Question;ACC 317 WK 5 Midterm Exam;1. Tomas owns a sole proprietorship, and Lucy is the sole shareholder;of a C corporation. In the current year both businesses make a net;profit of $60,000. Neither business distributes any funds to the owners;in the year. For the current year, Tomas must report $60,000 of income;on his individual tax return, but Lucy is not required to report any;income from the corporation on her individual tax return. True False;2. Rose is a 50% partner in Wren Partnership. During the year, Wren;earned net profit of $100,000 ($210,000 gross income ? $110,000;operating expenses) and distributed $20,000 to each partner. Rose must;report Wren Partnership profit of $20,000 on her Federal income tax;return. True False;3. Rajib is the sole shareholder of Robin Corporation, a calendar;year S corporation. Robin earned net profit of $350,000 ($520,000 gross;income ? $170,000 operating expenses) and distributed $80,000 to Rajib.;Rajib must report Robin Corporation profit of $350,000 on his Federal;income tax return. True False;4. Donald owns a 60% interest in a partnership that earned $230,000;in the current year. He also owns 60% of the stock in a C corporation;that earned $230,000 during the year. Donald received $50,000 in;distributions from each of the two entities during the year. With;respect to this information, Donald must report $188,000 of income on;his individual income tax return for the year. True False;5. Quail Corporation is a C corporation with net income of $125,000;during the current year. If Quail paid dividends of $25,000 to its;shareholders, the corporation must pay tax on $100,000 of net income.;Shareholders must report the $25,000 of dividends as income. True False;6. Eagle Company, a partnership, had a short-term capital loss of;$10,000 during the year. Aaron, who owns 25% of Eagle, will report;$2,500 of Eagle?s short-term capital loss on his individual tax return. True False;7. Katherine, the sole shareholder of Purple Corporation, a calendar;year C corporation, has the corporation pay her a salary of $450,000 in;the current year. The Tax Court has held that $150,000 represents;unreasonable compensation. Purple Corporation?s taxable income is;unaffected by the Tax Court?s determination. True False;8. Double taxation of corporate income results because dividend;distributions are included in a shareholder?s gross income but are not;deductible by the corporation. True False;9. Jake, the sole shareholder of Peach Corporation, a C corporation;has the corporation pay him $100,000. For tax purposes, Jake would;prefer to have the payment treated as salary instead of dividend. True False;10. Thrush Corporation files Form 1120, which reports taxable income of $200,000. The corporation?s tax is $56,250. True False;11. The corporate marginal income tax rates range from 10% to 35%;while the individual marginal income tax rates range from 15% to 39%. True False;12. Employment taxes apply to all entity forms of operating a;business. As a result, employment taxes are a neutral factor in;selecting the most tax effective form of operating a business. True False;13. Under the ?check-the-box? Regulations, a two-owner LLC that fails;to elect to be to treated as a corporation will be taxed as a sole;proprietorship. True False;14. As a general rule, a personal service corporation (PSC) must use a calendar year as its accounting period. True False;15. A calendar year C corporation with average annual gross receipts;of $5 million or less must use the cash method of accounting. True False;16. On December 31, 2012, Lavender, Inc., an accrual basis C;corporation, accrues a $90,000 bonus to Barry, its vice president and a;70% shareholder. Lavender pays the bonus to Barry, who is a cash basis;taxpayer, on March 15, 2013. Lavender can deduct the bonus in 2013, the;year in which it is included in Barry?s gross income. True False;17. Azure Corporation, a C corporation, had a long-term capital gain;of $50,000 in the current year. The maximum amount of tax applicable to;the capital gain is $7,500 ($50,000 ? 15%). True False;18. Albatross, a C corporation, had $140,000 net income from;operations and a $25,000 short-term capital loss in the current year.;Albatross Corporation?s taxable income is $140,000. True False;19. If a C corporation uses straight-line depreciation on real estate;(? 1250 property), no gain on the sale of the property will be;recaptured as ordinary income. True False;20. The passive loss rules apply to closely held C corporations and to personal service corporations but not to S corporations. True False;21. Peach Corporation had $210,000 of active income, $45,000 of;portfolio income, and a $230,000 passive loss during the current year.;If Peach is a closely held C corporation that is not a PSC, it can;deduct $230,000 of the passive loss in the year. True False;22. On December 20, 2012, the directors of Quail Corporation (an;accrual basis, calendar year taxpayer) authorized a cash donation of;$5,000 to the American Cancer Society, a qualified charity. The;payment, which is made on April 10, 2013, may be claimed as a deduction;for tax year 2012. True False;23. In the current year, Oriole Corporation donated a painting worth;$30,000 to the Texas Art Museum, a qualified public charity. The museum;included the painting in its permanent collection. Oriole Corporation;purchased the painting 5 years ago for $10,000. Oriole?s charitable;contribution deduction is $30,000 (ignoring the taxable income;limitation). True False;24. Crow Corporation, a C corporation, donated scientific property;(basis of $30,000, fair market value of $50,000) to State University, a;qualified charitable organization, to be used in research. Crow had held;the property for four months as inventory. Crow Corporation may deduct;$50,000 for the charitable contribution (ignoring the taxable income;limitation). True False;25. Heron Corporation, a calendar year C corporation, had an excess;charitable contribution for 2011 of $5,000. In 2012, Heron made a;further charitable contribution of $20,000. Heron?s 2012 deduction is;limited to $15,000 (10% of taxable income). The current year?s;contribution must be applied first against the $15,000 limitation. True False;26. For a corporation in 2012, the domestic production activities;deduction is equal to 9% of the higher of (1) qualified production;activities income or (2) taxable income. However, the deduction cannot;exceed 50% of the W-2 wages related to qualified production activities;income. True False;27. Generally, corporate net operating loss can be carried back 3;years and forward 5 years to offset taxable income for those years. True False;28. Azul Corporation, a calendar year C corporation, received a;dividend of $50,000 from Naranja Corporation. Azul owns 10% of the;Naranja Corporation stock. Assuming it is not subject to the taxable;income limitation, Azul?s dividends received deduction is $35,000. True False;29. Because of the taxable income limitation, no dividends received;deduction is allowed if a corporation has an NOL for the current taxable;year. True False;30. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days. True False;31. Black Corporation, an accrual basis taxpayer, was formed and;began operations on February 1, 2012. During its first year of;operations (February 1 ? December 31, 2012), Black incurred the;following expenses: fee paid to state of incorporation of $2,000;accounting and legal services incident to organization of $9,000, and;expenses related to the printing and sale of stock certificates of;$10,000. Black has $11,000 of qualified organizational expenditures;that it may elect to amortize. True False;32. Lilac Corporation incurred $4,700 of legal and accounting fees;associated with its incorporation. The $4,700 is deductible as startup;expenditures on Lilac?s tax return for the year in which it begins;business. True False;33. A personal service corporation with taxable income of $100,000 will have a tax liability of $22,250. True False;34. Ed, an individual, incorporates two separate businesses that he;owns by establishing two new corporations. Each corporation generates;taxable income of $50,000. Each corporation will have a tax liability of;$7,500. True False;35. A calendar year C corporation can receive an automatic 6-month;extension to file its 2012 corporate return (Form 1120) by filing Form;7004 by March 15, 2013. True False;36. The due date (not including extensions) for filing a 2012 Federal;income tax return for a calendar year C corporation (Form 1120) is;April 15, 2013. True False;37. Schedule M-1 is used to reconcile net income as computed for;financial accounting purposes with taxable income reported on the;corporation?s income tax return. True False;38. An expense that is deducted in computing net income per books but;not deductible in computing taxable income is a subtraction item on;Schedule M-1. True False;39. On December 31, 2012, Flamingo, Inc., a calendar year, accrual;method C corporation, accrues a bonus of $50,000 to its president (a;cash basis taxpayer), who owns 75% of the corporation?s outstanding;stock. The $50,000 bonus is paid to the president on February 1, 2013.;For Flamingo?s 2012 Form 1120, the $50,000 bonus will be a subtraction;item on Schedule M-1. True False;40. Canary Corporation, which sustained a $5,000 net capital loss;during the year, will enter $5,000 as a addition item on Schedule M-1. True False;41. Schedule M-2 is used to reconcile unappropriated retained;earnings at the beginning of the year with unappropriated retained;earnings at the end of the year. True False;42. A corporation with $5 million or more in assets must file Schedule M-3 (instead of Schedule M-1). True False;43. Schedule M-3 is similar to Schedule M-1 in that the form is;designed to reconcile net income per books with taxable income.;However, an objective of Schedule M-3 is more transparency between;financial statements and tax returns than that provided by Schedule;M-1. True False;44. Juanita owns 60% of the stock in a C corporation that had a;profit of $200,000 in 2012. Carlos owns a 60% interest in a partnership;that had a profit of $200,000 during the year. The corporation;distributed $45,000 to Juanita, and the partnership distributed $45,000;to Carlos. Which of the following statements relating to 2012 is incorrect? A. Juanita must report $120,000 of income from the corporation. B. The corporation must pay corporate tax on $200,000 of income. C. Carlos must report $120,000 of income from the partnership. D. The partnership is not subject to a Federal entity-level income tax. E. None of the above.;45. Bjorn owns a 60% interest in an S corporation that earned;$150,000 in 2012. He also owns 60% of the stock in a C corporation that;earned $150,000 during the year. The S corporation distributed $30,000;to Bjorn and the C corporation paid dividends of $30,000 to Bjorn. How;much income must Bjorn report from these businesses? A. $0 income from the S corporation and $30,000 income from the C corporation. B. $30,000 income from the S corporation and $30,000 of dividend income from the C corporation. C. $90,000 income from the S corporation and $0 income from the C corporation. D. $90,000 income from the S corporation and $30,000 income from the C corporation. E. None of the above.
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