Tax Exam 1 solutions
2014SP ACNT 1278-63202 Exam # 1 Name: __________________________________________
1. Corporations are legally formed by filing articles of organization with the state in which the corporation will be created.
True False
2. While a taxable corporation's losses cannot be used by their shareholders to offset personal income, a taxable corporation may carry back and carry forward losses to help offset the taxable income a corporation had or will have. How are these net operating losses carried back and carried forward?
A. Carried back two years, carried forward indefinitely
B. Carried back indefinitely, carried forward two years
C. Carried back two years, carried forward five years
D. Carried back two years, carried forward twenty years
3. In general, a corporation may choose to use either the accrual or cash method of accounting no matter how large the corporation.
True False
4. Which of the following is not calculated in the corporate income tax formula?
A. Gross income
B. Adjusted gross income
C. Taxable income
D. Regular tax liability
5. TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the nature of the book-tax difference created by this expense?
A. Permanent; favorable
B. Permanent; unfavorable
C. Temporary; favorable
D. Temporary; unfavorable
6. Assume corporate tax rates are a constant 35%. Elco started operations at the beginning of this year. Its bookincome is $10 million and its taxable income is $13 million. The difference will give rise to
A. deferred tax liability of $1,050,000
B. deferred tax asset of $1,050,000
C. income taxes payable of $3,500,000
D. income tax expense of $4,550,000
B. A deferred tax asset is created (this is Elco’s first year) because taxable income is greater than book income.
Income taxes payable are $4,550,000 ($13 million × 35%). Income tax expense is $3,500,000 ($10 million ×35%). The difference of $1,050,000 is the deferred tax asset.
7. Bob owns all 50
1. Corporations are legally formed by filing articles of organization with the state in which the corporation will be created.
True False
2. While a taxable corporation's losses cannot be used by their shareholders to offset personal income, a taxable corporation may carry back and carry forward losses to help offset the taxable income a corporation had or will have. How are these net operating losses carried back and carried forward?
A. Carried back two years, carried forward indefinitely
B. Carried back indefinitely, carried forward two years
C. Carried back two years, carried forward five years
D. Carried back two years, carried forward twenty years
3. In general, a corporation may choose to use either the accrual or cash method of accounting no matter how large the corporation.
True False
4. Which of the following is not calculated in the corporate income tax formula?
A. Gross income
B. Adjusted gross income
C. Taxable income
D. Regular tax liability
5. TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the nature of the book-tax difference created by this expense?
A. Permanent; favorable
B. Permanent; unfavorable
C. Temporary; favorable
D. Temporary; unfavorable
6. Assume corporate tax rates are a constant 35%. Elco started operations at the beginning of this year. Its bookincome is $10 million and its taxable income is $13 million. The difference will give rise to
A. deferred tax liability of $1,050,000
B. deferred tax asset of $1,050,000
C. income taxes payable of $3,500,000
D. income tax expense of $4,550,000
B. A deferred tax asset is created (this is Elco’s first year) because taxable income is greater than book income.
Income taxes payable are $4,550,000 ($13 million × 35%). Income tax expense is $3,500,000 ($10 million ×35%). The difference of $1,050,000 is the deferred tax asset.
7. Bob owns all 50