,000) may be carried forward. The net effect is to increase his taxable income by $102,000 ($105,000 net profit $3,000 LTCL). PTS: 1 REF: Example 1 2. Bjorn owns a 40% interest in an S corporation that earned $150,000 in 2007. He also owns 30% of the stock in a C corporation that earned $150,000 during the year. The S corporation distributed $35,000 to Bjorn and the C corporation paid dividends of $35,000 to Bjorn. How much income must Bjorn report from these businesses? a. $0 income from the S corporation and $0 income from the C corporation. b. $35,000 income from the S corporation and $35,000 income from the C corporation. c. $60,000 income from the S corporation and $35,000 of dividend income from the C corporation. d. $60,000 income from the S corporation and $0 income from the C corporation. e. None of the above. Register to View AnswerBjorn must report his $60,000 share of the S corporations income on his individual tax return. He will report $35,000 of dividend income from the C corporation. PTS: 1 REF: p. 17-3 | p. 17-4 3. Juan is the sole shareholder of an S corporation, and Diego owns a sole proprietorship. Both businesses, which were started in 2007, make a profit of $300,000 in 2007. Each owner withdraws $225,000 from his business during the year. Which of the following statements is correct? a. Diego must report net profit from his business of $300,000 for 2007. b. Juan must report dividend income of $300,000 for 2007. c. Diegos proprietorship is required to pay tax on the $300,000 profit for 2007. d. Juans S corporation must pay tax on $300,000 for 2007. e. None of the above. Register to View AnswerJuan must report the profit of $300,000 for 2007 (but not as dividend incomesee choice b.). The S corporation, which is a flow-through entity, is not required to pay tax on its $300,000 profit. Diego must report net profit from his business of $300,000 for 2007, but the proprietorship is not a taxable entity. PTS: 1 REF: p. 17-2 to 17-5 174. 2008 Comprehensive Volume/Test Bank Norma formed Hyacinth Enterprises, a proprietorship, in 2007. In its first year, Hyacinth had operating income of $150,000 and operating expenses of $100,000. In addition, Hyacinth had a long-term capital loss of $4,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $25,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2007? a. Increases Normas taxable income by $25,000. b. Increases Normas taxable income by $21,000 ($25,000 income $4,000 long-term capital loss). c. Increases Normas taxable income by $47,000 ($50,000 income $3,000 long-term capital loss). d. Increases Normas taxable income by $50,000. e. None of the above. 10 Register to View AnswerA proprietorship is not a separate taxable entity. As a proprietor, Norma reports profit or loss from Hyacinth on her individual return. Normas taxable income for 2007 will be increased by $47,000 ($150,000 $100,000 = $50,000 net profit $3,000 long-term capital loss limit). The $25,000 she withdrew from Hyacinth has no effect on her taxable income. PTS: 1 REF: p. 17-2 | p. 17-3 | p. 17-11 5. Geneva, a sole proprietor, sold one of her non-depreciable business assets for a $20,000 long-term capital gain. Genevas marginal tax rate is 35%. Gulf, a C corporation, sold one of its assets for a $20,000 longterm capital gain. Gulfs marginal tax rate is 35%. What tax rates are applicable to these capital gains? a. 15% rate applies to both Geneva and Gulf. b. 15% rate applies to Geneva and 35% rate applies to Gulf. c. 15% rate applies to Gulf and 35% rate applies to Geneva. d. 35% rate applies to both Geneva and Gulf. e. None of the above. Register to View AnswerGeneva reports the long-term capital gain on her individual tax return, and it is subject to a maximum tax rate of 15%. Gulf does not receive special tax treatment for its long-term capital gain. Therefore, the corporations gain will be taxed at 35%. PTS: 1 REF: p. 17-10 | p. 17-11 Corporations: Introduction and Operating Rules 6. Becky is the owner of PGC (a C corporation). In 2007, the company had gross income of $300,000 and operating expenses of $195,000, including Beckys salary of $93,000. In November, PGC sold a capital asset that had been held by the business for two years for a $15,000 loss. PGC also had a long-term capital gain of $26,000 in 2007. During 2007, PGC paid Becky a dividend of $20,000. What is PGCs taxable income for 2007? a. $105,000. b. $116,000. c. $131,000. d. $12,000. e. None of the above. 11 Register to View AnswerPGC reports the income and expenses of the business on Form 1120, resulting in net profit (ordinary income + capital gain) of $116,000 ($300,000 $195,000 + $11,000 NLTCG). PGC also reports a $15,000 LTCL and a $26,000 LTCG on Schedule D of its Form 1120. The corporation cannot deduct the dividend paid to Becky. PTS: 1 REF: p. 17-11 7. Glen and Michael are equal partners in Trout Enterprises, a calendar year partnership. During the year, Trout Enterprises had gross income of $750,000 and operating expenses of $525,000. In addition, the partnership sold land that had been held for investment purposes for a long-term capital gain of $90,000. During the year, Glen withdrew $60,000 from the partnership, and Michael withdrew $67,500. Discuss the impact of this information on the taxable income of Trout, Glen, and Michael. a. Trout has $0 taxable income, Glens taxable income increases by $60,000, and Michaels taxable income increases by $67,500. b. Trout has $225,000 taxable income, Glens taxable income increases by $60,000, and Michaels taxable income increases by $67,500. c. Trout has $0 taxable income, Glens taxable income increases by $112,500, and Michaels taxable income increases by $112,500. d. Trout has $0 taxable income, Glens taxable income increases by $157,500, and Michaels taxable income increases by $157,500. e. None of the above. Register to View AnswerTrout, a partnership, is not a taxpaying entity. Its profit (loss) and separate items flow through to the partners. The partnerships Form 1065 reports net profit of $225,000 ($750,000 income $525,000 expenses). The partnership also reports the $90,000 long-term capital gain as a separately stated item on Form 1065. Glen and Michael both receive a Schedule K-1 reporting net profit of $112,500 and separately stated long-term capital gain of $45,000. Each partner reports net profit of $112,500 and longterm capital gain of $45,000 on his own return. The withdrawals do not affect taxable income for the partners but decrease their basis in the partnership. PTS: 1 REF: Example 2 178. 2008 Comprehensive Volume/Test Bank 12 Norm is the sole shareholder of Elk, Inc., a C corporation. Maxine is the sole shareholder of Moose, Inc., an S corporation. Both businesses were started in 2007, and each business sustained a $10,000 capital loss for the year. Which of the following statements is correct? a. Norm can offset the $10,000 loss against his capital gains for the year. If he has no capital gains, he may deduct a $3,000 capital loss in 2007. b. Elk, Inc., can carry the capital loss forward for up to five years. c. Moose, Inc., can carry the capital loss forward for up to five years. d. Maxine can offset the $10,000 loss against her capital gains for the year. If she has no capital gains, she may deduct a $10,000 capital loss in 2007. e. None of the above. Register to View AnswerA C corporation cannot deduct a capital loss in the year incurred but is allowed to carry such loss back 3 years and forward 5 years. Elk, Inc., was started in 2007, so there is no carryback period. Therefore, the loss may be carried forward five years. Individuals cannot carry capital losses back. If Maxine has any capital gains, she can offset the capital loss against other capital gains. If she has a net capital loss after offsetting the capital loss against capital gains, she may deduct $3,000 of the loss in 2007. PTS: 1 REF: p. 17-11 9. Elk, a C corporation, has $400,000 operating income and $350,000 operating expenses during the year. In addition, Elk has a $30,000 long-term capital gain and a $52,000 short-term capital loss. Elks taxable income is: a. ($2,000). b. $28,000. c. $50,000. d. $80,000. e. None of the above. Register to View AnswerA corporation cannot deduct a net capital loss in the year incurred. The net loss can be carried back for three years and offset against capital gain in the carryback years. If the capital loss is not used in the carryback, it can be carried forward for five years. Capital gains of corporations are included in taxable income and are not subject to the favorable rates applicable to individuals. $400,000 (operating income) $350,000 (operating expenses) = $50,000 taxable income. No capital loss deduction is allowed. PTS: 1 REF: p. 17-10 | p. 17-11 Corporations: Introduction and Operating Rules 13 10. Penguin Corporation, a C corporation, has two equal shareholders, Bob and Leo. Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder. Before considering the dividend, Bob is in the 28% individual income tax bracket and Leo is in the 35% individual income tax bracket. Which of the following statements is incorrect? a. $100,000 will be subject to double taxation. b. Penguin could have avoided paying corporate tax if, instead of paying a dividend, it had paid Bob and Leo a salary of $50,000 each (assuming a $50,000 salary for each is reasonable). c. Bob will pay less Federal income tax on his dividend than Leo will pay on his dividend. d. If Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less Federal income tax on his salary than Leo would have paid on his salary. e. None of the above. Register to View AnswerBob and Leo will pay the same 15% rate of Federal income tax on the dividend. PTS: 1 REF: p. 17-5 11. Which of the following statements about a limited liability company is incorrect? a. A limited liability company with more than one owner can elect to be classified as either a partnership or a corporation. b. A limited liability company with only one owner can elect to be classified as either a proprietorship or a corporation. c. If a limited liability company does not make an election under the check the box regulations, multi-owner entities are classified as partnerships. d. If a limited liability company does not make an election under the check the box regulations, single-person entities are classified as proprietorships. e. None of the above. Register to View AnswerStatements a. through d. are correct. PTS: 1 REF: p. 17-7 | p. 17-8 12. Falcon Corporation had gross receipts of $6 million in 2005, $15 million in 2006, and $10 million in 2007. Hawk Corporation, a PSC, had gross receipts of $3 million in 2005, $4 million in 2006, and $7 million in 2007. Which of the corporations will be allowed to use the cash method of accounting in 2008? a. Falcon Corporation only. b. Hawk Corporation only. c. Both Falcon Corporation and Hawk Corporation. d. Neither Falcon Corporation nor Hawk Corporation. e. None of the above. Register to View AnswerHawk Corporation, a PSC, may use the cash method. Falcon Corporation cannot use the cash receipts method because it had average annual gross receipts in excess of $10 million during the three preceding years. PTS: 1 REF: p. 17-10 17- 2008 Comprehensive Volume/Test Bank 14 13. Tulip Corporation had $750,000 operating income and $510,000 operating expenses during the year. Tulip, which owns 25% of Daisy, Inc.s stock, received a $75,000 dividend from Daisy. Tulip also had a $45,000 long-term capital gain and a $15,000 short-term capital loss. Compute Tulips taxable income for the year. a. $240,000. b. $270,000. c. $285,000. d. $292,500. e. None of the above. Register to View AnswerOperating income Operating expenses Subtotal Dividend received Net capital gain ($45,000 $15,000) Subtotal Dividends received deduction ($75,000 80%) Net profit PTS: 1 REF: p. 17-12 | p. 17-13 $750,000 (510,000) $240,000 75,000 30,000 $345,000 (60,000) $285,000 Corporations: Introduction and Operating Rules 15 14. Bear Corporation has net short-term capital gains of $45,000 and net long-term capital losses of $285,000 during 2008. Bear Corporation had taxable income from other sources of $700,000. Prior years transactions included the following: 2004 2005 2006 2007 Net short-term capital gains Net long-term capital gains Net short-term capital gains Net long-term capital gains $150,000 60,000 45,000 105,000 Compute the amount of Bears capital loss carryover. a. $0. b. c. $30,000. $210,000. d. $140,000. e. None of the above. Register to View AnswerNet short-term capital gain for 2008 Net long-term capital loss for 2008 Excess net long-term loss $ 45,000 (285,000) ($240,000) The excess capital losses of $240,000 are not deductible on the 2008 return, but must be carried back to the three preceding years, applying them to 2005, 2006, and 2007, in that order. Such long-term capital losses are carried back or forward as short-term capital losses. 2008 excess loss Offset against 2005 (net long-term capital gains) 2006 (net short-term capital gains) 2007 (net long-term capital gains) Total carrybacks ($240,000) $ 60,000 45,000 105,000 ($210,000) Bears capital loss carryover is $30,000 ($240,000 $210,000), which may be carried over to 2009, 2010, 2011, 2012, and 2013 in that order. PTS: 1 REF: p. 17-11 15. Maize Corporation had $100,000 operating income and $40,000 operating expenses during the year. In addition, Maize had a $3,000 long-term capital gain and a $5,000 short-term capital loss. Compute Maizes taxable income for the year. a. $60,000. b. $108,000. c. $109,000. d. $111,000. e. None of the above. Register to View Answer$100,000 operating income $40,000 operating expenses = $60,000 taxable income. The net short-term capital loss of $2,000 cannot be deducted in the year incurred, but can be carried back 3 years and forward five years ($3,000 LTCG $5,000 STCL = $2,000 net short-term capital loss). PTS: 1 REF: p. 17-11 17- 2008 Comprehensive Volume/Test Bank 16 16. Starling Corporation, a closely held personal service corporation, has $90,000 of active income, $54,000 of portfolio income, and a $135,000 loss from a passive activity. How much of the passive loss can Starling deduct? a. $0. b. $54,000. c. $90,000. d. 135,000. e. None of the above. Register to View AnswerPersonal service corporations cannot offset passive losses against either active or portfolio income. PTS: 1 REF: p. 17-12 17. Azul Corporation, a personal service corporation, had $750,000 of active income, $55,000 of portfolio income, and a $100,000 passive loss during the year. How much of the passive loss is deductible? a. $0. b. $55,000. c. $75,000. d. $100,000. e. None of the above. Register to View AnswerA personal service corporation may not offset passive loss against active income or portfolio income. PTS: 1 REF: p. 17-12 18. Sage, Inc., a closely held corporation (not a PSC), has a $240,000 passive loss from a rental activity, $135,000 of active business income, and $105,000 of portfolio income. How much of the passive loss can Sage deduct? a. $0. b. $105,000. c. $135,000. d. $240,000. e. None of the above. Register to View AnswerSage may offset $135,000 of the $240,000 passive loss against the $135,000 of active business income, but may not offset the remaining $105,000 against portfolio income. PTS: 1 REF: Example 13 19. Redwood, Inc., a closely held corporation (and a PSC), has a $240,000 passive loss from a rental activity, $135,000 of active business income, and $105,000 of portfolio income. How much of the passive loss can Redwood deduct? a. $0. b. $105,000. c. $135,000. d. $240,000. e. None of the above. Register to View AnswerBecause Redwood is a PSC, it cannot offset the passive loss against either active or portfolio income. PTS: 1 REF: p. 17-12 Corporations: Introduction and Operating Rules 17 20. Rodney, the sole shareholder of a calendar year, accrual basis C corporation, loaned the corporation a substantial amount of money on January 1, 2007. The corporation accrued $45,000 of interest expense on the loan on December 31, 2007. It pays the interest to Rodney, a cash basis taxpayer, on April 1, 2008. Under these facts: a. The corporation will be allowed to deduct the interest expense in 2007 and Rodney will be required to report the interest income in 2008. b. The corporation will be allowed to deduct the interest expense in 2008 and Rodney will be required to report the interest income in 2008. c. The corporation will be allowed to deduct the interest expense in 2008 and Rodney will be required to report the interest income in 2007. d. The corporation will be allowed to deduct the interest expense in 2007 and Rodney will be required to report the interest income in 2007. e. None of the above. Register to View AnswerA corporation that uses the accrual method cannot claim a deduction for an accrual owed to a related party until the recipient reports that amount as income. Rodney, a cash basis taxpayer, must report the income in the year he receives the payment from the corporation. PTS: 1 REF: p. 17-10 21. Grocer Services Corporation (a calendar year taxpayer), a wholesale distributor of food, made the following donations to qualified charitable organizations during the year: Food (held as inventory) donated to the Ohio Childrens Shelter Passenger van to Ohio Childrens Shelter, to be used to transport children to school Stock in Acme Corporation acquired two years ago and held as an investment, donated to Southwest University How much qualifies for the charitable contribution deduction? a. $21,750. b. $21,600. c. $19,800. d. $19,500. e. None of the above. Register to View AnswerSince Grocer Services is a corporation and the inventory exception is met, one-half of the appreciation on the food may be claimed, or $300 [1/2 of ($8,100 $7,500)]. Therefore, $7,800 ($7,500 + $300 appreciation) is allowed as a deduction. Because the Acme stock is long-term capital gain property and not tangible personalty, the deduction is based on fair market value ($6,750). The deduction for the delivery van, which is not a capital asset, is limited to the lesser of adjusted basis or fair market value ($5,700). Thus, $7,800 + $6,750 + $5,700 = $20,250. PTS: 1 REF: p. 17-12 | p. 17-13 | Example 16 | Example 18 Adjusted Basis $7,500 7,500 6,000 Fair Market Value $8,100 5,700 6,750 17- 2008 Comprehensive Volume/Test Bank 18 22. Rhino, Inc., a calendar year C corporation, had the following income and expenses in 2007: Income from operations Expenses from operations Dividends received (less than 20% ownership) Capital loss carryback Charitable contribution How much is Rhinos charitable contribution deduction for 2007? a. $17,895. b. $18,300. c. $18,945. d. $19,350. e. None of the above. Register to View AnswerTaxable income for purposes of applying the 10% charitable contributions limitation does not include the dividends received deduction or capital loss carryback. Thus, taxable income is $193,500 ($300,000 $120,000 + $13,500) and the maximum charitable contribution allowed is $19,350 (10% $193,500). PTS: 1 REF: p. 17-14 | Example 19 23. Hippo, Inc., a calendar year C corporation, manufactures golf gloves. For 2007, Hippo had taxable income of $200,000, qualified domestic production activities income of $250,000, and W-2 wages related to production activities of $23,000. Hippos domestic production activities deduction for 2007 is: a. $11,500. b. $12,000. c. $15,000. d. $23,000. e. None of the above. Register to View AnswerHippos tentative domestic production activities deduction for 2007 is 6% of the lesser of: $200,000 taxable income qualified production activities income of $250,000 $12,000 $15,000 $300,000 120,000 13,500 10,500 24,000 Although the tentative deduction is $12,000 ($200,000 6%), the wage limitation applies ($23,000 50% = $11,500). Therefore, Hippos production activities deduction is $11,500. PTS: 1 REF: p. 17-15 Corporations: Introduction and Operating Rules 24. Fender Corporation was organized in 2006 and had profits in 2006 and 2007. The corporation had an NOL in 2008. The corporation should elect to forgo carrying the NOL back: a. If tax rates in the preceding years were low and if higher tax rates are expected in the future. b. If tax rates in the preceding years were high and if lower tax rates are expected in the future. c. If all of the NOL cannot be used in the carryback years. d. If it cannot accurately predict future tax rates. e. None of the above. 19 Register to View AnswerFender Corporation should elect to forgo the NOL carryback if tax rates in the two preceding years were low and if higher tax rates are expected in the future (choice a.). Before electing to forgo an NOL carryback, a corporation should be able to predict with confidence that future tax rates will be higher (choice d.) PTS: 1 REF: p. 17-32 25. Red Corporation, which owns stock in Blue Corporation, had net operating income of $500,000 for the year. Blue pays Red a dividend of $50,000. Red takes a dividends received deduction of $35,000. Which of the following statements is correct? a. Red owns less than 20% of Blue Corporation. b. Red owns 20% or more, but less than 80% of Blue Corporation. c. Red owns 80% of Blue Corporation. d. Red owns 80% or more of Blue Corporation. e. None of the above. Register to View AnswerReds dividends received deduction is 70% of the dividend received ($35,000 $50,000). The 70% dividends received deduction applies if ownership is less than 20%. PTS: 1 REF: p. 17-17 17- 2008 Comprehensive Volume/Test Bank 20 26. Eagle Corporation owns stock in Hawk Corporation and has taxable income of $187,500 for the year before considering the dividends received deduction. Hawk Corporation pays Eagle a dividend of $300,000, which was considered in calculating the $187,500. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawks stock? a. $0. b. $131,250. c. $187,500. d. $210,000. e. None of the above. Register to View AnswerThe dividends received deduction depends upon the percentage of ownership by the corporate shareholder. Because Eagle Corporation owns 15% of Hawk Corporation, Eagle would qualify for a 70% deduction, calculated as shown below. 1. 2. 3. Multiply the dividends received by the deduction percentage ($300,000 70% = $210,000). Multiply the taxable income before the dividends received deduction by the deduction percentage ($187,500 70% = $131,250). Limit the deduction to the lesser of step 1 or step 2, unless subtracting the amount derived in step 1 ($210,000) from 100% of taxable income before the dividends received deduction ($187,500) generates an NOL ($187,500 $210,000 = $22,500 NOL). If so, use the amount derived in step 1 ($210,000). PTS: 1 REF: Example 23 27. Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year. Bronze Corporation pays Copper a dividend of $300,000. What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (assuming Coppers dividends received deduction is not limited by its taxable income)? a. $0. b. $210,000. c. $240,000. d. $300,000. e. None of the above. Register to View AnswerThe dividends received deduction depends upon the percentage of ownership by the corporate shareholder. If Copper Corporation owns 85% of Bronze Corporation, Copper would qualify for a 100% deduction, or $300,000 in this case. PTS: 1 REF: p. 17-16 | p. 17-17 Corporations: Introduction and Operating Rules 21 28. Orange Corporation owns stock in White Corporation and has net operating income of $800,000 for the year. White Corporation pays Orange a dividend of $300,000. What amount of dividends received deduction may Orange claim if it owns 18% of White stock (assuming Oranges dividends received deduction is not limited by its taxable income)? a. $0. b. $210,000. c. $240,000. d. $300,000. e. None of the above. Register to View AnswerThe dividends received deduction depends upon the percentage of ownership by the corporate shareholder. If Orange Corporation owns 18% of White Corporation, Orange would qualify for a 70% deduction, or $210,000 in this case. PTS: 1 REF: p. 17-16 | p. 17-17 29. Saguaro Corporation, a cash basis and calendar year taxpayer, was formed and began operations on July 1, 2007. Saguaro incurred the following expenses during its first year of operations (July 1-December 31, 2007): Expenses of temporary directors and of organizational meetings Fee paid to the state of incorporation Expenses in printing and sale of stock certificates Legal services for drafting the corporate charter and bylaws Total $10,500 5,000 1,200 7,500 $24,200 If Saguaro Corporation makes a timely election under 248 to amortize qualifying organizational expenses, how much may the corporation deduct for tax year 2007? a. $5,000. b. $5,100. c. $5,600. d. $5,800. e. None of the above. Register to View AnswerQualifying organizational expenditures include these items: Expenses of temporary directors and of organizational meetings Fee paid to the state of incorporation Legal services for drafting the corporate charter and bylaws Total $10,500 5,000 7,500 $23,000 Since an appropriate and timely election under 248(c) was made, the amount that Saguaro Corporation may write off for the tax year 2007 is determined as follows: (1) Immediate expensing of first $5,000 (2) Amortization: [($23,000 $5,000) 180] 6 (months in tax year) Total PTS: 1 REF: p. 17-17 | p. 17-18 | Example 24 $5,000 600 $5,600 17- 2008 Comprehensive Volume/Test Bank 22 30. Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporations income tax return as follows: net income per books + additions subtractions = taxable income. Additions or subtractions on Schedule M-1 include the following: a. Charitable contributions carryover from previous year. b. Travel and entertainment expenses in excess of deductible limits. c. Book depreciation in excess of allowable tax depreciation. d. Federal income tax per books. e. Charitable contributions in excess of deductible limits. f. Premiums paid on life insurance policy on key employee. g. Proceeds of life insurance paid on death of key employee. h. Tax-exempt interest. i. Interest incurred to carry tax-exempt bonds. Which of the above items are additions on Schedule M-1? a. Items b., d., e., and f. b. Items a., b., c., d., f., and g. c. Items a., g., and h. d. Items b., c., d., e., f., and i. e. None of the above. Register to View AnswerAdditions are as follows: b. Travel and entertainment expenses in excess of deductible limits. c. Book depreciation in excess of allowable tax depreciation. d. Federal income tax per books. e. Charitable contributions in excess of deductible limits. f. Premiums paid on life insurance policy on key employee. i. Interest incurred to carry tax-exempt bonds. PTS: 1 REF: Example 38 Corporations: Introduction and Operating Rules 23 31. Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporations income tax return as follows: net income per books + additions subtractions = taxable income. Additions or subtractions on Schedule M-1 include the following: a. Charitable contributions carryover from previous year. b. Travel and entertainment expenses in excess of deductible limits. c. Book depreciation in excess of allowable tax depreciation. d. Federal income tax per books. e. Charitable contributions in excess of deductible limits. f. Premiums paid on life insurance policy on key employee. g. Proceeds of life insurance paid on death of key employee. h. Tax-exempt interest. i. Interest incurred to carry tax-exempt bonds. Which of the above items are subtractions on Schedule M-1? a. Items a., b., c., e., and f. only. b. Items a., g., and h. only. c. Items a., d., e., g., and h. only. d. Items b., c., d., e., f., and i. only. e. None of the above. Register to View AnswerSubtractions are as follows: a. Charitable contributions carryover from previous year. g. Proceeds of life insurance paid on death of key employee. h. Tax-exempt interest. PTS: 1 REF: Example 38 17ESSAY 1. 2008 Comprehensive Volume/Test Bank 24 Compare the basic tax and nontax factors of doing business as a partnership, an S corporation, and a C corporation. Circle the corrent answers. Tax Questions Who pays tax on the entitys income? Are operating losses passed through to owners? Are capital gains (losses) reported on owners tax returns as such? Are distributions of profits taxable to owners? Nontax Factors Is the liability of owners limited? Is there free transferability of ownership interests? Column A Partnership Partners Partnership Yes No Yes No Yes No Partnership Yes No Yes No Column B S Corporation Shareholders S corporation Yes No Yes No Yes No S Corporation Yes No Yes No Column C C Corporation Shareholders C Corporation Yes No Yes No Yes No C Corporation Yes No Yes No Corporations: Introduction and Operating Rules ANS: The correct answers are shaded. Tax Questions Who pays tax on the entitys income? Are operating losses passed through to owners? Are capital gains (losses) reported on owners tax returns as such? Are distributions of profits taxable to owners? Nontax Factors Is the liability of owners limited? Is there free transferability of ownership interests? PTS: 1 2. REF: p. 17-3 to 17-7 Column A Partnership Partners Partnership Yes No Yes No Yes No Partnership Yes No Yes No Column B S Corporation Shareholders S corporation Yes No Yes No Yes No S Corporation Yes No Yes No Column C C Corporation Shareholders C Corporation Yes No Yes No Yes No C Corporation Yes No Yes No 25 Chuck is the sole proprietor of Chucks Carpet Shop, which had gross income of $432,000 and operating expenses of $225,000 during the year. In addition, Chuck sold a capital asset that had been held by the business for 3 years for a $10,500 capital loss. He withdrew $112,500 from the business for living expenses during the year. What is Chucks net income from the proprietorship for the year? ANS: Chuck reports the income and expenses of the business on Schedule C of Form 1040, resulting in net profit (ordinary income) of $207,000 ($432,000 $225,000). He reports the $207,000 net profit from the business on Form 1040, where he computes taxable income for the year. The $112,500 that Chuck withdrew from the business has no impact on his taxable income. If he has capital gains during the year, these can be offset by the capital loss. If capital losses exceed capital gains, he can use up to $3,000 of the capital loss to offset ordinary income and can carry any unused capital loss forward. PTS: 1 REF: Example 1 173. 2008 Comprehensive Volume/Test Bank 26 Ken is the sole shareholder of Spruce Corporation, which is an S corporation. Spruce earned net operating income of $80,000 during the year and had a long-term capital gain of $3,000 and a long-term capital loss of $8,000. Ken withdrew $20,000 of the profit from the corporation. How much income must Ken report on his individual tax return for 2007? ANS: Ken must report $80,000 of Spruce Corporation income and may deduct $3,000 of the $5,000 net longterm capital loss ($8,000 NLTCL $3,000 NLTCG) on his Federal income tax return. He may carry forward the $2,000 unused LTCL and treat it as LTCL in the future. S corporations are similar to partnerships in that net profit or loss flows through to the shareholders to be reported on their separate returns. The $20,000 withdrawal has no impact on Kens taxable income. PTS: 1 REF: p. 17-3 | p. 17-11 4. Before paying salaries to its two shareholders, Steamboat Corporation has net income of $640,000 during the year ($1,200,000 revenue $560,000 operating expenses). Dean and Mary are equal shareholders of Steamboat and work in similar jobs as employees of the corporation. Steamboat pays each shareholder/employee a salary of $320,000, which results in zero taxable income for the corporation. On audit, an IRS agent determines that $40,000 of the amount paid to each of the shareholders is unreasonable compensation. The shareholders tax adviser has told them that the IRS agent is probably correct in his determination. What effect will the IRS agents finding have on the taxable income of Dean, Mary, and Steamboat Corporation? ANS: Salaries are deductible by a corporation. Thus, to the extent salaries are paid to shareholders, the shareholder and corporation are able to avoid double taxation. A problem can occur if compensation to shareholders/employees is held to be unreasonable. In that case, the deduction is disallowed. The payment is treated as a dividend paid by the corporation and a constructive dividend received by the shareholder/employee. Dividends are taxed at a rate of 15%, while salary may be taxed at a rate as high as 35%. However, salaries are deductible by the corporation but dividends are not. Thus, dividends continue to be subject to double taxation, but usually at a much lower rate at the individual level. Mary and Dean each would report income of $320,000 ($280,000 salary + $40,000 dividend). Steamboats net income would be $80,000 ($1,200,000 revenue $560,000 operating expenses $560,000 allowed salaries). PTS: 1 REF: p. 17-4 5. Charles is a 45% shareholder and the president of Chinook, Inc. The board of directors of Chinook has decided to pay him a $50,000 bonus for the year based on outstanding performance. The directors want to pay the $50,000 as salary, but Charles would prefer to have it paid as a dividend. Discuss. ANS: Charles will be subject to a 15% rate on the $50,000 if Chinook pays it as a dividend, but Chinook will not be allowed to deduct the amount in computing corporate taxable income. If Chinook pays Charles the additional $50,000 as salary, he will be taxed at his marginal rate (presumably higher than 15%), and the corporation will be allowed to deduct the salary payment in computing corporate taxable income. PTS: 1 REF: p. 17-4 Corporations: Introduction and Operating Rules 6. 27 Osprey Company had a net loss of $80,000 from merchandising operations in 2007. Mary owns Osprey and works 20 hours a week in the business. She has a large amount of income from other sources and is in the 35% marginal tax bracket. Would Marys tax situation be better if Osprey Company were a proprietorship or a C corporation? ANS: If Osprey is a proprietorship. Revenues, expenses, gains, and losses of a proprietorship flow through to the proprietor. Mary qualifies as a material participant in Osprey, so she will report the $80,000 net loss on her individual tax return. If Osprey is a C corporation. Shareholders are required to report income from a corporation only to the extent of dividends received. Losses do not flow through from the corporation to shareholders. Therefore, Mary does not report the net loss on her individual return. PTS: 1 REF: p. 17-2 to 17-4 | p. 17-6 7. Serena, a cash basis taxpayer, owns 60% of the stock of Lark Corporation, a calendar year, accrual basis corporation. On December 31, 2007, Lark accrues a salary of $30,000 to Serena, but the payment is not made until 2008. a. b. Register to View AnswerWhen does Serena report the salary as income, and when does Lark deduct the salary expense? How would your answer change if Serena were a 25% shareholder? Serena and the corporation are related parties. Serena, a cash basis taxpayer, must report the salary income in 2008, the year of receipt. The corporation, which is on the accrual basis, cannot deduct the salary expense when accrued in 2007, but must wait until Serena reports the salary as income. If Serena were a 25% shareholder, the related party rules would not apply. Lark would deduct the accrued salary in 2007 and Serena would report it in 2008. REF: Example 10 b. PTS: 1 178. 2008 Comprehensive Volume/Test Bank List and explain at least five nontax factors that should be considered when deciding whether to incorporate a business. 28 ANS: Nontax considerations relative to incorporation include limited liability, the ability to raise large amounts of capital, freely transferable ownership, continuity of life, and centralized management. Corporate shareholders are not personally liable for debts of the corporation. They stand to lose only the amount invested in the shares of stock they hold. Because the number of shareholders is virtually unlimited, corporations have the ability to raise large amounts of capital. Partnerships represent a more cumbersome vehicle for raising large amounts of capital. Corporate shares are freely transferable, while a partnership interest can be transferred only with the agreement of all existing partners. The life of a partnership may end on the death of a partner, but this is not the case with a corporation. Finally, the corporate structure provides for centralized management through a board of directors that appoints corporate officers. Centralized management is more difficult to achieve in partnerships, where each partner theoretically has a right to participate in management of the business. PTS: 1 REF: p. 17-6 | p. 17-7 9. Virginia, who owns a proprietorship, has scheduled an appointment to talk with you about the advisability of incorporating. At this time, you know nothing about Virginias business or her existing tax situation. List the questions you will need to ask during the appointment so you can help her make an informed decision. ANS: There are many relevant questions that you should ask Virginia. Some of these questions are listed below: PTS: 1 How much income does she have from the proprietorship? Does she have any sources of income other than the proprietorship? If so, how much and what kind of income? Does she ever experience a net operating loss from the proprietorship? Does she have capital gains or losses from the proprietorship? If so, how much and how often? Is she aware of the nontax differences between the proprietorship and corporate forms of business organization? REF: pp. 17-4 to 17-6 | pp. 17-29 to 17-34 10. Tom and Maureen have formed a new business as a limited liability company (LLC) and plan to elect partnership treatment. How is the election made? ANS: The check-the-box rules permit a qualifying entity to elect to be taxed either as a partnership or as a corporation. The election is made by filing Form 8832. If Tom and Maureen do not file Form 8832, the entity will be treated as a partnership by default. PTS: 1 REF: p. 17-7 | p. 17-8 Corporations: Introduction and Operating Rules 29 11. Which of the following corporations will be allowed to use the cash method of accounting? Explain your answers. a. b. Cardinal Corporation, which had net profits as follows: $25 million in 2006, $35 million in 2007, and $44 million in 2008. Redbird Corporation, a PSC, which had gross receipts as follows: $3 million in 2006, $4 million in 2007, and $7 million in 2008. ANS: Cardinal Corporation cannot use the cash method because its average gross receipts exceed $10 million per year for the previous three years. Redbird Corporation can use the cash method of accounting because it is a personal service corporation. PTS: 1 REF: p. 17-10 12. On December 28, 2007, the directors of Greyhawk Enterprises (an accrual basis, calendar year taxpayer) authorized a cash donation of $10,000 to the United Way, a qualified charity. The payment is made on March 15, 2008. a. b. Register to View AnswerCan Greyhawk claim the $10,000 contribution as a deduction for tax year 2007? Explain. Would your answer differ if Greyhawk were a partnership and its partners authorized a donation on December 28, 2007, and Greyhawk paid it on March 15, 2008? Explain. The contribution is deductible in 2007. In order to be deductible by an accrual basis corporation in the year authorized by its board of directors, a charitable contribution must be paid within 2 1/2 months of the end of the year of authorization (March 15 in this case). Because payment was made by March 15, 2008, the contribution is deductible in 2007. The rules that apply to corporations (see part a.) do not apply to partnerships. If Greyhawk were a partnership, it would be allowed to deduct the contribution in 2008. REF: Example 14 b. PTS: 1 13. Discuss the purpose of Schedule M-1. Give an example of one addition and one subtraction that could be reported on Schedule M-1. ANS: Schedule M-1 is used to reconcile the differences between taxable income and financial net income (book income). An example of an addition is Federal income tax expense, which is deducted in computing net income per books but is disallowed in computing taxable income. An example of a subtraction is an excess charitable contribution carryover that was deducted for book purposes in a prior year but deducted in the current year for tax purposes. PTS: 1 REF: p. 17-26 | p. 17-27 17- 2008 Comprehensive Volume/Test Bank 30 14. Distinguish between organizational expenditures and start-up expenditures and give examples of each. Discuss the tax treatment of each type of expenditure. ANS: Organizational expenditures are those incurred in connection with the formation and organization of a corporation. They include legal and accounting expenses, expenses of temporary directors, expenses of organizational meetings, and fees paid to the state of incorporation. Start-up expenditures include investigation expenses of entering a new business and operating expenses that are incurred before the business actually begins to produce income. Corporations can elect to deduct up to $5,000 (subject to limitations) of either type of expenditure in the year incurred and amortize the remainder over a period of 180 months or more. If the amortization election is not made, the expenditures are capitalized and cannot be deducted until the corporation ceases to do business or liquidates. PTS: 1 REF: p. 17-17 | p. 17-18 15. Pierre is the sole shareholder of Pine Corporation, which has annual taxable income of approximately $100,000. He decides to transfer half of the Pine assets to Oak Corporation in order to reduce overall corporate income taxes. Will Pierres plan work? Discuss. ANS: Pierres plan will not reduce corporate income taxes. Pine and Oak would be related corporations and would be subject to special rules for computing the corporate income tax. Therefore, the total corporate tax liability would remain unchanged. PTS: 1 REF: Example 27 | Example 28 16. Wren Corporation received a dividend from Martin Corporation in December 2006; at that time, Wren owned 70% of Martins stock. Wren acquires the remaining 30% of Martins stock in 2007. Assume Martin pays a dividend in 2007. How will this stock acquisition affect the amount of dividend income that Wren Corporation will report for 2007? ANS: Corporate shareholders are allowed a dividends received deduction. The amount of the deduction depends on the percentage of ownership the recipient corporation holds in the corporation that pays the dividend. Wrens deduction percentage in 2006 would be 80%, based on ownership of 20% or more but less than 80%. In 2007, Wrens deduction percentage would be 100%, based on 100% ownership of Martin. PTS: 1 REF: p. 17-16

Textbooks related to the document above:

Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education.

Below is a small sample set of documents:

Wilberforce - ACC - 3551
CHAPTER 18 CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURETRUE/FALSE 1. The reason for 351 (which permits transfers to controlled corporations to be tax free) can be justified under the wherewithal to pay concept. REF: p. 18-3ANS: T 2.Similar
Wilberforce - ACC - 3551
CHAPTER 19 CORPORATIONS: DISTRIBUTIONS NOT IN COMPLETE LIQUIDATIONTRUE/FALSE 1. Distributions by a corporation to its shareholders are presumed to be dividends unless the parties can prove otherwise. REF: p. 19-3ANS: T 2.A distribution from a co
Wilberforce - ACC - 3551
CHAPTER 20 CORPORATIONS: DISTRIBUTIONS IN COMPLETE LIQUIDATION AND AN OVERVIEW OF REORGANIZATIONSTRUE/FALSE 1. A liquidation can occur for tax purposes even though the corporation has retained some assets to pay remaining debts and preserve legal s
Wilberforce - ACC - 3551
CHAPTER 21 PARTNERSHIPSTRUE/FALSE 1. Unlike a subchapter C corporation, a partnership is subject to only one level of taxation and can often liquidate in a tax-deferred manner.ANS: T A partnership is a flow-through entity subject to only one level
Wilberforce - ACC - 3551
CHAPTER 22 S CORPORATIONSTRUE/FALSE 1. S corporations are treated as partnerships under state laws. REF: p. 22-2ANS: F 2.Liabilities affect the owners basis differently in an S corporation versus a partnership. REF: p. 22-2ANS: T 3.An S cor
Wilberforce - ACC - 3551
CHAPTER 23 EXEMPT ENTITIESTRUE/FALSE 1. The only purpose of the Federal income tax law is to raise revenue.ANS: F The major purpose of the Federal income tax law is to raise revenue. Among the other purposes are social considerations and economic
Wilberforce - ACC - 3551
CHAPTER 24 MULTISTATE CORPORATE TAXATIONTRUE/FALSE 1. Roughly two-thirds of all taxes paid by businesses in the U.S. are to state, local, and municipal jurisdictions.ANS: F About forty percent of all business taxes are paid to state and local age
Wilberforce - ACC - 3551
CHAPTER 27 THE FEDERAL GIFT AND ESTATE TAXESTRUE/FALSE 1. Sometimes also known as transaction taxes, Federal gift and estate taxes are excise taxes. REF: p. 27-2ANS: T 2.A lifetime transfer that is supported by full and adequate consideration i
Wilberforce - ACC - 3551
CHAPTER 28 INCOME TAXATION OF TRUSTS AND ESTATESTRUE/FALSE 1. Trusts are created exclusively to reduce tax liabilities.ANS: F Tax consequences generally are secondary to the decision to create a trust. PTS: 1 REF: p. 28-2 | Table 28-1 2. A trust
UNC Greensboro - ACC - 600
(CH13) 33, 37, 39, 41, 43, 45, 47, 49, 5613.33 a) b) c) d) 13.37 a) b) 13.39 2002 2003 2004 2005 2006 2007 54,000 AGI = 40,000 + 14,000 28,000 AGI = 40,000 - 12,000 OL 37,300 AGI = 40,000 - 9,000 OL + 6,300 LTCG 30,000 AGI = 40,000 - 7,000 OL - 3,00
UNC Greensboro - ACC - 600
Lind page 23, 146 #1, page 157; Anderson 48, 548) a) Reggie - $70,000 Jackson - 120,000 b) Reggie - 20,000 Jackson - 100,000 = 120,000 - 20,000 55) a) No. 80% control requirement not met b) Eric - 150,000 = 200 - 50 Florence - 25,000 1245 ORD George
UNC Greensboro - ACC - 600
The University of North Carolina at Greensboro Bryan School of Business and Economics Professional Accounting Research (ACC 600) Fall 2008 CLASS: INSTRUCTOR: MW 3:30 - 4:45pm 112 Bryan Dr. Jane Livingstone, Ph.D., CPA 341 Bryan Bldg. (Accounting & Fi
UNC Greensboro - ACC - 600
Tax Planning & Research Week 2 Research Process 5 steps chapter 1, pp. 9-11 chapter 9, pp. 189-205 discussion of the research steps but not the financial accounting example chapter 7, pp. 148-152Step 1 Identify Relevant Facts & Issues Wha
UNC Greensboro - ACC - 600
July 15 July 16 July 31 August 2 August 2 August 6 August 6 Sometime Later Two Weeks LaterAngela receives an e-mail from Ralph questioning the tardiness of her report. Angela responds, stating that she was unaware of the new due date. Angela receiv
Saint Louis - ECON - 190
Mesopotamia In fertile crescent between Tigris and Euphrates rivers Populations based on city-states Different groups of people invaded the region and lived there throughout history Babylonians, Assyrians, Chaldeans, Persians Ziggurat Importan
Saint Louis - ECON - 190
To maximize economic well-being, a person should: -balance the benefits and costs of different courses of action and select the one that adds most to satisfaction The price of good X is $16, the price of good Y is $ 24, and the marginal utility from
Saint Louis - ECON - 190
Tradeoffs Giving up one thing for another. Opportunity Cost the cost of a purchase/decision of a forgone alternative Efficiency purchasing the largest attainable output of a desired quantity. Macroeconomics The study of the economy as a whole. Mic
Saint Louis - ECON - 190
Structure of a Corporation: [Stockholders (own)] [Board of Directors (Govern)] [Management (Runs)] Factors of Production: Sources of Output [Land (Rent)][Labor (Wages)][Capital (Interest)][Entrep. (Profit)] Producers (Transforms resources into a
Saint Louis - COMM - 130
Public speaking exam 1 study guideSimilarities and Differences in public speaking and conversation: Similarities: Organizing your thoughts logically Tailoring your message to your audience Telling a story for a maximum impact Adapting to listen
UMass (Amherst) - SPORTMGT - 210
Josh Mittleman Nike: Dont Do It This commercial is focusing on the sub world of fans, athletes, and media viewers of all ages. Fans can relate to the Barry Bonds part of the commercial because everyone knows he was a great baseball player. His image
UMass (Amherst) - SPORTMGT - 210
Josh Mittleman Sociology of Sport TA: Karina Discussion: Friday @ 12:20 I watched the Super Bowl at my fraternity house with all of my brothers and many of my other friends. It was very interesting to watch how people interacted with each other seein
UMass (Amherst) - SPORTMGT - 210
1 Josh Mittleman & Ricky Harris 5-12-08 Sociology of Sport Sports photography is a very interesting subject to study. Many photographs are taken of athletes of different genders and races everyday. If these photographs are studied, one can learn a lo
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott HW #8 April 25, 2008 This assignment again helped me think about how healthy I actually am. My scores were very similar for the most part to when I first took this survey. My lowest score increased from a 2
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott Sexuality HW April 18, 2008 This weeks homework is all about sexuality. I chose the question thats asks about safe sex. The first question is asks whether or not people in committed relationships should pra
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott HW #6 Ecology April 11, 2008 My personal mastery is still in its developing process. I am still young in terms of needing to have a specific skill and to find a job that uses that skill. I am in the proces
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott HW #2 Alcohol and Drugs Feb 22, 2008 This week we learned about drugs and alcohol. I learned many interesting facts and I feel that I now know how to better handle situations that involve both alcohol and
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman 22722963 PubHealth 5-1-08 Liz Whynott For our required community service I worked with Habitat for Humanity. I spent a few hours helping to build a house here in Amherst. I had a lot of fun doing it because I was with a big group of my
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott HW #3 Self Discovery Feb 29, 2008 This homework got me thinking about who I am. Some sections took longer than others to think of answers for and this means some things about myself are more obvious to me
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott HW #1 Health and Lifestyle Part 1 Feb 15, 2008 The How Well Are You questions got me thinking about how healthy I actually am. I have always believed that Im a pretty healthy guy compared to everyone else
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott Community Service Mar 7, 2008 To complete my community service for this class I will be building a house for habitat for humanity. In one of the weekends right after spring break I will help build a house h
UMass (Amherst) - PUBHLTH - 160
Josh Mittleman ID# 22722963 TA Liz Whynott HW #5 March 28, 2008 These excerpts were very interesting. The whole concept of walking on water is very fascinating. The assignment that he gave to that class is one that I almost wish was given to me so t
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro To Sport 5-9-08 Career Goals Paper A degree in Sports Management from The University of Massachusetts at Amherst will only further benefit me with my future endeavors in the Sports Management field, particularly in becoming a gen
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport Current Issues Assignment 2-22-08 This week in Sports Business Journal I found 2 very interesting articles about sports businesses. CBS has decided to redo the format of CSTV, starting with a name change to CBS College S
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport 4-18-08 I looked at what McDonalds has done to activate their sponsorship with the Olympic Games. I went to the website and found that they proudly show that they sponsor the Olympics, NASCAR, FIFA, AVP, and high school
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport 4-11-08 The 2008 Olympics in Beijing, China has been the root of a lot of hostility and violence lately throughout the world. There have been protests all over the world, many of which where the torch has been run. This
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman 3-28-08 Intro to Sport I watched a replay of the 2003 AFC Divisional playoff game between the Patriots and Raiders. This was the game where Adam Vinatieri kicked the game winning field goal in the middle of the snowstorm on frozen grou
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman 4-4-08 Intro to Sport Management International Sport is a growing market. Soccer is the most popular sport in the world, but it has only just in the past 2 decades begun to break into American lives. The MLS is the professional soccer
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport 3-7-08 The Academic Progress Rate (APR) is the latest academic reform being used by the NCAA in regard to college athletics. The APR is used to measure the success or failure of collegiate athletic teams in moving studen
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport 2-22-08 When it comes to the sports industry in todays fast paced world, some changes need to be done in order to maintain fan loyalty. A wide variety of minor and major changes can be accomplished in order to maintain a
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport 2-22-08 In the case of Kelvin Sampson vs. Indiana University, it is accurate to assume that the infractions against Mr. Sampson will result in a negative manner. The five major laws, according to the NCAA, have been brok
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport 2-15-08 There have been many innovations and contributions made by several sports marketing pioneers. Two of these are Bill Veeck and Albert Spalding. Veeck has had a lasting impression on baseball and Spalding has left
UMass (Amherst) - SPORTMGT - 202
Josh Mittleman Intro to Sport 2-8-08 I have worked many jobs in my life but Id have to say there are 2 bosses that stand out to me in terms of influencing and teaching me. Both of these jobs gave me different experiences and taught me different thing
UMass (Amherst) - ECON - 103
Mittleman and Delanese 1 Josh Mittleman and Brian Delanese Econ 103 Prof Friedman Fall 2007 *We are in different sections but both have you, Avanti, as our T.A.*1. a. In a market economy people produce the goods and services people want so that the
UMass (Amherst) - KIN - 100
Joshua Mittleman 22722963 Liz Whynott 5-2-08 Habitat for Humanity is a non-profit organization whose goal is to eliminate poverty housing and homelessness from the world, and to make decent shelter a matter of conscience and action. Habitat for Human
UMass (Amherst) - ECONOMICS - 104
Josh Mittleman 22722963 Boston, Massachusetts 4-22-08 Econ 104 Boston, Massachusetts is one of the major cities in the United States. It is the largest city in the New England area, and is also considered the economic and cultural center of the New E
UMass (Amherst) - ECONOMICS - 104
Josh Mittleman jmittlem@student.umass.edu 516-312-8276 ID# 22722963 Jobs In My Family Jobs are a very important part of the economy today. Workers are coming to the US from all over the world because of the high salary and good benefits of jobs here.
UMass (Amherst) - SOCIOLOGY - 106
Josh Mittleman Essay 2 Almost all of the time women are paid less then men. The national average is that women make about 77 cents to every 1 dollar a man makes. One idea for this discrepancy is that women work easier jobs then men. Some people belie
UMass (Amherst) - ECON - 103
Josh Mittleman Econ 103 Sect. B Prof Friedman Fall 2007 1. a. It is efficient for old people to drive sometimes, while it is inefficient other times. If the person lives in a city, then it is inefficient. If the person lives in a suburb, or any area
UMass (Amherst) - SOCIOLOGY - 106
Josh Mittleman Essay 3 Looking at gender through the prism of difference means that when someone looks at a man and a woman and compares them they have the social thoughts running through their head and see many differences. Since the 1960s gender st
UMass (Amherst) - ECON - 103
Josh Mittleman 1 Josh Mittleman Econ 103 Sect. B Prof Friedman Fall 2007 1. a. There is a tradeoff between the two activities because there are a set amount of hours in a day. One cannot properly study while hanging out with friends so it a choice be
UMass (Amherst) - ASTRONOMY - 101
Josh Mittleman (22722963) Ten years ago, scientists across the globe would have told anyone that it is impossible for humans to live on Mars. Ten years ago, scientists across the globe would have told anyone that it is impossible for humans to live o
UMass (Amherst) - SOCIOLOGY - 106
Josh Mittleman Essay 1 Gender role socialization is the process through which we learn how to be a normal member of society within our own gender. This means that while growing up a boy learns to become a man and do all the things men are supposed to
USC - FBE - 421
Fall 2008 FBE 421 MIDTERM I Problem 1. Answer A EBIT = 60 + 40 + 18 = 118 = 1,400 780 430 47 25 = 118 Problem 2. Answer B EBITDA = EBIT + depreciation = 118 + 47 = 165 = 1,400 780 430 25 = 165 Problems 3. Answer A NOPAT = EBIT x (1 t) = 118 x
USC - FBE - 421
Solutions to Chapter 1 ProblemsVALUATION HANDBOOKby Lloyd A. Levitin Professor of Clinical Finance & Commerce Marshall School of Business University of Southern CaliforniaCopyright 2008 by Lloyd A. Levitin. All Rights Reserved. No part of this
USC - FBE - 421
Solutions to Chapter 6 ProblemsVALUATION HANDBOOKby Lloyd A. Levitin Professor of Clinical Finance & Commerce Marshall School of Business University of Southern CaliforniaChapter 6 Problem 1 Shown below is a balance sheet and income statement fo
USC - FBE - 421
Solutions to Chapter 5 ProblemsVALUATION HANDBOOKby Lloyd A. Levitin Professor of Clinical Finance & Commerce Marshall School of Business University of Southern CaliforniaChapter 5 Problem 1 Shown below is selected data from Safeway, Inc. financ
USC - BUAD - 351
Quiz 1 1. a. b. c. d. e. 2. a. b. c. d. e. 3. a. b. c. d. e. 4. a. b. c. d. e. To an economist, a market refers to ~a single group of closely related products. a specific location where trade takes place. buyers and sellers trading in a particular ge
Grand Valley State - CHM - 232
Ch.5ProteinPurificationandCharacterizationTechniques (On2ndexam) I.ProteinPurification A.BreakingCells 1.HomogenizationPuttingcellsinabufferthatishypotonicandsqueezingthem againstatubewallsotheywillbreakandburst 2.Sonication 3.Freezethawcycles B.Sepa
Keystone - PHED - 105
Kay-Cee PezakFitness essayMy personal fitness goals for this semester are to improve my upper body strength as well as my cardiovascular stamina. I never really had good upper body strength even when I was younger and much more active. I always h
Keystone - PHED - 105
Kay-Cee Pezak 206 McKinley Dr. Jessup, Pa 18434 570 489 8061 kpezak@keystone.edu I chose online PHED because in class gym would not fit into my schedule.
Chulalongkorn University - NO - 101
Abraham LincolnGeorge Haven PutnamAbraham LincolnTable of ContentsAbraham Lincoln.1 George Haven Putnam..2 INTRODUCTORY NOTE.3 I. THE EVOLUTION OF THE MAN.4 II. WORK AT THE BAR AND ENTRANCE INTO POLITICS.7 III. THE FIGHT AGAINST THE EXTENSION O