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Exam 5: Corporate Operations

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Question 41

True/False

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Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.

A) True
B) False

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Question 42

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Which of the following statements regarding book-tax differences associated with purchased goodwill is false?

A) It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.
B) In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year) , the book-tax difference will be unfavorable.
C) Temporary book-tax differences associated with goodwill are always favorable.
D) If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognized.

E) A) and B)
F) All of the above

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Question 43

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Coop Inc. owns 40 percent of Chicken Inc. Both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting earnings of $20,000 for that year. Assume Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction) ?

Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.

Which of the following statements is false regarding consolidated tax returns?

GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified nonprofit organization, in November of 2019. GenerUs made the payment to FoodBank on February 2, 2020. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2019 tax return.

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while capital loss carrybacks are not.

Corporations may carry excess charitable contributions forward five years, but they may not carry them back.

Taxable income of all C corporations is subject to a flat 21 percent tax rate.

Large corporations (corporations with more than $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.

In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. Adams has a favorable temporary book-tax difference for that year.

On January 1, 2018, 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 2018. By the end of 2018, 20,000 of the options had vested. At the end of 2019, these options were exercised when the stock price is $6.25. What is the total book-tax difference associated with the stock options for 2019? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary?

In general, all C corporations can elect to use either the accrual or cash method of accounting.

Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total) . The options vest over two years-half in 2019 (the year of issue) and half in 2020. One thousand options are exercised in 2020 with a bargain element on each option of $6. What is the 2020 book-tax difference associated with the stock options?

Which of the following is allowable as a deduction in calculating a corporation's net operating loss?

Which of the following is deductible in calculating the charitable contribution limit modified taxable income?

A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.

On January 1, 2017, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2018, the auditors of Credit Inc. determined that the goodwill had been impaired by $50,000, and Credit Inc. wrote down the book value of the goodwill by $50,000. During 2019, the goodwill was not further impaired. In 2020, additional goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book-tax difference associated with the purchased goodwill in 2018, 2019, and 2020? Are the differences favorable or unfavorable? Are the differences permanent or temporary?

An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.

Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?