Chapter 16 Corporate Operations

Chapter 16

Corporate Operations

True / False Questions

1. In general, a corporation can elect to use either the accrual or cash method of accounting no matter how large the corporation.

True False

2. Corporations calculate adjusted gross income (AGI) in the same way as individuals.

True False

3. Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.

True False

4. Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.

True False

5. Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

True False

6. An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

True False

7. Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

True False

8. Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.

True False

9. For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.

True False

10. In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. It has a favorable temporary book-tax difference for that year.

True False

11. For incentive stock options granted when ASC 718 (a codification of FAS 123R) applies, the value of the options that vest in a given year always creates a permanent, unfavorable book-tax difference.

True False

12. For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.

True False

13. A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during the year but is exercised in a later year.

True False

14. In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.

True False

15. A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.

True False

16. A corporation may carry a net capital loss back two years and forward 20 years.

True False

17. A corporation may carry a net capital loss back three years and forward five years.

True False

18. Corporations can carry net operating loss sustained in 2014 back two years and forward 20 years.

True False

19. Bingo Corporation incurred a net operating loss in 2014. If it carries the loss back, it must first carry the loss back to offset its 2013 taxable income and then it carries any remaining loss back to offset its 2012 taxable income.

True False

20. Net operating losses generally create permanent book-tax differences.

True False

21. Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year.

True False

22. Accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.

True False

23. GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2014. GenerUs made payment to FoodBank on February 2, 2015. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2014 tax return.

True False

24. NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while NOL and capital loss carrybacks are not.

True False

25. Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

True False

26. A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.

True False

27. Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).

True False

28. The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

True False

29. Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation's stock.

True False

30. The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero.

True False

31. The dividends received deduction is subject to a limitation based on modified taxable income.

True False

32. Taxable income of the most profitable corporations is subject to a flat 35% tax rate.

True False

33. Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.

True False

34. Three brothers each own 20% of the stock in three corporations. Because no single brother owns more than 50% of a corporation, the tax law would not treat the corporations as a controlled group.

True False

35. A C corporation reports its taxable income or loss on Form 1065.

True False

36. Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability).

True False

37. Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.

True False

38. An affiliated group must file a consolidated tax return.

True False

39. The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.

True False

40. Calendar-year corporations that request an extension for filing their tax returns will have a tax return due date of September 15.

True False

41. Volos Company (a calendar-year corporation) began operations in March of 2012 and was not profitable through December of 2013. Volos has been profitable for the first quarter of 2014 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2014 because it had no tax liability for the 2013 tax year and has been in business for at least 12 months.

True False

42. Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.

True False

43. Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

True False

44. For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.

True False

45. Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax.

True False

46. Urban Corporation receives tax-exempt income from Denver municipal bonds. All the proceeds from the bonds were used to fund public projects. In computing its AMT base, Urban must add back the interest income from its municipal bonds to taxable income.

True False

47. Depreciation adjustments can increase or decrease the AMT base relative to taxable income.

True False

48. The tax rate for the corporate alternative minimum tax is a flat 26%.

True False

49. The adjusted current earnings (ACE) adjustment is 75% of the difference between a corporation's alternative minimum taxable income before the ACE adjustment and its ACE.

True False

50. Corporations are allowed to deduct at least some AMT exemption regardless of profitability.

True False

51. A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.

True False

52. Minimum tax credits generated by the corporate AMT can be carried forward indefinitely.

True False

53. A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax.

True False

54. The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax.

True False

Multiple Choice Questions

55. Which of the following is not calculated in the corporate income tax formula?

A. Gross income

B. Adjusted gross income

C. Taxable income

D. Regular tax liability

56. WFO Corporation has gross receipts according to the following schedule:

If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?

A. Year 3

B. Year 4

C. Year 5

D. Year 6

E. None of these.

57. Which of the following does NOT create a permanent book-tax difference?

A. Organizational and start-up expenses

B. Key employee death benefit income

C. Fines and penalties expenses

D. Municipal bond interest income

58. Which of the following does NOT create a temporary book-tax difference?

A. Deferred compensation

B. Bad-debt expense

C. Depreciation expense

D. Domestic production activities deduction

59. Which of the following statements regarding book-tax differences is true?

A. Corporations are not required to report book-tax differences on their income tax returns.

B. Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.

C. Income excludable for tax purposes usually creates a temporary book-tax difference.

D. None of these is true.

60. It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

A. Temporary book-tax differences will reverse in future years whereas permanent differences will not.

B. Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.

C. Temporary book-tax differences will reverse in future years whereas permanent differences will not, and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.

D. Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.

61. TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the nature of the book-tax difference created by this expense?

A. Permanent; favorable

B. Permanent; unfavorable

C. Temporary; favorable

D. Temporary; unfavorable

62. iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense?

A. Permanent; favorable

B. Permanent; unfavorable

C. Temporary; favorable

D. Temporary; unfavorable

63. AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale?

A. Permanent; favorable

B. Permanent; unfavorable

C. Temporary; favorable

D. Temporary; unfavorable

64. Corporation A receives a dividend from Corporation B. Corporation A includes the dividend in its gross income for tax and financial accounting purposes (no book-tax difference). If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own?

A. A owns less than 20 percent of the stock of B

B. A owns at least 20 but not more than 50 percent of the stock of B

C. A owns more than 50 percent of the stock of B

D. Cannot be determined

65. Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?

A. A owns less than 20 percent of the stock of B

B. A owns at least 20 but not more than 50 percent of the stock of B

C. A owns more than 50 percent of the stock of B

D. Cannot be determined

66. Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2014. Chicken also reports financial accounting earnings of $20,000 for that year. Assume that Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?

A. $2,000 unfavorable

B. $2,000 favorable

C. $10,000 unfavorable

D. $10,000 favorable

E. None of these

67. Over what time period do corporations amortize purchased goodwill for tax purposes?

A. 180 months

B. 150 months

C. 60 months

D. None of these

68. Which of the following statements regarding book-tax differences associated with purchased goodwill is false?

A. It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.

B. In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book-tax difference will be unfavorable.

C. Temporary book-tax differences associated with goodwill are always favorable.

D. If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognized.

69. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 (a codification of FAS 123R) applies?

A. Financial accounting—no expense; tax—no deduction

B. Financial accounting—no expense; tax—deduct bargain element at exercise

C. Financial—expense value over vesting period; tax—no deduction

D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

70. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 (a codification of FAS 123R) does not apply?

A. Financial accounting—no expense; tax—no deduction

B. Financial accounting—no expense; tax—deduct bargain element at exercise

C. Financial accounting—expense value over vesting period; tax—no deduction

D. Financial accounting—expense value over vesting period; tax—deduct bargain element at exercise

71. Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs) that were granted when ASC 718 (a codification of FAS 123R) applies?

A. Financial—no expense; tax—no deduction

B. Financial—no expense; tax—deduct bargain element at exercise

C. Financial—expense value over vesting period; tax—no deduction

D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

72. Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 (a codification of FAS 123R) did not apply?

A. Financial—no expense; tax—no deduction

B. Financial—no expense; tax—deduct bargain element at exercise

C. Financial—expense value over vesting period; tax—no deduction

D. Financial—expense value over vesting period; tax—deduct bargain element at exercise

73. Which of the following statements regarding nonqualified stock options (NQOs) is false?

A. If ASC 718 (a codification of FAS 123R) applies, book-tax differences associated with NQOs may be either permanent or temporary.

B. In a given year when ASC 718 applies, if the value of the options that vest is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable.

C. Before ASC 718 applied, no expense recognition was required for NQOs for financial accounting purposes.

D. If ASC 718 does not apply, all stock option-related book-tax differences are temporary.

74. Which of the following statements regarding incentive stock options (ISOs) is false?

A. If ASC 718 (a codification of FAS 123R) does not apply, ISOs do not create book-tax differences.

B. For ISOs granted when ASC 718 applies, book-tax differences are always unfavorable.

C. If ASC 718 applies, the value expensed for book purposes in a given year is the value of the options that vest.

D. If ASC 718 applies, book-tax differences associated with ISOs may be either permanent or temporary.

75. Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years - half in 2014 (the year of issue) and half in 2015. One thousand options are exercised in 2015 with a bargain element on each option of $6. What is the 2015 book-tax difference associated with the stock options?

A. $14,000 unfavorable

B. $14,000 favorable

C. $20,000 unfavorable

D. $20,000 favorable

E. None of these

76. In January 2013, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2014, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $60,000. For 2014, what is the book-tax difference due to the options exercised?

A. 10,000 unfavorable

B. 10,000 favorable

C. 50,000 unfavorable

D. 60,000 favorable

77. In January 2014, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2015, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2015, what is the nature of the book-tax difference due to the options exercised?

A. Favorable and temporary

B. Favorable and permanent

C. Unfavorable and temporary

D. Unfavorable and permanent

E. Not enough information to determine.

78. Which of the following statements regarding capital gains and losses is false?

A. In terms of tax treatment, corporations generally prefer capital gains to ordinary income.

B. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.

C. C corporations can carry back net capital losses three years and they can carry them forward for five years.

D. Corporations must apply capital loss carrybacks and carryovers in a particular order.

79. For corporations, which of the following regarding net capital losses is true?

A. A corporation that experiences a net capital loss has a favorable book-tax difference in the year of the loss.

B. A corporation that experiences a net capital loss in year 4 first carries the loss back to year 3, then year 2, and then year 1 before carrying it forward.

C. Net capital loss carrybacks are deductible in determining a corporation's net operating loss.

D. Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used before they expire.

80. Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?

A. $11,000 unfavorable

B. $11,000 favorable

C. $16,000 unfavorable

D. $16,000 favorable

81. Tatoo Inc. reported a net capital loss of $13,000 in 2014. It had a net capital gain of $4,300 in 2012 and $3,000 in 2011. In 2013, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of the Tatoo's capital loss carryover remaining after it applies the carryback?

A. $4,700

B. $5,700

C. $8,700

D. $13,000

82. BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year?

A. Permanent; favorable

B. Permanent; unfavorable

C. Temporary; favorable

D. Temporary; unfavorable

83. Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

A. Charitable contribution deduction

B. Domestic production activities deduction

C. Net capital loss carryback

D. Net operating losses from other years

84. Which of the following statements regarding net operating losses generated in 2013 is true?

A. Corporations can carry net operating losses back two years and forward up to 15 years.

B. A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future years.

C. When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover.

D. Marginal tax rates are irrelevant in determining the tax benefit of applying a net operating loss carryback or carryover.

E. None of these is a true statement.

85. Which of the following statements regarding charitable contributions is false?

A. Only contributions made to qualified charitable organizations are deductible.

B. Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions).

C. Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.

D. The amount deductible for non-cash contributions is always the adjusted basis of the property donated.

86. Which of the following is unnecessary to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity?

A. Approval of the payment from the board of directors.

B. Approval from the IRS prior to making the contribution.

C. Payment made within two and one-half months of the tax year end.

D. All of these are necessary.

87. Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $5,000 in cash. Second, it could give stock it initially purchased two years ago for $4,000 but is now worth $6,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes?

A. Cash > Stock > Inventory

B. Stock > Cash > Inventory

C. Inventory > Stock > Cash

D. Inventory > Cash > Stock

88. Which of the following is deductible in calculating the charitable contribution limit modified taxable income?

A. Net capital loss carrybacks

B. NOL carrybacks

C. NOL carryovers

D. Charitable contributions

89. Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of $72,000. Its charitable contributions for the year were $7,500. What is Remsco's current-year charitable contribution deduction and contribution carryover?

A. $6,000 current-year deduction; $1,500 carryover

B. $7,500 current-year deduction; $0 carryover

C. $1,200 current-year deduction; $6,300 carryover

D. $7,200 current-year deduction; $300 carryover

90. If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book-tax difference is created?

A. Permanent; favorable

B. Permanent; unfavorable

C. Temporary; favorable

D. Temporary; unfavorable

91. Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true?

A. Corporations may not carry over or carry back excess charitable contributions.

B. Corporations can carry excess charitable contributions over to a future year or back to a prior year.

C. Corporations can carry excess charitable contributions over to a future year but not back to a prior year.

D. Corporations can carry excess charitable contributions back to a prior year but not over to a future year.

92. Which of the following statements regarding the dividends and/or the dividends received deduction (DRD) is true?

A. Dividends are taxed at preferential rates for corporations as well as for individuals.

B. The DRD can increase the net operating loss of a corporation.

C. Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock.

D. The DRD allows corporations to deduct the amount of dividends that they distribute.

93. Which of the following is deductible in calculating DRD modified taxable income?

A. Charitable contribution deduction

B. NOL carrybacks

C. NOL carryovers

D. Dividends received deduction

94. Jazz Corporation owns 50% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?

A. $0

B. $7,000

C. $8,000

D. $10,000

95. Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?

A. $0

B. $5,600

C. $7,000

D. $8,000

E. None of these.

96. Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?

A. $0

B. $2,800

C. $4,200

D. $7,000

E. None of these.

97. Which of the following is not a type of controlled group as defined in the Internal Revenue Code?

A. Parent-subsidiary

B. Brother-sister

C. Combined

D. All of these are types of controlled groups.

98. TireShop, Inc. owns 85% of Rubber Supply Co.'s voting stock throughout the tax year. TireShop and Rubber Supply would be considered as what kind of controlled group?

A. Parent-subsidiary

B. Brother-sister

C. Combined

D. None of these

99. Together, Kurt and Esmeralda own 60% of three corporations: RAZ, DVA, and TRE. The three corporations would be considered as what kind of controlled group for tax purposes?

A. Parent-subsidiary

B. Brother-sister

C. Combined

D. The three corporations would not be considered to be a controlled group for tax purposes.

100. Which of the following statements regarding controlled groups is false?

A. The purpose of the controlled group rules is to essentially treat the group as though it were one entity for purposes of determining certain tax benefits.

B. Having several entities treated as a controlled group is advantageous for tax purposes because each corporation in the group is allowed to use the 15% tax bracket in the corporate tax rate schedule in computing its regular income tax liability.

C. Lauren owns 100% of Corporation A stock and 100% of Corporation B stock. Corporation A and Corporation B form a controlled group.

D. Corporation A owns 100% of Corporation B. Corporation A and Corporation B form a controlled group.

101. Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?

A. In general, smaller corporations are required to complete Schedule M-1 while larger corporations are required to complete Schedule M-3.

B. Schedule M-3 lists more book-tax differences than Schedule M-1.

C. Both Schedules M-1 and M-3 reconcile to a corporation's bottom line taxable income.

D. Schedule M-1 does not distinguish between temporary and permanent book-tax differences whereas Schedule M-3 does.

102. Which of the following statements is false regarding consolidated tax returns?

A. An affiliated group can file a consolidated tax return only if it elects to do so.

B. To file a consolidated tax return, one corporation must own at least 50% of the stock of another corporation.

C. For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member.

D. For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.

103. What is the unextended due date of the tax return of a calendar-year corporation?

A. February 15.

B. March 15.

C. April 15.

D. September 15.

104. Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations?

A. 100 percent of the prior year's tax liability (with a few exceptions)

B. 100 percent of the current year's tax liability

C. 100 percent of the estimated current year tax liability using the annualized income method

D. All of these are acceptable methods of determining the required annual payment of federal income tax for corporations

105. Which of the following statements is false regarding corporate estimated tax payments?

A. The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.

B. Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000 (including the alternative minimum tax).

C. Even though a corporation extends its tax return it still must pay its tax liability for the year by two and one half months after year end.

D. Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.

106. Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income as of the end of the third quarter?

A. $300,000

B. $320,000

C. $400,000

D. $480,000

107. Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true?

A. Rapidpro may use the prior year tax liability to determine its first and second quarter estimated tax payments only since it is a large corporation.

B. To avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).

C. To avoid penalty, the third quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its third quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).

D. None of these is true.

108. Which of the following statements regarding the alternative minimum tax is false?

A. Corporations compute the AMT by multiplying their AMT base by 35% and subtracting their regular tax liability.

B. Small corporations are exempt from the AMT.

C. All first-year corporations are exempt from the AMT.

D. None of these is false (choose if you believe All of these are true).

109. Which of the following is not an AMT adjustment?

A. Adjustment for depreciation

B. Adjustment of gain or loss on sale of depreciable assets

C. Adjustment for adjusted current earnings (ACE)

D. Adjustment for domestic production activities deduction

110. In the current year, FurnitureKing Corporation recognized $32,000 of income from an installment sale it made in a previous tax year. If installment sales are the only difference between ACE and alternative minimum taxable income (before the ACE adjustment), what is the amount and nature of the ACE adjustment for the current tax year?

A. $24,000 favorable

B. $24,000 unfavorable

C. $32,000 favorable

D. $32,000 unfavorable

111. XPO Corporation has a minimum tax credit of $51,000 from 2013. If its 2014 tentative minimum tax is $211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2015?

A. $51,000

B. $39,000

C. $12,000

D. $0

112. Flywest Airlines, Inc. has regular taxable income of $190 million. It also has $10 million of AMT preference items, a $5 million unfavorable depreciation adjustment, and a $2 million favorable ACE adjustment. What is Flywest's alternative minimum tax income (AMTI)?

A. $177 million

B. $183 million

C. $197 million

D. $203 million

113. Z Corporation has AMTI of $250,000, which exceeds the AMT exemption phase-out threshold by $100,000. What is Z's tentative minimum tax?

A. $47,000

B. $45,000

C. $40,000

D. $30,000

114. Which of the following statements regarding AMT is true?

A. Only very profitable companies (AMTI greater than $1 million) have their AMT exemption phased out.

B. The AMT exemption is phased out dollar for dollar as AMTI increases.

C. Minimum tax credits are generated whenever regular tax liability exceeds tentative minimum tax.

D. Minimum tax credits can be carried forward indefinitely.

115. Assume a corporation is not required to pay AMT in the current year but will pay AMT next year. Also assume the corporation's regular marginal tax rate is 35%. Which tax planning strategy would minimize its after-tax cost of a charitable contribution it is considering paying to a qualified charity?

A. Pay the contribution this year.

B. Wait until next year to pay the contribution.

C. The after-tax cost of the contribution will be the same no matter which year it makes the contribution.

D. None of these.

Essay Questions

116. In 2014, AutoUSA Inc. received $4,600,000 of book income, including $20,000 of interest income from tax-exempt municipal bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $350,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return? Assume AutoUSA pays taxes at a flat 34 percent rate and disregard the alternative minimum tax.

117. For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2013. It also expensed $12,000 of radio station filing fines paid to the FCC the same year. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?

118. In 2014, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of meals and entertainment expenditures. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the book-tax difference is temporary and what amount is permanent?

119. In 2014, Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book-tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book-tax difference is permanent and what amount is temporary?

120. Atom Ventures Inc. (AV) owns stock in the Primo and Faraday corporations. The following summarizes information relating to AV's investment in Primo and Faraday as follows:

Assuming that AV follows the general rules for reporting its income from these investments, what is the amount of AV's book-tax difference associated with the investment in these corporations (disregarding the dividends received deduction)? Is it favorable or unfavorable? Is it permanent or temporary?

121. On January 1, 2012, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2013, the auditors of Credit Inc. determined that the goodwill had been impaired by $50,000 and Credit Inc. wrote down the book value of the goodwill by $50,000. During 2014, the goodwill was not further impaired. In 2015, additional goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book-tax difference associated with the purchased goodwill 2013, 2014, and 2015? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

122. On January 1, 2013, GrowCo issued 50,000 nonqualified stock options (NQOs) valued at $1 per option. Each option entitles the owner to purchase one share of stock for $4. These options vest at 20 percent per year for five years beginning in 2013. By the end of 2014, 20,000 of the options had vested. At the end of 2014, these options were exercised when the stock price is $6.25. What is the total value of the book-tax difference associated with the stock options for 2014? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary? (Note that ASC 718 applies to these transactions.)

123. On January 1, 2005 [before the adoption of ASC 718 (a codification of FAS 123R)], Net Optimizers Inc. granted 1,000 nonqualified stock options (NQOs) valued at $.05 per option. Each option entitles the owner to purchase one share of stock for $1. These options vest at 10 percent per year for ten years. On December 31, 2014, 300 options are exercised when the stock price is $5. In 2014, what is the book-tax difference associated with the stock options? Is it favorable or unfavorable? Is it permanent or temporary?

124. Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2014 with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning in 2014). Each option allows the holder to purchase one share of stock at $8. On January 1, 2015, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2015 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

125. Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2014 of $64,000. It had net capital gains of $21,500 in 2013, $45,000 in 2012, $10,000 in 2011 (but suffered a net operating loss in 2011), and $8,000 of net capital gain in 2010. What is the net capital gain in 2013 after the carryback is applied?

126. In 2011, Smith Traders Inc. reported taxable income of $100,000. In 2012, it reported taxable income of $15,000. In 2013, it reported taxable income of $95,000. In 2014, Smith Traders experienced a net operating loss of $25,000. What amount of refund can Smith Traders receive if it does not elect to forgo the carry back (see the corporate income tax schedule)?

127. During 2014, Hughes Corporation sold a portfolio of stock it had held for five years at a loss of $200,000. It also sold some investment land and recognized a capital gain of $180,000. In 2012, Hughes reported a net capital gain of $12,000 and in 2013 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2015?

128. In 2014, Webtel Corporation donated $50,000 to a qualifying charity. For the year, it reported taxable income of $310,000, which included the following: the $50,000 charitable contribution (before limitation), a $100,000 dividends received deduction, and a $20,000 net operating loss carryover. What is Webtel Corp's charitable contribution deduction?

129. In 2014, Datasoft Inc. received $350,000 in dividends from CSLabs Inc. Datasoft's taxable income before the dividends received deduction and $20,000 charitable contribution deduction is $300,000. What is Datasoft's DRD assuming it owns 15% of the CSLabs Inc. stock?

130. AB Inc. received a dividend from CD Corporation and is able to claim a dividends received deduction without limitation. AB owns 10 percent of CD. What is AB's marginal tax rate (to the nearest tenth of a percent) on the dividends received (after taking the DRD into account) assuming its ordinary marginal tax rate is 34%?

131. In 2014, LuxAir Inc. (LA) has book income of $160,000. Included in this figure is income generated from ownership in Jet Repair Corporation (JRC), of which LA owns 30%. JRC has $270,000 in earnings for the year and pays $32,000 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD) are its only book-tax differences, what is LA's tax liability for 2014 (see corporate tax schedule)?

132. Netgate Corporation's gross regular tax liability for 2014 was $95,375. What was its taxable income?

133. For 2014, SRH's taxable income is $35,000 and JHH's taxable income is $45,000. Together, Scott and Jackson Howard own 100 percent of both corporations. What is the combined tax liability of the two corporations?

134. AR Systems Inc. (AR) had $120,000 of tax liability last year. It anticipates a current-year tax liability of $500,000. Assuming AR is considered a large corporation for purposes of estimating tax liability, what are the minimum estimated tax payments it should make to avoid underpayment penalties? Ignore the annualized income method.

135. In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters:

What amount of estimated tax payments would Auto Rent pay each quarter in order to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

136. IndusTree Inc. received $1,800,000 from the sale of a property in 2014. The property's adjusted basis for regular tax purposes was $200,000 at the time of the sale. The property's adjusted basis for AMT purposes was $290,000. What is the amount of the AMT adjustment due to the sale of the asset? Does it increase or decrease AMTI?

137. ValuCo gives you the following information:

What is its ACE adjustment for the year? Is it favorable or unfavorable?

138. TerraWise Inc. reported the following information for 2014:

What is TerraWise Inc.'s AMTI?

139. QDP Corporation's AMTI is $569,000 for 2014. Its regular tax liability is $110,000. What is its AMT?

140. VitalJuice Corporation reports the following schedule of prior year taxes it owed:

What is VitalJuice's tax liability for Year 4?