ACC 455 Practice: Week 4 Knowledge Check

Complete the Week 4 Knowledge Check in McGraw-Hill Connect.

Which of the following statements about ASC 740 as it relates to uncertain tax positions is true?

Multiple Choice

ASC 740 deals with all tax benefits involving income and non-income taxes.

ASC 740 deals with whether a recognized income tax benefit will be realized.

ASC 740 deals with recognized tax benefits related to income tax positions claimed on a filed tax return.

ASC 740 deals with recognized tax benefits related to income tax positions regardless of whether the item is taken on a filed tax return.

Which of the following statements best describes the objective(s) of ASC 740?

Multiple Choice

To compute a corporation’s current income tax liability or benefit.

To recognize deferred tax liabilities and assets.

To report permanent differences in the balance sheet.

To both compute a corporation’s current income tax liability or benefit and to recognize deferred tax liabilities and assets.

Which of the following items does not result in a permanent difference?

Multiple Choice

Accelerated tax depreciation in excess of straight-line book depreciation.

Interest income from a tax-exempt municipal bond.

Dividend received deduction on the income tax return.

Excess tax benefits from the exercise of an NQO.

Which of the following best describes the focus of ASC 740?

Multiple Choice

ASC 740 uses an “asset and liability approach” that focuses on the balance sheet.

ASC 740 uses an “income and expense approach” that focuses on the income statement.

ASC 740 uses a “taxes paid or refunded approach” that focuses on the statement of cash flows.

ASC 740 uses a “permanent differences approach” that focuses on the effective tax rate reported in the income tax note to the financial statements.

Which of the following statements best describes the ASC 740 process for evaluating a company’s uncertain tax positions?

Multiple Choice

ASC 740 requires a company to complete a two-step analysis every time it evaluates its uncertain tax positions.

ASC 740 requires a company to complete step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more-likely-than-not that that its tax position will be sustained on its merits (recognition).

ASC 740 allows a company to take into account the probability of audit by a tax authority in step 1 (measurement) in its evaluation of its uncertain tax positions.

ASC 740 allows a company to record a tax benefit from an uncertain tax position only if it is probable the benefit will be sustained on audit by a tax authority.

Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference in the allowance for bad debts account. This basis difference is characterized as:

Multiple Choice

Deductible temporary difference.

Taxable temporary difference.

Favorable permanent difference.

Unfavorable permanent difference.

Which of the following statements best describes a valuation allowance as it relates to accounting for income taxes?

Multiple Choice

A valuation allowance is a contra account to deferred tax assets only.

A valuation allowance is a contra account to deferred tax liabilities only.

A valuation allowance is a contra account to deferred tax assets and liabilities.

A valuation allowance is a contra account to noncurrent deferred tax assets only.

Green Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $50,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Green subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Green’s cash tax rate is:

Multiple Choice

21%.

20.475%.

19.95%

19.425%.

Smith Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Smith’s deferred income tax expense or benefit would be:

Multiple Choice

Net deferred tax expense of $6,300.

Net deferred tax benefit of $6,300.

Net deferred tax expense of $14,700.

Net deferred tax benefit of $14,700.

Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable temporary difference of $200,000 (taxed at 34%). During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000. At the beginning of the year, Congress reduced the corporate tax rate to 21%. Lynch’s deferred income tax expense or benefit for the current year would be:

Multiple Choice

Net deferred tax benefit of $6,300.

Net deferred tax expense of $6,300.

Net deferred tax benefit of $32,300.

Net deferred tax expense of $32,300.

Grand River Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $100,000, unfavorable temporary differences of $10,000, and favorable permanent differences of $80,000. The corporation’s current income tax expense or benefit would be:

Multiple Choice

$105,000.

$88,200.

$86,100.

$69,300.

Which of the following statements best describes the disclosure of a company’s deferred tax assets and liabilities?

Multiple Choice

Deferred tax assets and liabilities must be separately disclosed in the balance sheet.

All deferred tax assets and liabilities are treated as noncurrent and can be netted and disclosed as one aggregate amount on the balance sheet.

Current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities can always be netted on the balance sheet.

All deferred tax assets and liabilities are treated as noncurrent and can be netted on the balance sheet only if they arise in the same tax jurisdiction.

Tuna Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Tuna subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Book equivalent of taxable income is:

Multiple Choice

$1,125,000.

$1,110,000.

$1,015,000.

$985,000.

Which of the following statements is true?

Multiple Choice

ASC 740 focuses on the income tax expense or benefit on the income statement.

ASC 740 focuses on the balances in the deferred tax assets and liabilities on the balance sheet.

ASC 740 focuses on the income taxes paid or refunded in the Statement of Cash Flows.

ASC 740 focuses on the computation of a company’s effective tax rate in the income tax note to the financial statements.

Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Book equivalent of taxable income is:

Multiple Choice

$440,000.

$400,000.

$360,000.

$330,000.

Marlin Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Marlin subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Marlin’s current income tax expense or benefit would be:

Multiple Choice

$236,250 tax expense.

$233,100 tax expense.

$210,000 tax expense.

$205,800 tax expense.

A valuation allowance is recorded against a deferred tax asset when:

Multiple Choice

It is probable that the deferred tax asset will not be realized in the future.

It is more likely than not that the deferred tax asset will not be realized in the future.

It is highly likely the deferred tax asset will not be realized in the future.

It is remote the deferred tax asset will not be realized in the future.

What confidence level must management have that a tax position will be sustained on audit before it can recognize any portion of the related deferred tax asset under ASC 740?

Multiple Choice

More likely than not.

Reasonable basis.

Substantial authority.

Probable.

Which of the following statements is true?

Multiple Choice

A change in capitalized inventory costs under §263A always produces an increase in a deferred tax asset.

A change in capitalized inventory costs under §263A always produces a decrease in a deferred tax asset.

A change in capitalized inventory costs under §263A can produce an increase or a decrease in a deferred tax asset.

A change in capitalized inventory costs under §263A always produces a permanent difference.

Costello Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Costello received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Costello’s deferred income tax expense or benefit would be:

Multiple Choice

$7,350 net deferred tax expense.

$7,350 net deferred tax benefit.

$7,950 net deferred tax benefit.

$7,980 net deferred tax expense.

Which of the following statements concerning the classification of deferred tax assets and liabilities is true?

Multiple Choice

A deferred tax asset is classified as noncurrent if the company expects the future tax benefit to be received more than 12 months from the balance sheet date.

All deferred tax assets and liabilities are treated as noncurrent.

A deferred tax asset related to a bad debt reserve is classified as current if the related accounts receivable is classified as a current asset.

A deferred tax asset related to inventory capitalization is classified as noncurrent if the company uses a FIFO accounting method and the inventory to which the deferred tax asset relates will not be treated as sold within 12 months from the balance sheet date.

Kedzie Company determined that the book basis of its liability for “other post-retirement benefits” (OPEB) exceeded the tax basis of this account by $10,000,000. This basis difference is characterized as:

Multiple Choice

Deductible temporary difference.

Taxable temporary difference.

Favorable permanent difference.

Unfavorable permanent difference.

Which of the following items is NOT a reconciling item in the income tax footnote?

Multiple Choice

Compensation deduction related to incentive stock options.

Compensation deduction related to nonqualified stock options that were expensed for financial accounting purposes.

Domestic production activities deduction.

State and local income taxes.

Knollcrest Corporation has a cumulative book loss over the past 36 months. Which of the following statements best describes how this fact enters into the valuation allowance analysis?

Multiple Choice

The book loss is considered sufficient negative evidence that a valuation must be recorded.

The book loss is considered negative evidence that must be evaluated along with other evidence as to whether a valuation allowance should be recorded.

The book loss is not considered negative evidence because it relates to book income and not taxable income.

A cumulative book loss is considered negative evidence only after a period of 60 months.

Weaver Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000 (taxed at 34%). During the year, Weaver reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. At the beginning of the year, Congress reduced the corporate tax rate to 21%. Weaver’s deferred income tax expense or benefit for the current year would be:

Multiple Choice

Net deferred tax benefit of $6,300.

Net deferred tax expense of $6,300.

Net deferred tax benefit of $6,700.

Net deferred tax expense of $6,700.

Catamount Company had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land’s fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in 20X3 would be:

Multiple Choice

No loss recognized and a reduction in E&P of $250,000.

$50,000 loss recognized and a reduction in E&P of $250,000.

$50,000 loss recognized and a reduction in E&P of $150,000.

No loss recognized and a reduction in E&P of $200,000.

Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carryforward to 20X4. The computation of the loss did not include a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation’s current earnings and profits for 20X3 would be:

Multiple Choice

($250,000).

($260,000).

($300,000).

($360,000).

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

Multiple Choice

$0 dividend income and a tax basis in the new stock of $100 per share.

$0 dividend income and a tax basis in the new stock of $60 per share.

$0 dividend income and a tax basis in the new stock of $40 per share.

$15,000 dividend and a tax basis in the new stock of $100 per share.

Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

Multiple Choice

$400,000.

$300,000.

$200,000.

$100,000.

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3. Pam’s income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam because of the stock redemption?

Multiple Choice

$25,000 capital gain and a tax basis in each of her remaining shares of $500.

$25,000 capital gain and a tax basis in each of her remaining shares of $100.

$50,000 dividend and a tax basis in each of her remaining shares of $100.

$50,000 dividend and a tax basis in each of her remaining shares of $50.

Which of the following statements best describes current earnings and profits?

Multiple Choice

Current earnings and profits is another name for a corporation’s retained earnings on its balance sheet.

Current earnings and profits is a precisely defined tax term in the Internal Revenue Code and represents a corporation’s economic income.

Current earnings and profits is an ill-defined tax concept in the Internal Revenue Code and represents a corporation’s economic income.

Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue Code.

Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000 utilized in 20X3, and gain of $50,000 recognized on the collection of cash from an installment sale that took place in 20X1. The corporation’s current earnings and profits for 20X3 would be:

Multiple Choice

$1,015,000.

$965,000.

$675,000.

$625,000.

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

Multiple Choice

100.

150.

200.

300.

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam’s shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

Multiple Choice

No reduction in E&P because of the exchange.

A reduction of $50,000 in E&P because of the exchange.

A reduction of $40,000 in E&P because of the exchange.

A reduction of $80,000 in E&P because of the exchange.

Madison Corporation reported taxable income of $400,000 in 20X3 and accrued federal income taxes of $136,000. Included in the computation of taxable income was regular depreciation of $200,000 (E&P depreciation is $60,000) and a net capital loss carryover of $20,000 from 20X2 utilized in 20X3. The corporation’s current earnings and profits for 20X3 would be:

Multiple Choice

$424,000.

$404,000.

$380,000.

$344,000.

Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband Tommy. Which of the following statements is true?

Multiple Choice

A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as an exchange for tax purposes.

A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as a dividend for tax purposes.

A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as an exchange if Tammy waives the family attribution rules and files a “triple i” agreement with the IRS.

A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as a dividend to the extent that the redemption exceeds Tammy’s tax basis in the redeemed shares.

Husker Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder’s tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3?

Multiple Choice

$200,000 dividend.

$100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain.

$100,000 dividend and $100,000 tax-free return of basis.

$0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain.

Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land’s fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:

Multiple Choice

$100,000 dividend and a tax basis in the land of $100,000.

$100,000 dividend and a tax basis in the land of $90,000.

Dividend of $90,000 and a tax basis in the land of $100,000.

Dividend of $90,000 and a tax basis in the land of $90,000.

Lansing Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?

Multiple Choice

100.

200.

250.

300.

Which of the following individuals is not considered “family” for purposes of applying the stock attribution rules to a stock redemption?

Multiple Choice

Parents.

Grandchildren.

Grandparents.

Spouse.

Aztec Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of negative $100,000. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

Multiple Choice

$300,000.

$200,000.

$100,000.

$0.

Which of the following statements is not considered a timing difference due to separate accounting methods for taxable income and E&P?

Multiple Choice

Dividends received deduction.

Installment gain recognized in current year related to a sale in a prior year.

Gain on sale of depreciable assets with higher E&P basis.

Section 179 expense.

Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder’s tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?

Multiple Choice

$300,000 dividend.

$100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain.

$100,000 dividend and $200,000 tax-free return of basis.

$0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain.

Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend?

Multiple Choice

A distribution will only be a dividend if total earnings and profits (current plus accumulated) is positive at the time of the distribution.

A distribution can never be a dividend if current earnings and profits are negative.

At a minimum, some portion of the distribution will be a dividend if current earnings and profits for the year are positive, even if accumulated earnings and profits are negative.

A distribution will never be a dividend if current earnings and profits for the year are negative, even if accumulated earnings and profits is positive.

Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam’s stock to be treated as an exchange under the “substantially disproportionate” test, what percentage of Club stock must Sam own after the redemption?

Multiple Choice

Any percentage less than 70 percent.

Any percentage less than 56 percent.

Any percentage less than 50 percent.

All stock redemptions involving individuals are treated as exchanges.

Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on a current year transaction treated as an installment sale of $250,000. The corporation’s current earnings and profits for 20X3 would be:

Multiple Choice

($500,000).

($720,000).

($510,000).

($260,000).

A calendar-year corporation has positive current E&P of $500 and accumulated negative E&P of $1,200. The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true?

Multiple Choice

The distribution will not be a dividend because total earnings and profits is a negative $700.

The distribution may be a dividend, depending on whether total earnings and profits at the date of the distribution is positive.

The distribution will be a dividend because current earnings and profits are positive and exceed the distribution.

A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in earnings and profits.

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara’s stock in the company. After the partial liquidation, Tiara continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara’s income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize because of the transaction?

Multiple Choice

Tiara does not recognize any dividend income or capital gain.

Tiara recognizes capital gain of $50,000.

Tiara recognizes dividend income of $50,000.

Tiara recognizes capital gain of $25,000.

Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on a current year transaction treated as an installment sale of $25,000. The corporation’s current earnings and profits for 20X3 would be:

Multiple Choice

$524,000.

$500,000.

$354,000.

$331,000.

Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land’s fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be:

Multiple Choice

No loss recognized and a reduction in E&P of $200,000.

$50,000 loss recognized and a reduction in E&P of $200,000.

$50,000 loss recognized and a reduction in E&P of $225,000.

No loss recognized and a reduction in E&P of $225,000.