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Exam 16: Corporate Operations

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Question 31

Multiple Choice

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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

E) All of the above
F) A) and B)

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Question 32

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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.

A) True
B) False

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Question 33

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

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

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?

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

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?

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.

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?

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

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

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.

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

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) ?

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?

Corporation A receives a dividend from CorporationB. 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?

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?

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

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