Solved by verified expert :1. Question : What is a corporation’s alternative minimum tax rate?

Student Answer: 15%




2. Question : Which of the following business entities does not file a
separate tax return to report business operations?

Student Answer: Sole proprietorship

S corporation

C corporation


3. Question : Hoku Corporation (a C corporation) had the following
history of income and loss:
Year Income (Loss)
2009 $40,000
2010 $70,000
2011 ($10,000)
How much of a tax refund can Hoku Corporation receive by
carrying back its 2011 loss?

Student Answer: $1,500



None; it cannot carry its loss back

4. Question : Which of these persons never pays taxes directly?

Student Answer: Individual


C corporation


5. Question : Which of the following is not a characteristic of an S

Student Answer: Owners have
limited liability

The corporation is taxed directly on operating

The corporation can have no more than 100

Shareholders must consent to the S election by
the corporation

6. Question : The Mercury Corporation must decide whether to invest in
some new machinery for its business. Which tax rate is the most relevant for
making this decision?

Student Answer: The average tax

The marginal tax rate

The nominal tax rate

The effective tax rate

7. Question : What is the gain or loss on the sale of an asset for
$68,000 if the asset cost $185,000, depreciation expense deducted was $124,000,
repair costs were $12,000, and there was a $19,000 major addition to the asset?

Student Answer: $0

$12,000 loss

$7,000 gain

$24,000 loss

UNIT – 2

1. All of the following are part of the tax research process
except: (Points : 1)
Establish the
relevant authority
Identify the
the findings
All are part
of the tax research process
2. CK Corporation can invest $100,000 in a project. After
taxes, the project is expected to generate $40,000 of net income the first year
and $75,000 of net income the second year. If the company uses a 10 percent
discount rate to evaluate projects, what is the project’s net cash flow?
(Points : 1)
3. Changing which of the following factors as indicated
would decrease the after-tax net cash flow of a project: (Points : 1)
Delaying the
years in which inflows occur
revenue recognition
Increasing the
discount rate
All decrease
cash flows
None decrease
cash flows
4. What effect does an increased discount rate have on
project evaluations? (Points : 1)
Increases net
cash flow
Decreases net
cash flow
Increases the
probability that a project will be accepted
It has no
effect on project evaluation
5. Which of the following does not deal with a CPA’s
standard of conduct (Points : 1)
Circular 230
AICPA Code of
Revenue Service Manual
Statement of
Standards for Tax Services

6. Which of the following explain why it is important to
determine the period in which income is recognized? (Points : 1)
Marginal tax
rates may be different in different periods.
Tax laws may
The time value
of money
All of the
above are explanations
a. and b. only
are explanations
7. All of the following are allowable tax years except:
(Points : 1)
The last
Friday of July
December 31
The Sunday
closest to March 1
August 31

8. All of the following are acceptable methods of accounting
for revenue and expenses for tax purposes except: (Points : 1)
Cash method
Accrual method

Hybrid method
All are
acceptable methods

9. Which of the following is an application of the
wherewithal-to-pay concept? (Points : 1)

Hybrid method
of accounting
Accrual method
of accounting
10. Windjammer Corporation, a cash-basis, calendar-year
corporation sold $30,000 of merchandise to Jackpot Company in January, year 1.
In November, Jackpot declared bankruptcy without paying Windjammer. In year 4,
Jackpot had reorganized under a new owner and paid all its old debts including
the $30,000 owed Windjammer. How does Windjammer treat these events? (Points :
$30,000 revenue in year 1 only.
$30,000 revenue in year 4 only.
Deduct $30,000
as a bad debt in year 1.
Deduct $30,000
as a bad debt in year 1; recognize $30,000 income in year 4.


1. Which of the following is included as part of APB 23?
: 5)
A parent
corporation can exclude a foreign subsidiary’s income if earnings will not be
A parent
corporation can exclude deferred taxes on foreign income if earnings will not
be repatriated.
A parent must
meet a more-likely-than not standard to determine the effect of a tax benefit.
A parent must
disclose details relating to tax uncertainties of its subsidiaries.

2. If an expense is reported on the tax return before it is
reported on the financial accounting books
: 5)
the result is
a deferred tax asset
the result is
a deferred tax liability
there could be
either a deferred tax asset or liability
there is no
effect as this is not a timing difference

3. The more-likely-than-not standard (Points : 5)
is based on a
more-than 50 percent probability.
applies only to contested liabilities
is used to
determine if a deferred tax liability should be recognized.
is spelled out
in APB 23.

4. Waldo bought two tickets for a Packers game on Ebay for
$400. The tickets had a face value of $50 each. He took a client to the game
and they had a dinner afterwards where they discussed business. The cost of the
dinner was $70. What is Waldo’s deduction for these expenses? (Points : 5)

5. What is the purpose of a per diem allowance? (Points : 5)

Eliminate the
substantiation requirement for business expenses.
Reduce the
amount an employer must reimburse for employee business expenses.
paper work for certain employee business expenses.
reimbursement disagreements between employer and employee.

6. Which of the following is a working condition fringe
benefit? (Points : 5)
Flowers for an
ill employee
A holiday
cocktail party
A subscription
to a professional journal
A bus pass

7. Howard is a cash-basis, calendar-year taxpayer. He works
for Clyde Corporation, an accrual-basis, calendar-year corporation. Clyde
authorizes a $10,000 bonus for Howard on December 20, year 1. It pays the bonus
on March 31 of year 2. Which of the following is correct? (Points : 5)
recognizes income in year 1 and Clyde takes a deduction in year 1.
recognizes income in year 1 and Clyde takes a deduction in year 2.
recognizes income in year 2 and Clyde takes a deduction in year 1.
recognizes income in year 2 and Clyde takes a deduction in year 2.


1. The adjusted basis of an asset is: (Points : 5)
acquisition price only
cost less cost recovery
cost less selling price
Only the cash
used to purchase the asset

2. Momee Corporation, a calendar-year corporation, bought
only one asset in 2006, a crane it purchased for $700,000 on November 24. It
disposed of the asset in April, 2011. What is its depreciation deduction for
this asset in 2011 if cost recovery was determined using only regular MACRS?
: 5)

3. Coley Corporation has an $800 net short-term capital loss
and a $6,000 net long-term capital gain in the current year. It also has an
$8,000 long-term capital loss carryover from the prior year. What is Coley’s
capital loss carryover to the next year? (Points : 5)

4. Alpha Corporation had income from operations of $30,000.
What is the corporation’s taxable income including the following property
transactions: Gain on investment stock = $8,000; loss on machinery held three
years = $6,000; $4,000 loss on equipment held 10 months; $4,000 gain on land
used for six years for storage of trucks. (Points : 5)

5. All of the following are characteristics of percentage
depletion except:
: 5)
Depletion is
determined using a statutory percentage times gross income.
depletion can exceed the property’s cost.
Depletion in
excess of cost results in a negative basis for property.
Is an
investment incentive provision.

6. Angel sells the following depreciable assets from her
sole proprietorship:

Asset Cost Age
Office furniture $10,0004 years ($2,400)
Truck $20,0005 years 3,100
Bakery equipment $25,0009 months (4,500)

What should Angel report on her income tax return relative
to these property transactions? (Points : 5)
$3,800 capital
$3,100 Section
1245 recapture; $2,400 Section 1231 loss; $4,500 ordinary loss
ordinary loss
$700 Section
1231 gain; $4,500 ordinary loss
None of the

7. Jack did not depreciate one of his machines that cost
$40,000 because he had net operating losses for the last two years. Which of
the following statements is true?
: 5)
Jack’s basis
in the asset is $40,000 this year.
Jack can
deduct three year’s depreciation in the current year.
Jack must file
amended returns to claim the depreciation for prior years.
If Jack sells
the machine for $20,000 this year, he has a $20,000 loss.

1. Trudi Corporation has a building that it needs to sell or
exchange because of growth in its business. If Trudi sells the building, it
will have a gain of $450,000. What is the amount of taxes that Trudi will avoid
paying if it can exchange the building? The corporation has $1,000,000 of
taxable income from operations for the current year. (Points : 1)
None of the

2. In early 2011, Conrad Corporation discovered their
bookkeeper had embezzled $30,000 over the last three years at a rate of
approximately $10,000 per year. Conrad also suffered uninsured hurricane damage
of $40,000 late in 2011 in a presidentially declared disaster area. If Conrad
wants to deduct its losses at the earliest time possible, what are the amounts
and year(s) of its loss deduction? (Points : 1)
2011 = $70,000
2010 = $30,000,
2010 = $40,000
2010 =
$40,000, 2011 = $30,000
2009 =
$10,000, 2010 = $10,000; 2011 = $50,000
None of the

3. Sam’s land was condemned for a sewage treatment plant. He
received $600,000 for the land that had a basis of $650,000. What is his
realized and recognized gain or loss, respectively, on this involuntary
conversion? (Points : 1)
($50,000), 0
0, 0
None of the

4. Which of the following is not a characteristic of
involuntary conversions? (Points : 1)
Gain only is
The taxpayer
can receive cash to invest in qualifying replacement property
The provision
applies to both realty and personalty
All of these
are characteristics
None of these
are characteristics

5. The taxpayer-use test for qualifying replacement property
(Points : 1)
applies only
to personalty
replacement property used by the taxpayer to be used in the same business as
the converted property
only requires
leased realty to be replaced with other leased realty
Is more
restrictive than the functional-use test

6. Which of the following would be an indication that
corporate debt is disguised equity? (Points : 1)
Debt is issued
to the shareholders in the same proportion as stock
The debt has a
specified maturity date
The debt has a
specified interest rate
Interest is
paid annually
None of the

7. A corporation that owns 72 percent of all the outstanding
stock of another corporation: (Points : 1)
May not file a
consolidate return
May file a
consolidated return
May take a 100
percent dividend received deduction
May take a 70
percent dividend received deduction
Is the parent
of the 72 percent-owned company

8. A clothing manufacturing corporation donates last year’s
inventory to the Red Cross for use in its disaster relief efforts. The clothes
have a fair market value of $200,000 and a basis to the corporation of $75,000.
What is its charitable contribution deduction? (Points : 1)

9. A corporation has pre-tax book income of $324,000. In
determining this income, the corporation included $2,000 of tax-exempt
interest, $6,000 of dividends from an affiliated corporation, a capital loss of
$50,000 and $3,000 of excess book depreciation. What is the corporation’s
taxable income? (Points : 1)

10. The Willow Corporation reported $400,000 of taxable
income. In making a conversion to book income, the accountant had to adjust for
the following: a $25,000 Section 179 deduction, but book depreciation would
have been $5,000; a fine of $12,500 for overweight trucks; and a net capital
loss of $10,000. What is Willow Corporation’s book income? (Points : 1)
None of the
1. John has $120,000 of net income from his sole
proprietorship in 2011. What is his deduction for AGI for self-employment
taxes? (Points : 1)

2. James owns 60% of the James and Peter Partnership. The
partnership reports $300,000 of construction revenue, $120,000 of construction
expenses, and $80,000 of other expenses that include $4,000 of doctor expenses
paid for James, and a $6,000 charitable contribution. What is the bottom line
net income reported on Jame’s Schedule K-1? (Points : 1)

3. Mary has $30,000 of passive losses, $25,000 of passive
gains, $27,000 of active income and $24,000 of active losses during the year.
What is Mary’s current year net taxable income or loss? (Points : 1)
$2,000 loss
$3,000 income
$5,000 income

4. Will and Grace are equal partners in Will and Grace
Partnership. Grace is employed full-time and receives a guaranteed salary from
the partnership of $60,000 annually. If there is profit remaining after that
salary, Will receives an allowance of $5,000 for his excess partner capital
balance. Any remainder is divided equally among Will and Grace. If the
accounting income before either of these payments is $80,000, what is the
amount of income or loss allocated to Grace? (Points : 1)

5. Which of the following is not a requirement to make an S
election? (Points : 1)
Minimum of 2
Maximum of 100
One class of
d.It must be a domestic corporation

6. Karen has a $30,000 basis in her 40% ownership in an S
Corporation and lent the corporation $10,000 last year. The corporation has
other debt outstanding of $60,000 during the entire year. This year the S
Corporation reported a $200,000 loss. How much of this loss may Karen deduct? (Points
: 1)

7. Williams Company is a S Corporation owned equally by
Smith and Weston. Williams had taxable income of $60,000 for the current
taxable year. Smith and Weston received distribution during the tax year of
$20,000 each. What is Smith’s taxable income from Williams Company for the
current taxableyear? (Points : 1)

8. Joy purchased a 50% interest in an S corporation on April
1 of the current year and sells one-half of her interest on October 1. If the S
corporation reported $40,000 of income for the year, what income does it report
on Joy’s Schedule K-1? (Points : 1)

9. Samantha and Ashley form the MAS General Partnership.
Samantha contributed $20,000 cash in exchange for her 50 percent partnership
interest. During the first year of partnership operations, the partnership
reported net taxable income of $10,000, Samantha withdrew $8,000 cash from the
partnership, and the partnership took out an $18,000 loan on the last day of
the year. Samantha’s adjusted basis for her partnership interest at year end
is: (Points : 1)

10. Which of the following is not a characteristic of sole
proprietorships? (Points : 1)
Owners pay
self-employment taxes
Formation is
always tax-free
of entity income are tax-free
Loss is
recognized on liquidation

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