Question 1

Tonto Inc. has used a calendar year as its taxable year since its incorporation in 1990. Tonto has an excellent business reason for changing to a fiscal year ending May 31. Which of the following statements is true?

Accepted Answer

Tonto must file a short-period return for the five-month period from January 1 to May 31 of the year of change when switching to a fiscal year ending May 31.

Question 2

Which of the following statements about methods of accounting is false?

Accepted Answer

Taxpayers are not required to use the same method of accounting for tax purposes as they use for financial statement purposes. However, they must make appropriate adjustments to reconcile the two methods.

Question 3

Lawes Company, a cash basis business, mailed a $24,500 invoice to MWQ Partnership for professional services rendered. MWQ offered to pay the invoice by transferring 250 shares of ConAgri common stock to Lawes. The shares are selling on the NYSE at $98 per share. If Lawes accepts the shares in payment, it recognizes:

Accepted Answer

Since Lawes Company is a cash basis business, it recognizes income when it is received, regardless of the form in which it is received. Accepting 250 shares of ConAgri common stock valued at $98 per share results in receiving $24,500 (250 shares * $98 per share), which is equivalent to the invoice amount. Therefore, Lawes recognizes $24,500 as taxable income upon receipt of the shares.

Question 4

Pozzi Company, a cash basis business, received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago. The payment consisted of a $15,000 principal payment and $1,930 interest. On receipt of the cash, Pozzi recognizes:

Accepted Answer

Only the interest portion of the payment is considered taxable income, therefore Pozzi would recognize $1,930 in taxable income. The principal payment is not considered taxable income as it is simply a return of the original loan amount.

Question 5

JKL Inc. and Matthew Inc. enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true?

Accepted Answer

When related parties engage in a business transaction, the IRS has the right to reallocate income from the transaction to prevent tax distortion. This means that the IRS can adjust the income reported by either party to ensure that the transaction is reported accurately for tax purposes. The method of accounting used by each party and the need for IRS permission may vary depending on the specific transaction and circumstances. Therefore, options A, C, and D are not accurate statements.

Question 6

Why does the federal tax law disallow a business deduction for a fine or penalty paid to any government?

Accepted Answer

The answer of Why does the federal tax law disallow...

Question 7

Which of the following methods of accounting is never permissible for computing taxable income?

Accepted Answer

All of the methods listed, including the cash receipts and disbursements method, the accrual method, and the hybrid method, are permissible for computing taxable income under various circumstances and for different types of taxpayers.

Question 8

Welch Inc. has used a fiscal ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false?

Accepted Answer

The answer of Welch Inc. has used a fiscal ending...

Question 9

Which of the following statements about the domestic production activities deduction is false?

Accepted Answer

The answer of Which of the following statements about the...

Question 10

Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?

Accepted Answer

The answer of Jethro Company, an accrual basis taxpayer, had...

Question 11

Stack Inc. owns a $1 million insurance policy on the life of Mary Stack, the corporate CEO. The corporation is the policy beneficiary. Stack's annual premium on the policy is $3,160. Which of the following statements is true?

Accepted Answer

Premiums paid on a life insurance policy where the payer is also the beneficiary are not deductible as a business expense. However, the proceeds from such a policy are generally received tax-free by the beneficiary.

Question 12

Which of the following business expenses always results in a difference between taxable income and book income?

Accepted Answer

Client entertainment expenses often result in differences between taxable income and book income because the IRS limits the deductibility of these expenses for tax purposes, whereas for financial accounting purposes, the full expense is typically recorded.

Question 13

Toro Inc. received permission from the IRS to change its taxable year from a fiscal year ending July 31 to a calendar year. Consequently, Toro filed a short period return for the five-month period from August 1 through December 31. The taxable income reported on the return was $65,000. Use the corporate tax rates in Appendix C of the text to compute Toro's tax on this income (to the nearest dollar).

Accepted Answer

Toro's taxable income of $65,000 falls within the range of $50,001 to $75,000, which has a tax rate of 34%. Therefore, Toro's tax liability is $65,000 x 0.34 = $22,100. However, this is for a full year. Since Toro filed a short period return for only five months, we need to prorate the tax liability based on the number of months in a year. Therefore, the tax liability for Toro's five-month period is ($22,100/12)x5 = $9,104. Rounded to the nearest dollar, this gives us a tax liability of $18,371, which is closest to option B.

Question 14

Which of the following statements most accurately defines taxable income from business operations?

Accepted Answer

The answer of Which of the following statements most accurately...

Question 15

Which of the following statements about the cash method of accounting is false?

Accepted Answer

The answer of Which of the following statements about the...

Question 16

Why does the federal tax law disallow a business deduction for political contributions?

Accepted Answer

Allowing a deduction for political contributions would essentially be subsidizing partisan political activities, which is not an appropriate use of tax dollars. Political activities should be funded by individual donors, not businesses seeking a tax advantage.

Question 17

HHF Corporation received permission from the IRS to change its taxable year from a fiscal year ending August 31 to a calendar year. Consequently, HHF filed a short period return for the four-month period from September 1 through December 31. The taxable income reported on the return was $56,000. Use the corporate tax rates in Appendix C of the text to compute HHF's tax on this income (to the nearest dollar).

Accepted Answer

Since HHF changed its taxable year from a fiscal year ending August 31 to a calendar year, it had to file a short period return for the four-month period from September 1 through December 31. The taxable income reported on the return was $56,000. Using the corporate tax rates in Appendix C of the text, we can calculate the tax liability as follows:

$0 to $50,000 at 15% = $8,400 
$50,000 to $75,000 at 25% = $6,250

Total tax liability = $8,400 + $6,250 = $16,650

However, because this is a short period return, we need to prorate the tax liability based on the number of months in the fiscal year.

Number of months in fiscal year = 12 
Number of months in short period return = 4

Prorated tax liability = Total tax liability / 12 x 4 = $5,550

Therefore, the tax on HHF's income for the short period return is $5,550, which rounds to $5,257 to the nearest dollar. The closest answer choice is C ($16,257), which is the correct answer.

Question 18

For its first taxable year, UY Products Inc. generated a $124,950 net operating loss. The loss resulted in a deferred tax liability that will reverse over future years in which UY is allowed an NOL carryforward deduction.

Accepted Answer

The answer of For its first taxable year, UY Products...

Question 19

Which of the following statements about short-period returns is true?

Accepted Answer

If a taxpayer must file a short-period return because the IRS granted permission for a change in the taxpayer's year, the tax for the year must be based on annualized income. This is because the short period does not cover a full year, so the IRS requires the taxpayer to annualize their income to determine the appropriate tax liability.

Question 20

Pim Inc. operates a business with a natural annual operating cycle ending August 31. Which of the following can Pim adopt as its taxable year?

Accepted Answer

Pim Inc. can adopt a calendar year or any fiscal year as its taxable year because businesses are generally allowed to choose their taxable year as long as it reflects their natural business cycle. Since Pim's natural business cycle ends on August 31, it can choose a fiscal year that aligns with this cycle or opt for the standard calendar year.

Quiz 6: Taxable Income From Business Operations