Question 1

Canary Corporation,an accrual method C corporation,uses the calendar year for tax purposes.Leticia,a cash method taxpayer,is both a shareholder of Canary and the corporation's CFO.On December 31,2010,Canary has accrued a $100,000 bonus to Leticia.Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations.

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Question 2

Shareholders of closely held C corporations frequently engage in transactions that produce a tax benefit to the corporations.In many cases,shareholders receive compensation for employment with closely held corporations,and such payments generate a deduction for the corporations.To avoid the double taxation effect,shareholders generally prefer these and other corporate deductible payments over dividend distributions.Explain how this strategy avoids double taxation,including examples of other shareholder-corporation transactions that could be used for such purpose.Also,discuss the possible pitfalls surrounding corporate payments to shareholders.

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Question 3

During the current year,Yellow Company had operating income of $380,000 and operating expenses of $300,000.In addition,Yellow had a long-term capital loss of $50,000.Based on this information,how does Alexandria,the sole owner of Yellow Company,report this information on her individual income tax return under following assumptions?

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Question 4

Almond Corporation,a calendar year C corporation,had taxable income of $900,000,$1.1 million,and $790,000 for 2007,2008,and 2009,respectively.Almond's taxable income is $1.5 million for 2010.Compute the minimum estimated tax payments for 2010 for Almond Corporation.

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Question 5

Warbler Corporation,an accrual method regular corporation,was formed and began operations on July 1,2010.The following expenses were incurred during its first year of operations (July 1 - December 31,2010):

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Question 6

Ostrich,a C corporation,has a net short-term capital gain of $40,000 and a net long-term capital loss of $180,000 during 2010.Ostrich also has taxable income from other sources of $1 million.Prior years' transactions included the following:

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Question 7

During the current year,Coyote Corporation (a calendar year C corporation)has the following transactions:

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Question 8

Maroon Company had $150,000 net profit from operations in 2010 and paid Bobbie,its sole shareholder,a dividend of $108,250 ($150,000 net profit - $41,750 corporate tax).Assume that Bobbie is in the 35% marginal tax bracket.Would Bobbie's tax situation be better or worse if Maroon Company were a proprietorship and Bobbie withdrew $108,250 from the business during the year? Explain.

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Question 9

Shaw,an architect,is the sole shareholder of Shaw Corporation,a professional association.The corporation paid Shaw a salary of $255,000 during its fiscal year ending October 31,2010.

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Question 10

Which of the following statements is correct regarding the taxation of C corporations?
A)The alternative minimum tax does not apply.
B)A corporation with taxable income of less than $500 need not file a tax return.
C)The due date for a corporate income tax return (ignoring extensions)is the fifteenth day of the third month following the close of the corporation's tax year.
D)In general,the required annual payment for corporate estimated taxes is 90% of the corporation's final tax for the current year.
E)None of the above.

Accepted Answer

The due date for a corporate income tax return is the fifteenth day of the third month following the close of the corporation's tax year. The alternative minimum tax can apply to C corporations. A corporation with taxable income of less than $500 still must file a tax return. The required annual payment for corporate estimated taxes can vary and is determined by the specific tax situation of the corporation. Therefore, option C is the only correct statement.

Question 11

Vireo Corporation,a calendar year C corporation,has taxable income of $1.3 million and $3 million for 2009 and 2010,respectively.The minimum 2010 estimated tax installment payments for Vireo are:
A)April 15,2010,$110,500;June 15,2010,$110,500;September 15,2010,$110,500;December 15,2010,$110,500.
B)April 15,2010,$110,500;June 15,2010,$399,500;September 15,2010,$399,500;December 15,2010,$399,500.
C)April 15,2010,$110,500;June 15,2010,$399,500;September 15,2010,$255,000;December 15,2010,$255,000.
D)April 15,2010,$255,000;June 15,2010,$255,000;September 15,2010,$255,000;December 15,2010,$255,000.
E)None of the above.

Accepted Answer

Vireo Corporation's estimated tax payments are based on the lesser of 100% of the previous year's tax liability or 90% of the current year's tax liability.

For the year 2009, Vireo Corporation's taxable income was $1.3 million, so their tax liability would have been approximately $396,100 ($22,250 + 34% of the amount over $100,000). Therefore, the minimum required installment for each quarter would be $99,025 ($396,100/4).

For the year 2010, Vireo Corporation's taxable income was $3 million, so their tax liability would have been approximately $991,700 ($113,900 + 39% of the amount over $335,000). Therefore, the minimum required installment for each quarter would be $247,925 ($991,700 * 90% / 4).

Based on these calculations, the correct choice would be C. The April 15, 2010 payment would be the same as the other options at $110,500, but the following payments would be $399,500, $255,000, and $255,000. This meets the requirement of the lesser of 100% of the previous year's liability or 90% of the current year's liability.

Question 12

Osprey Company had a net loss of $200,000 from merchandising operations in 2010,its first year of operations.Mary,the sole owner of Osprey,works full time in the business.She has a large amount of income from other sources and is in the 35% marginal tax bracket irrespective of Osprey.Considering this information,compare the affect of Osprey's loss to Mary under the various types of entity forms discussed in the chapter.

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Question 13

On December 30,2010,the board of directors of Gull Corporation,a calendar year,accrual method C corporation,authorized a contribution of $50,000 to a qualified charitable organization.For purposes of the taxable income limitation applicable to charitable deductions,Gull has taxable income of $420,000 and $370,000 for 2010 and 2011,respectively.Describe the tax consequences to Gull Corporation under the following independent situations.

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Question 14

During the current year,Flamingo Corporation,a regular corporation in the book publishing business,made charitable contributions to qualified organizations as follows:
  
Flamingo Corporation's taxable income (before any charitable contribution)is $1 million.

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Question 15

Compare the basic tax and nontax factors of doing business as a partnership,an S corporation,and a C corporation.Circle the correct answers.

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Question 16

During the current year,Quartz Corporation (a calendar year C corporation)has the following transactions:
  
Quartz owns 25% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss)for the year?

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Question 17

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is a subtraction on Schedule M-1.
A)Book depreciation in excess of allowable tax depreciation.
B)Federal income tax per books.
C)Premiums paid on life insurance policy on key employee.
D)Tax-exempt interest.
E)None of the above.

Accepted Answer

The answer of Schedule M-1 of Form 1120 is used...

Question 18

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is an addition on Schedule M-1?
A)Charitable contributions carryover from previous year.
B)Proceeds of life insurance paid on death of key employee.
C)Charitable contributions in excess of deductible limits.
D)Tax-exempt interest.
E)None of the above.

Accepted Answer

The answer of Schedule M-1 of Form 1120 is used...

Question 19

Beige Company has approximately $250,000 in net income in 2010 before deducting any compensation or other payment to its sole owner,Janet (who is single).Assume that Janet is in the 35% marginal tax bracket.Discuss the tax aspects of each of the following arrangements.(Ignore any employment tax considerations. )

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Question 20

Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1:

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Quiz 2: Corporations: Introduction and Operating Rules

Almond Corporation,a calendar year C corporation,had taxable income of $900,000,$1.1 million,and $790,000 for 2007,2008,and 2009,respectively.Almond's taxable income is $1.5 million for 2010.Compute the minimum estimated tax payments for 2010 for Almond Corporation.

Warbler Corporation,an accrual method regular corporation,was formed and began operations on July 1,2010.The following expenses were incurred during its first year of operations (July 1 - December 31,2010):

Ostrich,a C corporation,has a net short-term capital gain of $40,000 and a net long-term capital loss of $180,000 during 2010.Ostrich also has taxable income from other sources of $1 million.Prior years' transactions included the following:

During the current year,Coyote Corporation (a calendar year C corporation)has the following transactions:

Shaw,an architect,is the sole shareholder of Shaw Corporation,a professional association.The corporation paid Shaw a salary of $255,000 during its fiscal year ending October 31,2010.

Which of the following statements is correct regarding the taxation of C corporations?

Vireo Corporation,a calendar year C corporation,has taxable income of $1.3 million and $3 million for 2009 and 2010,respectively.The minimum 2010 estimated tax installment payments for Vireo are:

During the current year,Flamingo Corporation,a regular corporation in the book publishing business,made charitable contributions to qualified organizations as follows: Flamingo Corporation's taxable income (before any charitable contribution)is $1 million.

Compare the basic tax and nontax factors of doing business as a partnership,an S corporation,and a C corporation.Circle the correct answers.

During the current year,Quartz Corporation (a calendar year C corporation)has the following transactions: Quartz owns 25% of ABC Corporation's stock.How much is Quartz Corporation's taxable income (loss)for the year?

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is a subtraction on Schedule M-1.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income.Which of the following items is an addition on Schedule M-1?

Heron Corporation,a calendar year,accrual basis taxpayer,provides the following information for this year and asks you to prepare Schedule M-1: