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Exam 16: Corporate Operations

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Question 21

True/False

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Net operating losses generally create permanent book-tax differences.

A) True
B) False

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Question 22

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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.

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

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Question 23

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Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $10,000 in cash. Second, it could give stock it initially purchased two years ago for $8,000 but is now worth $12,000. 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?

Which of the following statements regarding net operating losses generated in 2019 is true?

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

For incentive stock options, the value of the options that accrue in a given year always creates a permanent, unfavorable book-tax difference.

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

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

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

Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2018 with an estimated value of $5.50 per option. The options vest (accrue) at 25 percent per year for four years (beginning in 2018). Each option allows the holder to purchase one share of stock at $8. On January 1, 2019, employees exercised 12,500 options as IC's stock price reached $14.72. 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?

Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2018 of $(64,000). It had net capital gains of $21,500 in 2017, $45,000 in 2016, $10,000 in 2015 (but suffered a net operating loss in 2015), and $8,000 of net capital gain in 2014. What is the net capital gain in 2017 after the carryback is applied?

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?

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?

In 2018, 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 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?

Taxable income of the all C corporations is subject to a flat 21% tax rate.

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

Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume 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) ?

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

On January 1, 2017, 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 (accrue) at 20 percent per year for five years beginning in 2017. By the end of 2017, 20,000 of the options had vested. At the end of 2018, these options were exercised when the stock price is $6.25. What is the total book-tax difference associated with the stock options for 2018? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary?

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