ACCT 341 Exam 1 Breanna Morrow Questions/Answers (Latest Grade )

Breanna Morrow Professor Hollies Mercy College- Accounting Program ACCT 341- Exam #1 Part I- True/False Questions (20 points). 1. The United States Federal government has a provision in the Constitution which precludes deficit spending. a. True b. False 2. Longer class lives for depreciable property and the required use of straight- line method of depreciation would likely dampen the tax incentive for purchasing capital assets. a. True b. False 3. The favorable treatment of research and development expenses is one means of controlling the economy. a. True b. False 4. One Internal Revenue Code section enables shareholders in a small business corporation to obtain an ordinary deduction for any loss recognized on a stock investment. a. True b. False 5. Although a corporation is subject to a Federal income tax, a partnership is not. a. True b. False 6. Alabama and South Carolina are community property states. a. True b. False 7. Taxpayers may read Committee Reports to determine the intent of Congress. a. True b. False 8. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income – $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income. a. True b. False 9. Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year. a. True b. False 10. Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle’s short-term capital loss on his individual tax return. a. True b. False 11. Double taxation of corporate income results because dividend distributions are included in a shareholder’s gross income but are not deductible by the corporation. a. True b. False 12. Thrush Corporation files Form 1120, which reports taxable income of $200,000 in the current year. The corporation’s tax is $42,000. a. True b. False 13. For tax years beginning before 2018, the corporate marginal income tax rates ranged from 15% to 39%, while the individual marginal income tax rates ranged from 10% to 39.6%. a. True b. False 14. 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. a. True b. False 14. As a general rule, C corporations must use the cash method of accounting. However, under several exceptions to this rule (e.g., average annual gross receipts of $25 million or less for the most recent 3-year period), a C corporation can use the accrual method. a. True b. False 15. 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%). a. True b. False 16. Similar to like-kind exchanges, the receipt of “boot” under § 351 can cause loss to be recognized. a. True b. False . 17. In a § 351 transfer, a shareholder receives boot of $10,000 but ends up with a realized loss of $3,000. Only $7,000 of the boot will be taxed to the shareholder. a. True b. False 18. If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received. a. True b. False 19. A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation’s E & P. a. True b. False 20. All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income. a. True b. False Part II- Multiple Choice Questions (20 points). 1. Which provision could best be justified as encouraging small business? a. Ordinary loss allowed on § 1244 stock. b. Percentage depletion. c. Charitable contributions deduction. d. Interest deduction on home mortgage. e. None of the above. 2. Which state is not a community property state? a. Arizona. b. Texas. c. New Mexico d. Virginia e. None of the above. 3. Federal tax legislation generally originates in what committee? a. House Budget Committee. b. Senate Finance Committee. c. House Ways and Means Committee. d. House Taxation Committee. e. None of the above. 4. Which citation is considered to be a statutory (legislative) citation? a. Ltr. Rul. . b. Ann. 94-5, 1994-2 I.R.B. 39. c. Reg. § 1.1014-1(c)(1). d. § 351. e. None of the above. 5. Revenue Procedures are published in the: a. Congressional Record. b. Federal Revenue Bulletin. c. Internal Revenue Bulletin. d. I.R.S. Digest. e. None of the above. 6. Regarding Technical Advice Memoranda, which statement is incorrect? a. Issued by the National Office of IRS. b. Most often deal with a completed transaction. c. May be cited and used as precedent. d. Issued with multi-digit file numbers. e. None are incorrect. 7. Which of the following is an administrative source of tax law? a. Rev. Rul. 2010-19. b. Joint Conference Committee Report. c. Section 12(a) of the Internal Revenue Code. d. All of the above. e. None of the above. 8. Copper Corporation, a C corporation, had gross receipts of $25 million in 2015, $26 million in 2016, and $23 million in 2017. Gold Corporation, a personal service corporation (PSC), had gross receipts of $24 million in 2015, $27 million in 2016, and $25 million in 2017. Which of the corporations will be allowed to use the cash method of accounting in 2018? a. Copper Corporation only. b. Gold Corporation only. c. Both Copper Corporation and Gold Corporation. d. Neither Copper Corporation nor Gold Corporation. e. None of the above. 9. In 2018, Bluebird Corporation had net income from operations of $100,000. Further, Bluebird recognized a long-term capital gain of $30,000, and a short- term capital loss of $45,000. Which of the following statements is correct? a. Bluebird Corporation will have taxable income in 2018 of $100,000 and will have a net capital loss of $15,000 that can be carried back 3 years and forward 5 years. b. Bluebird Corporation may use the capital loss to offset the capital gain and must carry the net capital loss of $15,000 forward five years as a short-term capital loss. c. Bluebird Corporation may deduct $33,000 of the capital loss in 2018 and may carry forward the remainder of the capital loss indefinitely to offset capital gains. d. Bluebird Corporation will have taxable income in 2018 of $85,000. e. None of the above. 10. Beige Corporation, a C corporation, purchases a warehouse on August 1, 2002, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 12, 2018, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty? a. Ordinary income of $0 and § 1231 gain of $611,750. b. Ordinary income of $411,750 and § 1231 gain of $200,000. c. Ordinary income of $82,350 and § 1231 gain of $529,400. d. Ordinary income of $117,650 and § 1231 gain of $494,100. e. None of the above. 11. Grackle Corporation, a personal service corporation, had $230,000 of net active income, $40,000 of portfolio income, and a $250,000 passive activity loss during the year. How much is Grackle’s taxable income? a. $20,000 b. $40,000 c. $270,000 d. $520,000 e. None of the above 12. Wanda is the Chief Executive Officer of Pink corporation, a publicly traded, calendar year corporation. For the current year, Wanda's compensation package consists of: Cash compensation $2.5 million Nontaxable fringe benefits 250,000 Taxable fringe benefits 150,000 Bonus tied to company performance 2 million How much of Wanda's compensation is deductible by Pink Corporation? a. $1,000,000. b. $1,250,000. c. $3,250,000. d. $4,900,000. e. None of the above. 13 Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000), executed by Green Corporation and made payable to Jane. As a result of the transfer: a. Jane recognizes no gain. b. Jane recognizes a gain of $75,000. c. Jane recognizes a gain of $270,000. d. Jane recognizes a gain of $320,000. e. None of the above. 14. Gabriella and Juanita form Luster Corporation. Gabriella transfers cash of $50,000 for 50 shares of stock, while Juanita transfers information concerning a proprietary process (basis of zero and fair market value of $50,000) for 50 shares of stock. a. The transfers to Luster are fully taxable to both Gabriella and Juanita. b. Juanita must recognize gain of $50,000. c. Because Juanita is required to recognize gain on the transfer, Gabriella also must recognize gain. d. Neither Gabriella nor Juanita will recognize gain on the transfer. e. None of the above. 15. Seoyun and Nicole form Indigo Corporation with the following transfers: inventory from Seoyun (basis of $360,000 and fair market value of $400,000) and improved real estate from Nicole (basis of $320,000 and fair market value of $375,000). Nicole, an accountant, agrees to contribute her services (worth $25,000) in organizing Indigo. The corporation’s stock is distributed equally to Seoyun and Nicole. As a result of these transfers: a. Indigo can deduct $25,000 as a business expense. b. Nicole has a recognized gain of $55,000 on the transfer of the real estate. c. Indigo has a basis of $360,000 in the inventory. d. Indigo has a basis of $375,000 in the real estate. e. None of the above. 16. Ann transferred land worth $200,000, with a tax basis of $40,000, to Brown Corporation, an existing entity, for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares. With respect to the transfer: a. Ann has no recognized gain. b. Brown Corporation has a basis of $160,000 in the land. c. Ann has a basis of $200,000 in her 100 shares in Brown Corporation. d. Ann has a basis of $40,000 in her 100 shares in Brown Corporation. e. None of the above. 17. Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. Federal income taxes paid $110,000 Net operating loss carryforward deducted currently 70,000 Gain recognized this year on an installment sale from a prior year 44,000 Depreciation deducted on tax return (ADS depreciation would have been $10,000) 40,000 Interest income on Iowa state bonds 8,000 Rose Corporation’s current E & P is: a. $254,000. b. $214,000. c. $194,000. d. $104,000. e. None of the above. 18. Which of the following statements is incorrect with respect to determining current E & P? a. All tax-exempt income should be added back to taxable income. b. Dividends received deductions should be added back to taxable income. c. Current year charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income. d. Federal income tax refunds should be added back to taxable income. e. None of the above statements are incorrect. 19. Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2018, for a total of $3,200. Tungsten filed its 2018 tax return in 2019 and the return showed a tax liability $4,200. At the time of filing, March 15, 2019, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten’s E & P? a. Increase by $1,000 in 2018. b. Increase by $1,000 in 2019. c. Decrease by $1,000 in 2018. d. Decrease by $1,000 in 2019. e. None of the above. 20. Stacey and Eva each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Eva on May 1. If Parakeet’s current E & P is $60,000, how much is allocated to Eva’s distribution? a. $5,000 b. $10,000 c. $18,000 d. $30,000 e. None of the above Part III- Problems (45 points).Choose five. 1. Ostrich, a C corporation, has a net short-term capital gain of $20,000 and a net long-term capital loss of $90,000 uring 2018. Ostrich also has taxable income from other sources of $1 million. Prior years’ transactions included the following: 2014 net short-term capital gains $20,000 2015 net long-term capital gains 15,000 2016 net short-term capital gains 25,000 2017 net long-term capital gains 5,000 a. How are the capital gains and losses treated on Ostrich’s 2018 tax return? Net short-term capital gain $ 20,000 Net long-term capital loss (90,000) Net capital loss ($70,000) The net capital loss of $70,000 is not deductible in 2018 but must be carried back to the three preceding years, applying it to 2014, 2015, and 2016, in that order. Such net capital loss is carried back or forward as a short-term capital loss. b. Determine the amount of the 2018 net capital loss that is carried back to each of the previous years. 2 018 net capital loss ($70,000) Offset against— 2014 net long-term capital gains $15,000 2015 net short-term capital gains 25,000 2016 net long-term capital gain s5,000 Total carrybacks $45,000 c. Compute the amount of capital loss carryover, if any, and indicate the years to which the loss may be carried. 25,000 ($70,000 –$45,000) STCL carryover to 2019, 2020, 2021, 2022, and 2023, in that order. d. If Ostrich were a proprietorship, how would Ellen, the owner, report these transactions on her 2018 tax return? Ellen would net these transactions with all other capital transactions for 2018. Assuming these were her only capital transactions in 2018, she would offset $20,000 of capital losses against the capital gains and deduct an additional $3,000 in capital losses on her return. The remaining $67,000 ($90,000 – $20,000 –$3,000) would be carried forward indefinitely as a LTCL. 2. Warbler Corporation, an accrual method regular corporation, was formed and began operations on March 1, 2018. The following expenses were incurred during its first year of operations (March 1 - December 31, 2018): Expenses of temporary directors and organizational meetings $25,000 Incorporation fee paid to state 2,000 Expenses incurred in printing and selling stock certificates 10,000 Accounting services incident to organization 12,000 a. Assuming a valid election under § 248 to amortize organizational expenditures, what is the amount of Warbler’s deduction for 2018? Warbler has qualifying organizational expenditures of $39,000 [$25,000 (expenses of temporary directors and organizational meetings) + $2,000 (incorporation fee)+ $12,000 (accounting fees)]. Expenses related to the printing or selling of stock or other securities do not qualify as organizational expenditures. Warbler’s 2014 deduction for the organizational expenditures is$6,889 {$5,000 + [($39,000 –$5,000)/180 ×10 months]} b. Same as a., except that Warbler also incurred in 2018 legal fees of $15,000 for the drafting of the corporate charter and bylaws. What is the amount of Warbler’s 2018 deduction for organizational expenditures? Warbler now has qualifying organizational expenditures of $54,000 [$39,000 (as computed in a., above) +$15,000 (legal fees)]. Warbler’s 2014 deduction for the organizational expenditures is $3,944 {$1,000 + [($54,000 – $1,000)/180 ×10 months]}. The $5,000 immediate expensing amount is reduced to the extent qualifying organizational expenditures exceed $50,000; thus, only $1,000 of the expenditures are immediately deductible, and the remainder of the expenditures are amortized over 180 months. 3. Nick exchanges property (basis of $100,000; fair market value of $3 million), for 65% of the stock of Yellow Corporation. The other 35% of the stock is owned by Gloria who acquired it several years ago. What are the tax consequences to Nick? Nick has a taxable gain of $2,900,000. Section 351 does not apply because Nick failed to receive at least 80% control of Yellow Corporation. Therefore, the transaction is a taxable exchange. Nick has a $3 million basis in his stock and Yellow Corporation has a basis of $3 million in the property. 4. Tan Corporation desires to set up a manufacturing facility in the western part of the United States. After considerable negotiations with Butte, Montana, Tan accepts the following offer: land (fair market value of $4.5 million) and cash of $1.5 million. a. How much income, if any, must Tan recognize? b. What basis will Tan Corporation have in the land? c. Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment? 5. Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city. Ann, the sole shareholder, contributes equipment (basis of $70,000 and fair market value of $200,000) to help Orange in its new operations. What are the tax consequences of these transfers to Orange Corporation? Orange Corporation will not have income on the transfers from Lark City or Ann. Ho wever, its basis in the donated land is zero. In addition, Orange must reduce its basis in the purchased land and building from $500,000 to $400,000. The basis of any property acquired with money received from a nonshareholder during a19-month period beginni ng on the day the contribution is received is reduced by the amount of the contribution. Orange will have a basis of $70,000 in the equipment it receives from Ann. Finally, the t ransfer, which is a capital contribution by Ann, increases her stock basis in Orange by $ 70,000. 6. Scarlet Corporation is an accrual basis, calendar year corporation. Scarlet distributes inventory (basis of $20,000; fair market value of $40,000) to Frank, its shareholder. Assuming that Scarlet has $500,000 of current E & P, what is the impact of the distribution on Scarlet Corporation and on Frank? Scarlet’s E & P is increased by the $20,000 gain [$40,000 (fair market value) – $20,000 (adjusted basis)] and decreased by the $40,000 fair market value of the distribution. Frank has dividend income of $40,000 Part IV- Essays (15 points). 1. Dawn is the sole shareholder of Thrush Corporation, a C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk. C corporation is a separate taxable entity; thus, Thrush Corporation is taxed on the $350,000 of earnings. Income of a C corporation has no effect on the shareholders until such time a dividend is paid. When dividends are paid, shareholders must report dividend income on their tax returns. Thus, Dawn is taxed on $75,000 of dividends and the 20%/15%/0% preferential tax rate applies with respect to the dividends. Generally, an S is not subject to an entity level Federal income tax. Instead, the corporation’s income, gains, deductions, and losses are passed through to and reported by the shareholders on their tax returns. Thus, Swallow reports the $350,000 of earnings on its tax return (Form 1120S), but pays no income tax. Kirk is taxed on the $350,000 of earnings from Swallow on his individual income tax return (Form 1040). Distributions from S corporations are not taxable to the shareholder (to the extent of stock basis). Thus, Kirk is not taxed on the $75,000 distribution from Swallow. 2. Explain the rules regarding the accounting periods available to corporate taxpayers. 3. Explain the Golsen doctrine. Because the Tax Court is a national court, it decides cases from all parts of the country. For many years, the Tax Court followed a policy of deciding cases based on what it thought the result should be, even though its decision might be appealed to a U.S. Circuit Court of Appeals that had previously decided a similar case differently. A number of years ago this policy was changed in the Golsen decision. Now the Tax Court will decide a case as it feels the law should be applaudingly the Circuit Court of Appeals of appropriate jurisdiction has not yet passed on the issue or has previously decided a similar case in accord with the Tax Court’s decision. If the Circuit Court of Appeals of appropriate jurisdiction has previously held otherwise, the Tax Court will conform under the Golsen rule even though it disagrees with the holding