ACCT4320Exam2 PDF

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Exam 2 review for midterm...

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LNS Corporation reports book income of $2,160,000. Included in the $2,160,000 is $27,750 of tax-exempt interest income. LNS reports $1,642,500 in ordinary and necessary business expenses. What is LNS Corporation’s taxable income for the year? $2,160,000 $27,750 - $1,642,500 Orange, Inc. issued 25,500 nonqualified stock options valued at $51,000 (in total). The options vest of 2 years-half in 2021 (the year of issue) and half in 2022. One thousand options are exercised in 2022 with a bargain element on each option of $5. What is the 2022 book-tax difference associated with the stock options? Book: ½ is expensed each year, so in 2022 $51,000 * 50% = $25,500Tax: only bargain element is deductible and in year of exercise, so 2022 deduction = $5 * 1,000 = $5,000Difference = $25,500 - $5,000 = $20,500 unfavorable Studios reported a net capital loss of $37,000 in Year 5. It reported net capital gains of $28,000 in Year 4 and $41,000 in Year 6. What is the amount and nature of the book-tax difference in Year 6 related to the net capital carryover? Carryback $28,000 Capital loss to offset Year 4 capital gains. $9,000 remains to offset future capital gains, so used in Year 6 to reduce the net capital gains. Jazz Corporation owns 50% of the Mitchell Corporation stock. Mitchell distributed a $26,000 dividend to Jazz Corporation. Jazz Corporation’s taxable income before the dividend was $101,600. What is the amount of Jazz’s dividends received deduction on the dividend it received from Mitchell Corporation? DRD % (20-80% ownership) = 65%; Full DRD = 65% * $26,000 = $16,900. Enough taxable income? Yes, so claim full DRD Jazz Corporation owns 10% of the Mitchell Corporation stock. Mitchell distributed a $23,000 dividend to Jazz Corporation. Jazz Corporation’s taxable income (loss) before the DRD, but after the dividend, was $(3,300). What is the amount of Jazz’s dividends received deduction on the dividend it received from Mitchell Corporation? DRD % (0-20% ownership) = 50%; Full DRD = 50% * $23,000 = $11,500. Enough taxable income? No, but the DRD is not creating the loss (already have a loss)  claim full DRD In 2021 Remsco has taxable income of $61,000 and a charitable contribution limit modified taxable income of $28,900. Remsco donated cash $7,590 to a qualified public charity. What is Remsco’s current-year charitable contribution deduction assuming Remsco makes any elections necessary to maximize its charitable contribution deduction? In 2021, max CC deduction is 25% of CC modified taxable income = 25% * $28,900 = $7,225. CC deduction is lesser of $7,225 or actual contributions of $7,590 >>>$7,225 deduction Shaw Corporation reported pretax book income of $1,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $50,000, and favorable permanent differences of $100,000. Compute the company’s deferred income tax expense or benefit. $(200,000) + $50,000= $(150,000) * 21%= $(31,500) expense Ann Corporation reported pretax book income of $1,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $50,000, and favorable permanent differences of $100,000. Compute the company’s book equivalent of taxable income. Use this number to compute the company’s total income tax provision or benefit. $1,000,000 – $(100,000) = $900,000 * 21%= $189,000 provision Book equivalent of taxable income takes into account only permanent differences. ETR = 189,000 / 1,000,000 = 18.9% Grand Corporation reported pretax book income of $600,000. Tax depreciation exceeded book depreciation by $400,000. In addition, the company received $300,000 of tax-exempt municipal bond interest. The company’s prior year tax return showed taxable income of $50,000. Compute the company’s current income tax expense or benefit. $600,000 - (400,000) - (300,000) = $(100,000) NOL * 21%= $21,000 benefit Tarheel Corporation reported pretax book income of $1,008,000. During the current year, the net reserve for warranties increased by $100,400. In addition, tax depreciation exceeded book depreciation by $202,000. Finally, Tarheel subtracted a dividends received deduction of $51,600 in computing its current-year taxable income. Tarheel’s accounting effective tax rate is: Only permanent items influence the ETR. $1,008,000 - $51,600 = $956,400 * 21% = $200,844 / $1,008,000 = 19.925% XYZ Corporation reported taxable income of $600,000 in 20X3 and paid federal income taxes of $204,000. Not included in the computation was a disallowed meals and entertainment expense of $2,200, tax-exempt income of $1,200, and deferred gain on a current-year transaction treated as an installment sale of $26,000. The corporation's current E&P for 20X3 would be: $600,000 $204,000 - $2,200 + $1,200 +$26,000 = $421,000 Abbot Corporation reported a net operating loss of $580,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $280,000 (E&P deprecation is $75,000), first-year expensing under Section 179 of $68,000, and a dividends received deduction of $11,800. The company’s current E&P for 20X3 would be: (580,000) +280,000 – 75,000 + 68,000 +11,800 = (295,200) Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3? $300,000 dividend and $100,000 tax-free return of basis What amount of gain or loss does Ramon realize on the transfer of the property to his corporation? FMV of stock received – Adj. Basis of property transferred = Gain(loss) What amount of gain or loss does Ramon recognize on the transfer of the property to his corporation? Ramon does not recognize any gain or loss on the transfer because the requirements of §351 are met and no boot is received in the exchange. What is Ramon’s basis in the stock he receives in his corporation? $84,000. Ramon’s tax basis in the stock received is a substituted basis of the assets transferred. Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation's tax basis in the property received in the exchange? Property received in exchange = Tax basis + cash = 200 + 0 = $200

Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange? Property received in exchange = Tax basis + cash= 500 + 50= $550 Ali transfers property with a tax basis of $526 and a fair market value of $655 to a corporation in exchange for stock with a fair market value of $565 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $90 on the property transferred. What is Ali’s tax basis in the stock received in the exchange? $526 basis of property contributed - $90 liability assumed by corporation = $436 Corporate Tax Formula -> Gross Income – Deductions= Taxable Income * Tax rates = Regular Income tax liability + Other Taxes= Total Tax – Credits – Prepayments = Taxes Due (Refund) Which of the following does NOT create a permanent book-tax difference? Organizational and start-up expenses Which of the following regarding book-tax differences is true? Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons? Temporary book-tax differences will reverse in future years whereas permanent differences will not. TrendSetter Incorporated paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Incorporated is the beneficiary. What is the nature of the book–tax difference created by this expense? Permanent; Unfavorable Which of the following is allowable as a deduction in calculating a corporation's net operating loss? CC Deduction Which of the following describes the correct treatment of incentive stock options (ISOs)? Financial-expense value over vesting period; tax-no deduction. Kedzie Company determined that the book basis of its liability for "other postretirement benefits" (OPEB) exceeded the tax basis of this account by $10,000,000. This basis difference is characterized as: Deductible Temporary difference Which of the following items is not a permanent book–tax difference? Accrued Vacation pay liability not paid within the first 2.5 months of the next tax year Which of the following items is not a reconciling item in the income tax footnote? Compensation deduction related to nonqualified stock options Which of the following items would likely not be included in the computation of a company's structural effective tax rate? Tax effects from an inventory reserve Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level? Compensation paid to a shareholder/employee of the corporation Which of the following statements best describes the tax law approach to recognizing gain or loss realized in an exchange? Gain or Loss realized is recognized unless specifically stated otherwise in the IRC...