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Exam 13: Corporate Formations and Operations

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Question 31

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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.

E) A) and B)
F) C) and D)

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Question 32

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For incentive stock options, the value of the options that is expensed as compensation in a given year creates a permanent, unfavorable book-tax difference.

A) True
B) False

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Question 33

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

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.

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

Keegan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation's stock.The property transferred to the corporation had the following fair market values and tax bases. $\begin{array}{c}\begin{array}{lll}\\\text {Inventory}\\\text {Building}\\\text {Land}\\\text {Total}\end{array}\begin{array}{rr}\text {FMV }\\\$ \quad 20,000 \\70,000 \\\underline{150,000}\\\underline{\$\quad 240,000} \end{array}\begin{array}{cc} \text { Tax Basis } \\\$ \quad 14,000 \\ 50,000 \\ \underline{100,00 }\\\underline{\$ \quad 164,000} \end{array}\end{array}$ The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Keegan. Assuming the gain or loss realized in the previous problem is deferred under section 351, what is Keegan's basis in the stock he receives in his corporation?

Which of the following describes the correct treatment of incentive stock options (ISOs) ?

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?

Imperial Construction Inc.(IC)issued 100,000 incentive stock options (ISOs)to its employees on December 31, 2018, with an estimated value of $5.50 per option.The options vest at 25 percent per year for four years (beginning on December 31, 2019).Each option allows the holder to purchase one share of stock at $8.On December 31, 2019, employees exercised 12,500 options when IC's stock was valued at $14.72 per share.What is the amount of the book-tax difference in 2019 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 cash in a transaction that qualifies as a section 351 transfer.The corporation assumed a liability of $1,000 on the property transferred.What is Sybil's tax basis in the stock received in the exchange?

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.

Net operating losses generally create permanent book-tax differences.

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

Ken and Jim agree to go into business together selling old comic books and records.According to the agreement, Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation.Ken's tax basis in the inventory is $120,000.Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures).The accounting services are valued at $50,000. Please answer the following questions about the tax consequences of the transaction to Jim. a.What amount of income, gain or loss, does Jim realize on the formation of the corporation? b.What amount of gain or loss, if any, does he recognize? c.What is Jim's tax basis in the stock he receives in return for his contribution of services to the corporation?

To meet the control test under section 351, a taxpayer transferring property to a corporation must by himself own 80 percent or more of the corporation's voting stock and 80 percent of each class of nonvoting stock after the transfer even if there are other transferors of property.

A nonqualified stock option will create a permanent book-tax difference in the year it is exercised if the bargain element is different from the estimated value of the option for financial accounting purposes when it was issued.

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 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?

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 for the tax year as of the end of the third quarter?

Federal income tax expense reported on a corporation's books generates a temporary book-tax difference.

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