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Home work-Chapter 8.
Assume the “current year” is calendar year 2014, unless you are provided other information. Turn in one copy of your one-page solutions sheet at the start of class. (24 @ 4 Pts. = 96+9=105)
This homework has been updated for Spring 2014.
You should work and turn in the first 24 questions. The remaining ones are review questions for us to look at before we leave the corporate tax chapters.
There are some similar questions dealing with basic concepts – gives you a good look at the number of ways those basic concepts can be tested on the CPA Exam.
1. The outstanding stock of Corporations A, B, C and D is owned by the following unrelated individuals:
Individuals
Bonnie
Bart
Delaney
Danette
A
Corporations
B
80% 70%
C
5%
5% 10%
5% 10%
10% 10%
5%
20%
70%
D
40%
20%
20%
20%
Which Corporations are members of a brother-sister controlled group under section 1563(a)(2)?
[Do not use section 1563(f)(5). May require instructor explanation in addition to PowerPoint file.] a. A, C & D b. A, B, C & D c. A, B & D d. B, C & D e. Other C
2. [Chapter 2. Pg. 2-23, Sec. 1561(a)] Assume for purposes of this question that all of the corporations in the preceding question are brother sister corporations. They each had taxable income of $50,000 ($200,000 total) in the current year. What is the total federal income tax liability for these corporations for the current year? a. $30,000 b. $37,500 c. $50,000 d. $61,250 D
3. [Chapter 2. Pg. 2-23, Sec. 1561(a)] Controlled groups. Joe owns 100% of the stock of two corporations:
(1) The Furniture Place in Gastonia and (2) The Appliance Place in Monroe.
Each corporation has taxable income of $100,000 (total of $200,000) in the current year.
How much total federal income tax is paid by these two corporations for the year?
a. $30,000 b. $35,000 c. $44,500 d.
$61,250 e. Other D
4. [Pg. 8-8, Sec. 1501, 1504] See preceding question. May these corporations file a consolidated tax return? a. Yes b. No B
5. [Chapter 2. Pg. 2-24, Sec. 6655] Compliance-estimated taxes.
A corporation’s total federal income tax liability after credits was $30,000 for the preceding year. The total federal to be paid for 2013 to avoid a penalty for underpayment of estimated tax for the current year is? a. $18,000 b.
$20,000 c. $27,000 d. $30,000 D
6. [Chapter 2. Pg. 2-24, Sec. 6081] Compliance-return due date. A calendar year corporation obtains an automatic six-month extension to file its 2013 corporate income tax return.
The corporation should file the return by: a. March 15, 2014 b.
April 15, 2014 c. September 15, 2014 d. October 15, 2014 C
7.
[Pg. 8-8, Sec. 1501, 1504(a)] Consolidated returns may be filed a. Either by parent-subsidiary corporations or by brother-sister corporations. b. Only by corporations that formally request advance permission from the IRS. c. Only by parent-subsidiary affiliated groups. d. Only by corporations that issue their financial statements on a consolidated basis.
8.
[Pg. 8-8, Sec. 1501, 1504(a)] The filing of consolidated returns is available only to a. Brother-sister corporations. b. Parent-subsidiary affiliated groups. c. Corporations that formally request advance permission from the IRS. d. Corporations that issue their financial statements on a consolidated basis.
C
B
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9.
[Pg. 8-8, Sec. 1501, 1504(a)] The filing of consolidated returns is available a. Only to parent-subsidiary corporations. CPA NOV. 1985 b. Only to brother-sister corporations. c. Either to parent-subsidiary corporations or to brother-sister corporations. d. Neither to parent-subsidiary corporations nor to brother-sister corporations.
A
10.
[Pg. 8-8, Sec. 1501, 1504(a)] The minimum total voting power that a parent corporation must have in a subsidiary's stock in order to be eligible for the filing of a consolidated return is a. 20% b. 50% c. 51% d. 80% D
11. [Pg. 8-27+, Example 16] In 2011, Parent bought all of the stock of Local Corp, which continued to operate as a subsidiary of Parent. They have provided the following for computation of consolidated taxable income.
Year - 20124
Gross income from operations
Interest income
MACRS depreciation
Other deductible operating expenses
Separate taxable income
Section 1231 gain
Capital loss
Parent
300,000
17,000
(22,000)
(200,000)
95,000
70,000
Local Corp. Consolidated
200,000
(5,000)
(203,000)
(8,000)
(62,000)
Consolidated taxable income
What is consolidated taxable income for 2014? a. $77,000 b. $87,000 c. $95,000 d. $165,000 C
12. [Pg. 8-18 8-29 & 30, Example 34, See web posting of one-page document for inventory inter co. sales.]
Potter Corp. and Sly Corp. file consolidated tax returns. In January 2013, Potter sold land, with a basis of
$60,000 and a fair value of $75,000, to Sly for $75,000. Sly sold the land in December 2014 for $125,000. In the consolidated group’s 2014 and 2013 tax returns, what amount of gain should be reported for these transactions in the consolidated return?
2014 a. $25,000 b. $50,000
2013
$40,000
$0
2014 c. $50,000 d. $65,000
2013
$25,000
$0
D
See Reg. 1.1502-13 Posted on the web
13.
[Pg. 8-18 8-29 & 30, Example 34, See web posting of one-page document for inventory inter co. sales.]
Parent Corp. and Subsidiary Corp. file consolidated returns on a calendar-year basis. In January 2013,
Subsidiary sold land, which it had used in its operations, to Parent for $75,000. Immediately before this sale,
Subsidiary's basis for the land was $45,000. Parent held the land primarily for sale to customers in the ordinary course of business. In July 2014, Parent sold the land to Dubin, an unrelated individual, for $90,000.
In determining the consolidated Section 1231 net gain for 2014, how much should Subsidiary take into account as a result of the 2013 sale of the land from Subsidiary to Parent? a. $45,000 b. $30,000 c. $22,500 d. $15,000 B
14.
[Pg. 8-21, Sec. 1501, 1504(a)] In the filing of a consolidated tax return for a corporation and its wholly owned subsidiaries, inter-company dividends between the parent and subsidiary corporations are
A a. Not taxable. b. Included in taxable income to the extent of 20% c. Included in taxable income to the extent of 80%. d. Fully taxable.
15.
[Chapter 2. Pg. 2-18, 8-21, Sec. 243] In 2014, Portal Corp. received $100,000 in dividends from Sal Corp., its 80%-owned subsidiary. What minimum net amount of dividend income (after DRD) that should Portal include in its 2014 separate tax return? a. $100,000 b. $ 80,000 c. $ 70,000 d. $0 D
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16.
[Chap 2. Pg. 2-18, 8-21, Sec. 243] In the consolidated income tax return of a corporation and its whollyowned subsidiary, what percentage of cash dividends paid by the subsidiary to the parent is tax-free? a. 0%. b. 70%. c. 80%. d. 100%. D
17.
[Sec. 243] Ace Corp. files a consolidated return with its 100% owned subsidiary, Barr Corp. Barr paid a cash dividend of $10,000 to Ace. How much of the dividend is taxable on consolidated return? a. $0 b. $1,500 c. $8,500 d. $10,000 CPA MAY-84 A
18.
Bank Corp. owns 40% of Shore Corp.'s outstanding capital stock. Shore's capital stock consists of 50,000 shares of common stock issued and outstanding. Shore's net income was $150,000 for the current year.
During the current year, Shore declared and paid dividends of $60,000.
In conformity with generally accepted accounting principles, Bank recorded the following entries for the year:
Investment in Shore Corp. common stock
Equity in earnings of subsidiary
Cash
Investment in Shore Corp. common stock
Debit
60,000
24,000
Credit
60,000
24,000
In its separate tax return, Bank should report income from its subsidiary (Before div. received deduction) of. a. $24,000 b. $60,000 c. $9,600 d. $0 (CPAN95#13) A
19. [Pg. 8-9 & 30, See web posting of one-page document for inventory inter co. sales.] Intercompany sale of land between parent corp. and its subsidiary: SCorp.
2011 PCorp bought land at a cost of
2012 PCorp sells the land to SCorp for
$ 70
$ 100
2013 SCorp sells the land to Outsider for $ 110
How are the gains reported after Consolidation Adjustments?
2012 2013
A a b c d
PCorp
$30
S Corp PCorp
$30
$40
SCorp
$10
$10
$40
See Reg. 1.1502-13 Posted on the web
20.
[Pg. 8-30, example 34] Intercompany sale of land between parent corp. and subsidiary.
2012 PCorp bought land at a cost of $70
2013 PCorp sells the land to Scorp for $100
SCorp sells the land to Outsider
2014 for
$90
How are the gains reported after Consolidation Adjustments?
2013 2014
A
B
C
D
PCorp
$30
S Corp PCorp SCorp
($10)
($10)
$20
See Reg. 1.1502-13 Posted on the web
$30
$20
A
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21.
[Pg. 8-15, Sec. 1501, 1504] How do the members of a consolidated group split among them the benefits of the lower tax brackets on the first $75,000 of taxable income? a. According to their relative net asset holdings. B b. According to an internal tax-sharing agreement. c. According to an internal tax-sharing agreement, which may be modified by the IRS upon audit. d. According to a tax-sharing agreement that must be approved by the IRS by the end of the first quarter of the tax year. e. Using some other method.
22.
[Pg. 8-6] With regard to consolidated tax returns, which of the following statements is correct? a. Operating losses of one group member may be used to offset operating profits of the other members included in the consolidated return b. Only corporations that issue their audited financial statements on a consolidated basis may file consolidated returns. c. Of all intercompany dividends paid by the subsidiaries to the parent, 70% are excludable from taxable income on the consolidated return d. The common parent must directly own 51% or more of the total voting power of all corporations included in the consolidated return.
A
23. [Pg. 6-27, 28, Sec. 338] Parent Corporation owns Local Corporation with the following balance sheet.
Parent organized Local Corporation and it has always been a C corporation.
Local Corporation
Cash
Receivables
Fixed Assets
Total Assets
Common Stock
Par value per share
Number of shares issued
Issue Price per share
Total Proceeds from stock issue
Common Stock
Additional Paid in Capital
Retained Earnings (also E & P)
Total Owner Equity
Book Value Market Value
$ 500,000 $ 500,000
100,000 100,000
400,000 1,400,000
$10
$ 1,000,000 $ 2,000,000
10,000
$30
$ 300,000
100,000
200,000
700,000
$ 1,000,000 $ 2,000,000
Parent’s basis in the stock has been increased by $700,000 as a result of reporting $700,000 of subsidiary income as part of consolidated taxable income. Suppose Huge Corp. buys all of the Local Corporation stock for
$2,000,000 and Local Corporation makes an election under 338(h)(10).
What will be the basis of the fixed assets owned by Local Corp. after the company is acquired by Huge Corp? a. $400,000 b. $1,400,000 c. $2,000,000 B
24. [Pg. 7-30 & 31, Sec. 382] On December 31, last year, a group of investors paid $2 million for 100 percent of
Brio’s stock. Among its other tax attributes, Brio had a $1,270,000 NOL carryforward.
The long-term tax-exempt federal interest rate was 6 percent on the date of Brio’s ownership change.
What is the amount of taxable income for this year if taxable income before NOL deduction was $800,000. a. $800,0000 b. $680,000 c. $500,000 d. Other B
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Compliance-Book Tax Differences.
25. [Sec. 103, 265] Starke Corp., an accrual-basis calendar year corporation, net income (GAAP) of $380,000.
Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What is Starke's taxable income? a. $330,000 b.
$500,000 c. $502,000 d. $550,000 CPANov1995 C
26. [Sec. 103, 265] For the current year, Maple Corp.'s book income, before federal income tax, was $100,000.
Included in this $100,000 were the following:
Provision for state income tax
Interest earned on U.S. Treasury Bonds
Interest expense on bank loan to purchase U.S. Treasury Bonds
Maple's taxable income for the current year was: a. $ 96,000 b. $ 97,000 c. $ 100,000 d. $ 101,000
$1,000
6,000
2,000
(CPA-May-1990) C
27.
[Sec. 166] A company reported net income before taxes of $40,000 on its GAAP income statement for 2006.
For financial accounting purposes, the company charges 4% of gross sales to bad debts expense each year. The company was started in 2005. The balance in the Allowance for Bad Debts, was $3,000 at 12/31/05 and $4,000 at 12/31/06. What is the amount of taxable income for 2006? a. $ 40,000 b. $41,000 c. $38,000 d. $39,000 e. none of these B
28.
[Sec. 166] The Charlotte Corporation provides this information at the end of 2014.
Sales (All on credit)
Expenses other than bad debts
Bad debts (Provision-5% of Sales)
$80,000
5,000
$ 100,000
Total Expenses 85,000
Net Income before Taxes $ 15,000
Accounts Receivable
Beginning
$ 80,000
Ending
$ 85,000
Allowance for Bad Debts $ 5,000
What is Charlotte Corporation’s taxable Income for 2014? a. $15,000 b.
$17,000 c. $13,000
$ 7,000 d. other B
29.
Repeat preceding question for the Charlotte Corp. How much cash was collected from customers in 2014? a. $100,000 b.
$90,000 c. $95,000 d. $92,000 D
30. [Sec. 166] In 2014 (first year of operations), Big Corp. had taxable income of $400,000. Big reported bad debts expense of $3,000 in its financial statements, but only wrote-off bad debts totaling $2,000. Big expects to have taxable income of about $400,000 for the foreseeable future.
What is reported on its financial statements for 2014? a. Deferred tax asset of $340 c. Deferred tax liability of $340 b.
Deferred tax asset of $660 d.
Deferred tax liability of $660
A
31.
Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 1, 2014. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies.
During 2014, South earned $80,000 and paid dividends of $50,000. What amount of gross income should Grant include in its 2014 Federal income tax return as a result of the investment? a. $15,000 b. $24,000 c.
$35,000 d.
$50,000 e. $80,000 CPA-95 A
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32. For the current year, Hurd, Inc. reported book income of $900,000 before income taxes.
Selected information for the current year is available from Hurd's records as follows:
Interest income on municipal bonds $ 70,000
Depreciation claimed on tax return in excess of depreciation per books
Warranty expense on the accrual basis
Actual warranty expenditures
$130,000
$ 40,000
$ 60,000
Hurd's income tax rate is 40%.
Hurd's current liability (for current year) for income taxes (before reduction for estimated taxes paid) is: a. $272,000 b. $290,000 c.
$332,000 d.
$360,000 e. Other Amount A
33. [Sec. 101, 111] For the current year, Bard Corp.'s income per accounting records, before federal income taxes, was $450,000 and included the following:
State corporate income tax refunds
Life insurance proceeds on officer's death
$ 4,000
15,000
Net loss on sale of securities bought for investment four years ago
Bard's taxable income for the current year was: a. $435,000 b. $451,000 c.
$455,000 d.
$470,000
20,000
CPA-87 C
34. [Sec. 274(n)] Bosse Corporation’s records reflect the following for the current year:
Net income per books
Tax-exempt interest
Excess charitable contributions
$76,000
4,000
2,000
Meals in excess of 50% limitation
Accrued federal income taxes
8,000
18,000
What is the amount of Bosse's taxable income reported on Schedule M-1 of its corporate income tax?
a.
$92,000 b. $100,000 c.
$104,000 d.
$108,000 B
35. Smith Corporation owns only 25% of the voting stock of Jones Corporation, but exercises significant influence over its operating and financial policies. The tax effect of differences between taxable income and pretax accounting income attributable to undistributed earnings of Jones should be: a. Accounted for as a permanent difference B b. Accounted for as a timing difference c. Ignored because it must be based on estimates and assumptions d. Ignored because Smith holds less than 51% of the voting stock of Jones
36. Manufacturer provides a 3-year warranty. Financial statements are for its first year:
Sales $1,000,000
Cost of sales
Expenses
600,000
300,000
Net income before taxes $100,000
Expenses above include a reserve of $20,000
[Reserve is for future repair costs on units sold in the current year.]
What is taxable income for current year? a. $100,000 b. $80,000 c.
$120,000
37. Repeat preceding question. What is the balance of deferred asset or liability? a. Deferred tax asset of $8,000 c. Deferred tax liability of $8,000 b.
Deferred tax asset of $12,000 d.
Deferred tax liability of $12,000
C
A
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38. A company reported net income before taxes of $40,000 on its GAAP income statement for 2014.
For financial accounting purposes, each year the company adds to its estimated warranty liability account 5% of gross sales. The company was started in 2013.
The balance in the estimated warranty liability account was $4,000 at 12/31/2013 and $6,000 at 12/31/2014.
What is the amount of taxable income for 2014? a. $ 41,000 b. $42,000 c. $38,000 d. $39,000 e. none of these B
39.
Charlotte Corp. provided this information for its first year of operations.
Revenue
Gross meals and entertainment expense
Provision for bad debts
Other expenses
Write-off of bad debts
$900,000
20,000
9,000
480,000
5,000
The entry for the write-off of receivables included a debit to the allowance account and a credit to accounts receivable. The expenses above do not include any accrual for federal income taxes or any payment of such taxes. There is no state income tax. The company expects no change in profitability or income tax rates in future years. What is the amount of income tax expense in the GAAP income statement? a. $132,940 b. $136,000 c. $136,340 d.
$137,000 e. $137,700 C
40.
Refer to the preceding question. What is the amount of income tax payable at the end of the year? a. $132,940 b. $136,000 c. $136,340 d.
$137,000 e. $137,700 E
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