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Exam 16: Corporate Operations

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Question 41

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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.

A) True
B) False

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Question 42

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

A) True
B) False

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Question 43

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

On January 1, 2015, 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 2015. By the end of 2016, 20,000 of the options had vested. At the end of 2016, 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 2016? 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.)

In 2016, 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?

The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.

Which of the following statements regarding net operating losses generated in 2016 is true?

TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Inc. is the beneficiary. What is the nature of the book-tax difference created by this expense?

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.

Which of the following statements regarding charitable contributions is false?

Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.

Corporations calculate adjusted gross income (AGI) in the same way as individuals.

Pure Action Cycles Inc., a bicycle manufacturer, has a net capital loss in 2016 of $64,000. It had net capital gains of $21,500 in 2015, $45,000 in 2014, $10,000 in 2013 (but suffered a net operating loss in 2013), and $8,000 of net capital gain in 2011. What is the net capital gain in 2015 after the carryback is applied?

Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 does not apply?

Flywest Airlines, Inc. has regular taxable income of $190 million. It also has $10 million of AMT preference items, a $5 million unfavorable depreciation adjustment, and a $2 million favorable ACE adjustment (after the 75% adjustment) . What is Flywest's alternative minimum tax income (AMTI) ?

In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters: What amount of estimated tax payments would Auto Rent pay each quarter in order to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

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 ($6,000) . What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.?

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

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?

Which of the following statements regarding the alternative minimum tax is false?