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Exam 16: Corporate Operations

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Question 71

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

A) True
B) False

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Question 72

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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.)

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$35,000, favorable. ...

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Question 73

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VitalJuice Corporation reports the following schedule of prior year taxes it owed: $\begin{array} { | l | l | l | } \hline \text { Year } & \begin{array} { l } \text { Regular tax } \\\text { liability }\end{array} & \begin{array} { l } \text { Tentative minimum } \\\text { tax }\end{array} \\\hline \text { Year 1 } & \$ 750,000 & \$ 700,000 \\\hline \text { Year 2 } & \$ 800,000 & \$ 900,000 \\\hline \text { Year 3 } & \$ 850,000 & \$ 900,000 \\\hline \text { Year 4 } & \$ 900,000 & \$ 700,000 \\\hline\end{array}$ What is VitalJuice's tax liability for Year 4?

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.

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.

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

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.

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.

ValuCo gives you the following information: $\begin{array} { | l | c | } \hline \text { Current year items } & \text { Amount } \\\hline \begin{array} { l } \text { Interest from tax-exempt bonds funding a public } \\\text { activity }\end{array} & \$ 14,000 \\\hline 70 \text { percent dividends received deduction } & \$ 60,000 \\\hline 80 \text { percent dividends received deduction } & \$ 40,000 \\\hline\end{array}$ What is its ACE adjustment for the year? Is it favorable or unfavorable?

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?

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

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

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?

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

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

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?

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

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).

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.