CHAPTER 17 CORPORATIONS: INTRODUCTION AND

1. Norma formed Hyacinth Enterprises, a proprietorship, in 2014. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses, how does this information affect her taxable income for 2014?

a. Increases Norma’s taxable income by $157,000 ($160,000 ordinary business income – $3,000 long­term capital loss).

b. Increases Norma’s taxable income by $150,000 ($160,000 ordinary business income – $10,000 long­term capital loss).

c. Increases Norma’s taxable income by $75,000.

d. Increases Norma’s taxable income by $160,000.

e. None of the above.

2. Pablo, a sole proprietor, sold stock held as an investment for a $40,000 long-term capital gain. Pablo’s marginal tax rate is 33%. Loon Corporation, a C corporation, sold stock held as an investment for a $40,000 long-term capital gain. Loon’s marginal tax rate is 35%. What tax rates are applicable to these capital gains?

a. 15% rate applies to Pablo and 35% rate applies to Loon.

b. 15% rate applies to Loon and 33% rate applies to Pablo.

c. 35% rate applies to Loon and 33% rate applies to Pablo.

d. 15% rate applies to both Pablo and Loon.

e. None of the above.

3. Lucinda is a 60% shareholder in Rhea Corporation, a calendar year S corporation. During the year, Rhea Corporation had gross income of $550,000 and operating expenses of $380,000. In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000. During the year, Rhea Corporation distributed $50,000 to Lucinda. With respect to this information, which of the following statements is correct?

a. Rhea Corporation will pay tax on taxable income of $200,000.

b. Lucinda reports ordinary income of $50,000.

c. Lucinda reports ordinary income of $120,000.

d. Lucinda reports ordinary income of $102,000 and a short-term capital gain of $18,000.

e. None of the above.

4. Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the year. In addition, Elk has a $10,000 long­term capital gain and a $17,000 short­term capital loss. Elk’s taxable income is:

a. $63,000.

b. $73,000.

c. $80,000.

d. $90,000.

e. None of the above.

5. Flycatcher Corporation, a C corporation, has two equal individual shareholders, Nancy and Pasqual. In the current year, Flycatcher earned $100,000 net profit and paid a dividend of $10,000 to each shareholder. Regardless of any tax consequences resulting from their interests in Flycatcher, Nancy is in the 33% marginal tax bracket and Pasqual is in the 15% marginal tax bracket. With respect to the current year, which of the following statements is incorrect?

a. Flycatcher cannot avoid the corporate tax altogether by distributing all $100,000 of net profit as dividends to the shareholders.

b. Nancy incurs income tax of $1,500 on her dividend income.

c. Pasqual incurs income tax of $1,500 on his dividend income.

d. Flycatcher pays corporate tax of $22,250.

e. None of the above.

6. Which of the following statements is incorrectabout LLCs and the check-the-box Regulations?

a. If a limited liability company with more than one owner does not make an election, the entity is taxed as a corporation.

b. All 50 states have passed laws that allow LLCs.

c. An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership.

d. If a limited liability company with one owner does not make an election, the entity is taxed as a sole proprietorship.

e. A limited liability company with one owner can elect to be taxed as a corporation.

7. Copper Corporation, a C corporation, had gross receipts of $5 million in 2011, $6 million in 2012, and $3 million in 2013. Gold Corporation, a personal service corporation (PSC), had gross receipts of $4 million in 2011, $7 million in 2012, and $5 million in 2013. Which of the corporations will be allowed to use the cash method of accounting in 2014?

a. Copper Corporation only.

b. Gold Corporation only.

c. Both Copper Corporation and Gold Corporation.

d. Neither Copper Corporation nor Gold Corporation.

e. None of the above.

8. Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2014, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2014, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 3, 2015, compute Ivory Corporation’s 2014 deduction for the above amounts.

a. $250,000.

b. $225,000.

c. $200,000.

d. $125,000.

e. None of above.

9. On December 31, 2014, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus?

a. In 2014, if the bonus was authorized by the Board of Directors and payment was made on or before March 15, 2015.

b. In 2015, if payment was made at any time during that year.

c. In 2014, if payment was made on or before March 15, 2015.

d. In 2015, but only if payment was made on or before March 15, 2015.

e. None of the above.

10.Carrot Corporation, a C corporation, has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2014. Carrot Corporation had taxable income from other sources of $720,000. Prior years’ transactions included the following:

2010	Net long-term capital gain	$150,000
2011	Net short-term capital gain	60,000
2012	Net short-term capital gain	45,000
2013	Net long-term capital gain	35,000

Compute the amount of Carrot’s capital loss carryover to 2015.

a. $0.

b. $32,000.

c. $45,000.

d. $185,000.

e. None of the above.

11.In 2014, Bluebird Corporation had net income from operations of $100,000. Further, Bluebird recognized a long- term capital gain of $30,000, and a short-term capital loss of $45,000. Which of the following statements is correct?

a. Bluebird Corporation will have taxable income in 2014 of $100,000 and will have a net capital loss of $15,000 that can be carried back 3 years and forward 5 years.

b. Bluebird Corporation may use the capital loss to offset the capital gain and must carry the net capital loss of $15,000 forward five years as a short-term capital loss.

c. Bluebird Corporation may deduct $33,000 of the capital loss in 2014 and may carry forward the remainder of the capital loss indefinitely to offset capital gains.

d. Bluebird Corporation will have taxable income in 2014 of $85,000.

e. None of the above.

12.In the current year, Sunset Corporation (a C corporation) had operating income of $200,000 and operating expenses of $175,000. In addition, Sunset had a $30,000 long-term capital gain, a $52,000 short-term capital loss, and $5,000 tax-exempt interest income. What is Sunset Corporation’s taxable income for the year?

a. $0.

b. $3,000.

c. $22,000.

d. $30,000.

e. None of the above.