CHAPTER17REVIEWQUESTIONS - ch2 - Corporations: Introduction...

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Corporations: Introduction and Operating Rules 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 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. ANS: T The partnership is not a taxpaying entity. Its profit (loss) and separate items flow through to the partners. The partnership’s 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). ANS: F The shareholders of an S corporation report their shares of net income or loss, regardless of how much of the income was withdrawn from the corporation.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 1
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17- 2008 Comprehensive Volume/Test Bank 4. 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. ANS: F Jeff must report his $80,000 (40% × $200,000) share of the partnership’s 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. ANS: F Quail 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:
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