1. Question : What is a corporation’s alternative minimum tax rate?
Student Answer: 15%
2. Question : Which of the following business entities does not file a separate tax return to report business operations?
Student Answer: Sole proprietorship
3. Question : Hoku Corporation (a C corporation) had the following history of income and loss:
Year Income (Loss)
How much of a tax refund can Hoku Corporation receive by carrying back its 2011 loss?
Student Answer: $1,500
None; it cannot carry its loss back
4. Question : Which of these persons never pays taxes directly?
Student Answer: Individual
5. Question : Which of the following is not a characteristic of an S corporation?
Student Answer: Owners have limited liability
The corporation is taxed directly on operating income
The corporation can have no more than 100 shareholders
Shareholders must consent to the S election by the corporation
6. Question : The Mercury Corporation must decide whether to invest in some new machinery for its business. Which tax rate is the most relevant for making this decision?
Student Answer: The average tax rate
The marginal tax rate
The nominal tax rate
The effective tax rate
7. Question : What is the gain or loss on the sale of an asset for $68,000 if the asset cost $185,000, depreciation expense deducted was $124,000, repair costs were $12,000, and there was a $19,000 major addition to the asset?
Student Answer: $0
UNIT – 2
1. All of the following are part of the tax research process except: (Points : 1)
Establish the facts
Locate relevant authority
Identify the issues
Communicate the findings
All are part of the tax research process
2. CK Corporation can invest $100,000 in a project. After taxes, the project is expected to generate $40,000 of net income the first year and $75,000 of net income the second year. If the company uses a 10 percent discount rate to evaluate projects, what is the project’s net cash flow? (Points : 1)
3. Changing which of the following factors as indicated would decrease the after-tax net cash flow of a project: (Points : 1)
Delaying the years in which inflows occur
Delaying revenue recognition
Increasing the discount rate
All decrease cash flows
None decrease cash flows
4. What effect does an increased discount rate have on project evaluations? (Points : 1)
Increases net cash flow
Decreases net cash flow
Increases the probability that a project will be accepted
It has no effect on project evaluation
5. Which of the following does not deal with a CPA’s standard of conduct (Points : 1)
Treasury Circular 230
AICPA Code of Conduct
Internal Revenue Service Manual
Statement of Standards for Tax Services
6. Which of the following explain why it is important to determine the period in which income is recognized? (Points : 1)
Marginal tax rates may be different in different periods.
Tax laws may change
The time value of money
All of the above are explanations
a. and b. only are explanations
7. All of the following are allowable tax years except: (Points : 1)
The last Friday of July
The Sunday closest to March 1
8. All of the following are acceptable methods of accounting for revenue and expenses for tax purposes except: (Points : 1)
All are acceptable methods
9. Which of the following is an application of the wherewithal-to-pay concept? (Points : 1)
Hybrid method of accounting
Accrual method of accounting
10. Windjammer Corporation, a cash-basis, calendar-year corporation sold $30,000 of merchandise to Jackpot Company in January, year 1. In November, Jackpot declared bankruptcy without paying Windjammer. In year 4, Jackpot had reorganized under a new owner and paid all its old debts including the $30,000 owed Windjammer. How does Windjammer treat these events? (Points : 1)
Recognize $30,000 revenue in year 1 only.
Recognize $30,000 revenue in year 4 only.
Deduct $30,000 as a bad debt in year 1.
Deduct $30,000 as a bad debt in year 1; recognize $30,000 income in year 4.
1. Which of the following is included as part of APB 23?
(Points : 5)
A parent corporation can exclude a foreign subsidiary’s income if earnings will not be repatriated.
A parent corporation can exclude deferred taxes on foreign income if earnings will not be repatriated.
A parent must meet a more-likely-than not standard to determine the effect of a tax benefit.
A parent must disclose details relating to tax uncertainties of its subsidiaries.
2. If an expense is reported on the tax return before it is reported on the financial accounting books
(Points : 5)
the result is a deferred tax asset
the result is a deferred tax liability
there could be either a deferred tax asset or liability
there is no effect as this is not a timing difference
3. The more-likely-than-not standard (Points : 5)
is based on a more-than 50 percent probability.
applies only to contested liabilities
is used to determine if a deferred tax liability should be recognized.
is spelled out in APB 23.
4. Waldo bought two tickets for a Packers game on Ebay for $400. The tickets had a face value of $50 each. He took a client to the game and they had a dinner afterwards where they discussed business. The cost of the dinner was $70. What is Waldo’s deduction for these expenses? (Points : 5)
5. What is the purpose of a per diem allowance? (Points : 5)
Eliminate the substantiation requirement for business expenses.
Reduce the amount an employer must reimburse for employee business expenses.
Eliminate paper work for certain employee business expenses.
Reduce reimbursement disagreements between employer and employee.
6. Which of the following is a working condition fringe benefit? (Points : 5)
Flowers for an ill employee
A holiday cocktail party
A subscription to a professional journal
A bus pass
7. Howard is a cash-basis, calendar-year taxpayer. He works for Clyde Corporation, an accrual-basis, calendar-year corporation. Clyde authorizes a $10,000 bonus for Howard on December 20, year 1. It pays the bonus on March 31 of year 2. Which of the following is correct? (Points : 5)
Howard recognizes income in year 1 and Clyde takes a deduction in year 1.
Howard recognizes income in year 1 and Clyde takes a deduction in year 2.
Howard recognizes income in year 2 and Clyde takes a deduction in year 1.
Howard recognizes income in year 2 and Clyde takes a deduction in year 2.
1. The adjusted basis of an asset is: (Points : 5)
Its acquisition price only
Acquisition cost less cost recovery
Acquisition cost less selling price
Only the cash used to purchase the asset
2. Momee Corporation, a calendar-year corporation, bought only one asset in 2006, a crane it purchased for $700,000 on November 24. It disposed of the asset in April, 2011. What is its depreciation deduction for this asset in 2011 if cost recovery was determined using only regular MACRS?
(Points : 5)
3. Coley Corporation has an $800 net short-term capital loss and a $6,000 net long-term capital gain in the current year. It also has an $8,000 long-term capital loss carryover from the prior year. What is Coley’s capital loss carryover to the next year? (Points : 5)
4. Alpha Corporation had income from operations of $30,000. What is the corporation’s taxable income including the following property transactions: Gain on investment stock = $8,000; loss on machinery held three years = $6,000; $4,000 loss on equipment held 10 months; $4,000 gain on land used for six years for storage of trucks. (Points : 5)
5. All of the following are characteristics of percentage depletion except:
(Points : 5)
Depletion is determined using a statutory percentage times gross income.
Percentage depletion can exceed the property’s cost.
Depletion in excess of cost results in a negative basis for property.
Is an investment incentive provision.
6. Angel sells the following depreciable assets from her sole proprietorship:
Asset Cost Age Gain/Loss
Office furniture $10,0004 years ($2,400)
Truck $20,0005 years 3,100
Bakery equipment $25,0009 months (4,500)
What should Angel report on her income tax return relative to these property transactions? (Points : 5)
$3,800 capital loss
$3,100 Section 1245 recapture; $2,400 Section 1231 loss; $4,500 ordinary loss
$3,800 ordinary loss
$700 Section 1231 gain; $4,500 ordinary loss
None of the above
7. Jack did not depreciate one of his machines that cost $40,000 because he had net operating losses for the last two years. Which of the following statements is true?
(Points : 5)
Jack’s basis in the asset is $40,000 this year.
Jack can deduct three year’s depreciation in the current year.
Jack must file amended returns to claim the depreciation for prior years.
If Jack sells the machine for $20,000 this year, he has a $20,000 loss.
1. Trudi Corporation has a building that it needs to sell or exchange because of growth in its business. If Trudi sells the building, it will have a gain of $450,000. What is the amount of taxes that Trudi will avoid paying if it can exchange the building? The corporation has $1,000,000 of taxable income from operations for the current year. (Points : 1)
None of the above
2. In early 2011, Conrad Corporation discovered their bookkeeper had embezzled $30,000 over the last three years at a rate of approximately $10,000 per year. Conrad also suffered uninsured hurricane damage of $40,000 late in 2011 in a presidentially declared disaster area. If Conrad wants to deduct its losses at the earliest time possible, what are the amounts and year(s) of its loss deduction? (Points : 1)
2011 = $70,000
2010 = $30,000, 2010 = $40,000
2010 = $40,000, 2011 = $30,000
2009 = $10,000, 2010 = $10,000; 2011 = $50,000
None of the above
3. Sam’s land was condemned for a sewage treatment plant. He received $600,000 for the land that had a basis of $650,000. What is his realized and recognized gain or loss, respectively, on this involuntary conversion? (Points : 1)
None of the above
4. Which of the following is not a characteristic of involuntary conversions? (Points : 1)
Gain only is deferred
The taxpayer can receive cash to invest in qualifying replacement property
The provision applies to both realty and personalty
All of these are characteristics
None of these are characteristics
5. The taxpayer-use test for qualifying replacement property (Points : 1)
applies only to personalty
requires replacement property used by the taxpayer to be used in the same business as the converted property
only requires leased realty to be replaced with other leased realty
Is more restrictive than the functional-use test
6. Which of the following would be an indication that corporate debt is disguised equity? (Points : 1)
Debt is issued to the shareholders in the same proportion as stock
The debt has a specified maturity date
The debt has a specified interest rate
Interest is paid annually
None of the above
7. A corporation that owns 72 percent of all the outstanding stock of another corporation: (Points : 1)
May not file a consolidate return
May file a consolidated return
May take a 100 percent dividend received deduction
May take a 70 percent dividend received deduction
Is the parent of the 72 percent-owned company
8. A clothing manufacturing corporation donates last year’s inventory to the Red Cross for use in its disaster relief efforts. The clothes have a fair market value of $200,000 and a basis to the corporation of $75,000. What is its charitable contribution deduction? (Points : 1)
9. A corporation has pre-tax book income of $324,000. In determining this income, the corporation included $2,000 of tax-exempt interest, $6,000 of dividends from an affiliated corporation, a capital loss of $50,000 and $3,000 of excess book depreciation. What is the corporation’s taxable income? (Points : 1)
10. The Willow Corporation reported $400,000 of taxable income. In making a conversion to book income, the accountant had to adjust for the following: a $25,000 Section 179 deduction, but book depreciation would have been $5,000; a fine of $12,500 for overweight trucks; and a net capital loss of $10,000. What is Willow Corporation’s book income? (Points : 1)
None of the above
1. John has $120,000 of net income from his sole proprietorship in 2011. What is his deduction for AGI for self-employment taxes? (Points : 1)
2. James owns 60% of the James and Peter Partnership. The partnership reports $300,000 of construction revenue, $120,000 of construction expenses, and $80,000 of other expenses that include $4,000 of doctor expenses paid for James, and a $6,000 charitable contribution. What is the bottom line net income reported on Jame’s Schedule K-1? (Points : 1)
3. Mary has $30,000 of passive losses, $25,000 of passive gains, $27,000 of active income and $24,000 of active losses during the year. What is Mary’s current year net taxable income or loss? (Points : 1)
4. Will and Grace are equal partners in Will and Grace Partnership. Grace is employed full-time and receives a guaranteed salary from the partnership of $60,000 annually. If there is profit remaining after that salary, Will receives an allowance of $5,000 for his excess partner capital balance. Any remainder is divided equally among Will and Grace. If the accounting income before either of these payments is $80,000, what is the amount of income or loss allocated to Grace? (Points : 1)
5. Which of the following is not a requirement to make an S election? (Points : 1)
Minimum of 2 shareholders
Maximum of 100 shareholders
One class of shareholders
d.It must be a domestic corporation
6. Karen has a $30,000 basis in her 40% ownership in an S Corporation and lent the corporation $10,000 last year. The corporation has other debt outstanding of $60,000 during the entire year. This year the S Corporation reported a $200,000 loss. How much of this loss may Karen deduct? (Points : 1)
7. Williams Company is a S Corporation owned equally by Smith and Weston. Williams had taxable income of $60,000 for the current taxable year. Smith and Weston received distribution during the tax year of $20,000 each. What is Smith’s taxable income from Williams Company for the current taxableyear? (Points : 1)
8. Joy purchased a 50% interest in an S corporation on April 1 of the current year and sells one-half of her interest on October 1. If the S corporation reported $40,000 of income for the year, what income does it report on Joy’s Schedule K-1? (Points : 1)
9. Samantha and Ashley form the MAS General Partnership. Samantha contributed $20,000 cash in exchange for her 50 percent partnership interest. During the first year of partnership operations, the partnership reported net taxable income of $10,000, Samantha withdrew $8,000 cash from the partnership, and the partnership took out an $18,000 loan on the last day of the year. Samantha’s adjusted basis for her partnership interest at year end is: (Points : 1)
10. Which of the following is not a characteristic of sole proprietorships? (Points : 1)
Owners pay self-employment taxes
Formation is always tax-free
Distributions of entity income are tax-free
Loss is recognized on liquidation