Fill in the Blank - Use the following terms to complete the sentences listed below. Note that not all terms will be used and no term is used more than once. Units of Production 1120S Partnership Ordinary income K-1 Schedule C Section 1245 Schedule M-3 AGI Proprietorship Capital gains 200% Declining Balance Straight-line 1065 Dividends Section 1231 Schedule E Amortization Corporation Schedule M-1 1. ________________ is a form for corporations with total assets in excess of $10million. 2. ________________ assets typically create long-term capital gains or ordinary losses when sold. 3. The most common type of depreciation used for book purposes is __________________. 4. Corporations are to include the amount of net long-term capital gain in ________________. 5. The partnership return is filed on Form _______________. 6. A Limited Liability Company with more than one member (owner) may file a tax return as a ________________ without having to file an election. 7. The most common type of depreciation used for tax purposes is _____________________. 8. The most notable difference between an individual tax return and a corporate return is _____________________. 9. The individual partner?s portion of the partnership return is found ona _______________. 10. A _________________ is an entity type that is legally separate from its owners. MULTIPLE CHOICE 1. Which of the following business expense deductions is most likely to be unreasonable in amount? A. Compensation paid to the taxpayer's spouse in excess of salary payments to other employees. B. Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations. C. Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client. D. None of the above is likely to be unreasonable in amount. E. A, B, and C are all likely to be considered unreasonable in amount. 2. Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures? $1,000 dinner with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting A. $450 B. $900 C. $1,100 D. $1,200 E. $800 3. Which of the following is a true statement? A. Meals are never deductible as a business expense. B. An employer can only deduct half of any meals provided to employees. C. The cost of business meals must be reasonable. D. A taxpayer can only deduct a meal for a client if business is discussed during the meal. E. None of the above is true. 4. Qualified production activities income is defined as follows for purposes of the domestic manufacturing deduction. A. net income from selling or leasing property the taxpayer manufactured in the United States. B. revenue from selling or leasing property the taxpayer manufactured in the United States. C. revenue from selling or leasing property the taxpayer manufactured in the United States but the revenue was less that 50 percent of qualifying wages used in the production. D. 6 percent of revenue from selling or leasing property the taxpayer manufactured in the United States. E. none of the above 5. George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic manufacturing deduction). Included in income was $70,000 of qualified production activities income. George paid $60,000 of wages to employees engaged in domestic manufacturing. What domestic manufacturing deduction will George be eligible to claim this year? A. $5,400 B. $6,300 C. $7,200 D. $15,300 E. $22,500 6. Beth operates a plumbing firm. In August of last year she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting? A. In August of last year B. In December of last year C. In January of this year D. In March of this year E. In April of this year 7. Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year? A. Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year. B. Jim must defer the recognition of the income until the income is earned. C. Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided. D. Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes. E. Jim can never defer the recognition of the prepayments of income. 8. Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition? A. $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3. B. $500 is recognized in year 1 and $8,500 in year 2. C. $9,000 is recognized in year 3. D. $2,500 is recognized in year 1 and $6,500 in year 2. E. $9,000 is recognized in year 1. 9. Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction? A. Jones will be allowed to deduct $40,000 only if his son eventually develops into an expert cook. B. Jones will be allowed to accrue $40,000 only if he pays his son in cash. C. Jones will be allowed to deduct $35,000 as compensation and another $5,000 can be deducted as an employee gift. D. Jones can only deduct $20,000 because an apprentice cook is only worth half as much as an experienced cook. E. None of the above - Jones can only deduct reasonable compensation. 10. Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities? A. LLC - LLC members B. Corporation - Corporation C. General Partnership - Partnership D. Limited Partnership - General partner E. Both B and D. 11. Which tax form is the default used for LLCs with more than one owner to report their income and losses? A. Form 1120 B. Form 1120S C. Form 1065 D. Form 1040, Schedule C 12. What tax year-end must unincorporated entities with only one owner adopt? A. The entity is free to adopt any tax year-end B. The entity must adopt the same year-end as its owner C. The entity must adopt a calendar year-end D. The entity may adopt any year-end except for a calendar year-end 13. Assume you plan to start a new enterprise; you know the probability of having losses for the first three years of operations is almost 90 percent, and you know you will report a substantial amount of income from other sources during those same three years. From a tax perspective, which of the following entity choices would be least favorable? A. C corporation B. LLC C. General partnership D. Limited partnership E. S corporation 14. Which depreciation convention is the general rule for tangible personal property? A. Full-month B. Half-year C. Mid-month D. Mid-quarter E. None of the above are conventions for tangible personal property 15. Lax, LLC purchased only one asset during the current year. It placed in service computer equipment (5-year property) on August 26 with a basis of $20,000. Calculate the maximum depreciation expense for the current year (ignoring section 179 and bonus expensing): A. $2,000 B. $2,858 C. $3,000 D. $4,000 E. None of the above 16. Poplock LLC purchased a warehouse and land during the current year for $350,000. The purchase price was allocated as follows: $275,000 to the building and $75,000 to the land. The property was placed in service on August 12. Calculate Poplock's maximum depreciation for this first year, rounded to the nearest whole number: A. $2,648 B. $3,371 C. $3,751 D. $4,774 E. None of the above 17. Lenter LLC placed in service on April 29, 2011 machinery and equipment (7-year property) with a basis of $600,000. Assume that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing): A. $85,740 B. $120,000 C. $514,290 D. $585,740 E. None of the above 18. The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss? A. Capital. B. Ordinary. C. Section 1231. D. Section 1245. E. None of the above. 19. Sumner sold equipment that it uses in its business for $30,000. Sumner bought the equipment a few years ago for $80,000 and has claimed $40,000 of depreciation expense. Assuming that this is Sumner's only disposition during the year, what is the amount and character of Sumner's gain or loss? A. $10,000 section 1231 loss. B. $10,000 section 1245 loss. C. $10,000 ordinary loss. D. $10,000 capital loss. E. None of the above. 20. Which of the following is not a section 1245 asset if held for more than one year? A. Machinery. B. Automobile. C. Building purchased in 1985 for which accelerated depreciation was elected. D. Land. E. None of the above. 21. Which of the following does NOT create a permanent book-tax difference? A. Organizational and start-up expenses B. Key employee death benefit income C. Fines and penalties expenses D. Municipal bond interest income 22. 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? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable 23. Which of the following statements regarding capital gains and losses is false? A. In terms of tax treatment, corporations generally prefer capital gains to ordinary income. B. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year. C. C corporations can carry back net capital losses three years and they can carry them forward for five years. D. Corporations must apply capital loss carrybacks and carryovers in a particular order. 24. BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year? A. Permanent; favorable B. Permanent; unfavorable C. Temporary; favorable D. Temporary; unfavorable 25. Which of the following statements regarding net operating losses generated in 2011 is true? A. Corporations can carry net operating losses back two years and forward up to 15 years. B. A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future years. C. When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover. D. Marginal tax rates are irrelevant in determining the tax benefit of applying a net operating loss carryback or carryover. E. None of the above is a true statement. 26. Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.? A. $0 B. $5,600 C. $7,000 D. $8,000 E. None of the above. 27. Which of the following best describes the focus of ASC 740? A. ASC 740 takes an "asset and liability approach" that focuses on the balance sheet B. ASC 740 takes an "income and expense approach" that focuses on the income statement C. ASC 740 takes a "taxes paid or refunded approach" that focuses on the statement of cash flows D. ASC 740 takes a "permanent differences approach" that focuses on the effective tax rate reported in the income tax note to the financial statements 28. Which of the following temporary differences creates a deferred tax asset in the year in which it originates? A. Accelerated tax depreciation in excess of straight-line book depreciation B. Prepayment income reported on the tax return prior to being reported on the income statement C. Gain reported on the income statement prior to being reported on the tax return D. Prepayment deduction reported on the tax return prior to being reported on the income statement SHORT ANSWER 1. SNL corporation, a C corporation, reports $400,000 of taxable income in the current year. SNL's tax rate is 35 percent. Answer the following questions, assuming Keegan, SNL's sole shareholder, has a marginal tax rate of 28 percent on ordinary income and 15 percent on dividend income. a. Compute the first level of tax on SNL's taxable income for the year. b. Compute the second level of tax on SNL's income assuming that SNL currently distributes all of its after-tax earnings to Keegan. What is the overall corporate (double) tax rate on SNL's taxable income for the year? 2. Teddy purchased only one asset during the current year. It placed in service machinery (7-year property) on October 1st with a basis of $76,500. Calculate the maximum depreciation expense, rounded to the nearest whole number (ignoring section 179 and bonus expensing). 3. In 2011, Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book-tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book-tax difference is permanent and what amount is temporary?
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