Questions and Answers of Principles Taxation Business

Bontaine Publications, an accrual basis, calendar year corporation, publishes and sells weekly and monthly magazines to retail bookstores and newsstands. The sales agreement provides that the
Company Y began business in February 2018. By the end of the calendar year, it had billed its clients for $3.5 million of services and had incurred $800,000 of operating expenses. As of December 31,
For each of the following businesses, indicate the choice of taxable year corresponding to the end of each business's natural business cycle. Your choices should match one of the following
CheapTrade, an accrual basis, calendar year corporation, operates a discount securities brokerage business. CheapTrade accepts orders to buy or sell marketable securities for its customers and
Corporation VB was formed in 2018. Immediately prior to year-end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before the end of 2018, or wait until 2019.
Assuming a 21 percent marginal tax rate, compute the after-tax cost of the following business expenses:a. $5,600 premium on business property and casualty insurance.b. $1,200 fine paid for business
Moleri, an accrual basis corporation with a fiscal taxable year ending on July 31, owns real estate on which it pays annual property tax to Madison County, Texas. The county assesses the tax for the
Northwest Company has average gross receipts of $50 million annually. This year, Northwest incurred $10.5 million of net business interest and has adjusted taxable income of $29 million. Compute
Jetex, an accrual basis, calendar year corporation, engages in the business of long-distance freight hauling. Every year, Jetex is required to purchase several hundred permits and licenses from state
FruAgro Company has average annual gross receipts of $30 million annually. This year, FruAgro earned $1 million of business interest income, incurred $7 million of business interest expense and has
Company A, a calendar year taxpayer, has always used the cash method of accounting. It completed an engagement for a major client in November 2018 and submitted a bill for its $160,000 fee. Because
For many years, Mr. K, the president of KJ Inc., took the corporation's most important clients golfing at The Links Golf Club several times a year. However, after the tax law was amended to disallow
In 2017, Firm K paid $129,000 real property tax to Jurisdiction J and deducted the payment. In 2018, it successfully contested the property tax assessment. As a result, Jurisdiction J refunded
Firm NB, which uses the cash method of accounting, recently received two cases of French wine from a client in settlement of a $1,300 bill. Does Firm NB avoid income recognition because it received a
Corporation WJ began business in 2018 and elected S corporation status. This year, it operated at a significant loss, flowing through $(624,000) of ordinary business loss to its sole shareholder,
Discuss the various circumstances in which a firm is required to prepare financial statements in accordance with GAAP.
Brillo Company uses the calendar year and the cash method of accounting. On December 29, 2018, Brillo made the following cash payments. To what extent can Brillo deduct the payment in 2018?a. $50,000
BL and TM are both calendar year corporations. On January 1, 2018, BL purchased TM's entire business (all TM's balance sheet assets), and TM's shareholders dissolved the corporation under state law.
LSG Company is a calendar year, cash basis taxpayer. On November 1, 2018, LSG paid $9,450 cash to the janitorial service firm that cleans LSG's administrative offices and retail stores. How much of
Net operating losses can be carried forward indefinitely. Why would a taxpayer prefer to use such losses sooner rather than later?
Wahoo Inc., a calendar year taxpayer, leases equipment to a customer for $4,500 monthly rent. On November 27, 2018, Wahoo received a $36,000 rent payment for the eight-month period beginning on
Using a 21 percent rate, compute the deferred tax asset or deferred tax liability (if any) resulting from the following:a. A transaction resulting in a $31,000 temporary excess of book income over
GT Inc.'s net income before tax on its financial statements was $700,000, and its taxable income was $810,000. The $110,000 difference is the aggregate of temporary book/tax differences. GT's tax
Yount Inc.'s auditors prepared the following reconciliation between book and taxable income. Yount's tax rate is 21 percent. Net income before tax $378,200 Permanent book/tax differences (33,500)
Micro, an accrual basis corporation, reported $505,100 net income before tax on its financial statements prepared in accordance with GAAP. Micro's records reveal the following information:Micro paid
GreenUp, a calendar year, accrual basis taxpayer, provides landscaping installation and maintenance services to its customers. In August 2018, GreenUp contracted with a university to renovate its
Ernlo is an accrual basis corporation with a June 30 fiscal year-end. On June 2, 2018, Ernlo entered into a binding contract to purchase a six-month supply of heating oil from a local distributor at
HomeSafe, an accrual basis, calendar year corporation, sells and installs home alarm systems. The contract price of a system includes four free service calls. HomeSafe's cost of each call is $75. At
BZD, a calendar year corporation, made the following year-end accruals for 2018 financial statement purposes. In each case, determine how much of the accrued expense is deductible on BZD's 2018
Parmco, a calendar year corporation, made the following accruals for 2018 financial statement purposes. In each case, determine how much of the accrued expense is deductible on Parmco's 2018 federal
In 2017, AS, an accrual basis corporation, contracted with a nationally prominent artist to paint a mural in the lobby of the new corporate headquarters under construction. The artist's commission
Extronic, a calendar year, accrual basis corporation, reported a $41,900 liability for accrued 2017 state income tax on its December 31, 2017, balance sheet. Extronic made the following state income
TRW Inc. began business in 2018 and incurred net operating losses for its first two years. In 2020, it became profitable. The following table shows TRW€™s taxable income before
For its first taxable year, Rony Inc.'s accounting records showed the following.Operating loss per books $(800,000) Temporary book/tax difference 90,000 Net operating loss for tax $(710,000)a. Use a
In October 2016, Firm G completed a consulting engagement and received a $200,000 cash payment for its services. In December, the client notified Firm G that it was unsatisfied with the work and
Refer to the facts in the preceding example. For its second taxable year, Rony Inc.'s accounting records showed the following.Net income before tax $1,200,000 Reversal of year 1 book/tax difference
Margaret, a married taxpayer filing a joint return, engaged in two business activities this year. Business A earned $470,000 of profit. Business B incurred a loss of $(995,000). How much of
Jahlil is a 10 percent partner in a partnership that incurred a $4 million business loss this year. Jahlil has no other business activities. How much of Jahlil's partnership loss can he deduct this
Assuming a 21 percent tax rate, compute the after-tax cost of the following business expenditures:a. $14,200 cost of a survey capitalized to land.b. $44,750 research and experimental expenditure.c.
Company C has a 21 percent marginal tax rate and uses an 8 percent discount rate to compute NPV. The company must decide whether to lease or purchase equipment to use for years 0 through 7. It could
MG, a corporation in the 21 percent marginal tax bracket, owns equipment that is fully depreciated. This old equipment is still operating and should continue to do so for four years (years 0, 1, 2,
KP Inc. is negotiating a 10-year lease for three floors of space in a commercial office building. KP can't use the space unless a security system is installed. The cost of the system is $50,000, and
In year 1, Firm A paid $50,000 cash to purchase a tangible business asset. In year 1 and year 2, it deducted $3,140 and $7,200 depreciation with respect to the asset. Firm A’s marginal tax rate in
In 2016, Firm Z elected to expense the $8,000 cost of a machine, which it reported as the only item of equipment placed in service that year. This year, the IRS audited Firm Z's 2016 return and
Refer to the facts in problem 6. Now assume that Firm A borrowed $50,000 to purchase the asset. In each year, it paid $3,800 annual interest on the debt. The interest payments were deductible.a. How
Hansen Company, a cash basis taxpayer, paid $50,000 for an asset in year 0. Assume it can deduct one-half of the cost in year 0 and the remainder in year 1. Assume a 21 percent tax rate and 8 percent
Refer to the facts in problem 10. In its second year of operations, XYZ manufactured 2,000 units of product and incurred $410,000 direct material cost and $275,000 direct labor costs. For financial
In year 0, Jarmex paid $55,000 for an overhaul of a tangible operating asset. Jarmex has a 21 percent marginal tax rate and uses a 7 percent discount rate to compute NPV.a. Compute the after-tax
Herelt Inc., a calendar year taxpayer, purchased equipment for $383,600 and placed it in service on April 1, 2018. The equipment was seven-year recovery property, and Herelt used the half-year
On May 12, 2018, Nelson Inc. purchased eight passenger automobiles for its business. Nelson did not make a Section 179 election to expense any portion of the cost of the automobiles, which are
In March 2018, Jones Company purchased a Mercedes for use in its business at a cost of $73,000. Assuming no bonus depreciation or Section 179 deduction, calculate the allowable tax depreciation on
In 2018, Firm L purchased machinery costing $21,300 and elected to expense the entire cost under Section 179. How much of the expense can Firm L deduct in each of the following cases?a. Its taxable
Early this year, ZeZe Inc. paid a $52,000 legal fee in connection with a dispute over ZeZe’s title to investment land. ZeZe’s auditors required the corporation to expense the payment on this
Loni Company paid $527,000 for tangible personalty in 2017 and elected to expense $510,000 of the cost (the limited dollar amount for 2017). Loni’s taxable income before a Section 179 deduction was
At the beginning of its 2018 tax year, Hiram owned the following business assets.On July 8, Hiram sold its equipment. On August 18, it purchased and placed in service new tools costing $589,000;
MNO is a calendar year taxpayer. On March 1, MNO signed a 36-month lease on 2,100 square feet of commercial office space. It paid a $3,240 fee to the real estate agent who located the space and
In April 2018, Lenape Corporation completed security, fire, and heating system improvements to existing nonresidential real property with a total cost of $1,275,000. Assuming these improvements are
On November 13, Underhill Inc., a calendar year taxpayer, purchased a business for a $750,000 lump-sum price. The business’s balance sheet assets had the following appraised FMV.Accounts
Lento Inc. owned machinery with a $30,000 initial cost basis. Accumulated book depreciation with respect to the machinery was $12,000, and accumulated tax depreciation was $19,100. Lento sold the
Several years ago, PTR purchased business equipment for $50,000. PTR’s accumulated book depreciation with respect to the equipment is $37,200, and its accumulated tax depreciation is $41,000.a.
For its first four years of operation, Corporation Y reported the following taxable income.In 2018, Corporation Y generated $900,000 ordinary income and recognized a $20,000 loss on the sale of a
Company L sold an inventory item to Firm M for $40,000. Company L’s marginal tax rate is 21 percent. In each of the following cases, compute Company L’s after-tax cash flow from the sale:a. Firm
Olno Inc. has a $52,100 capital loss carryforward into its current taxable year that will expire at the end of the year. During the year, Olno realized a $141,900 capital gain on sale of land. The
Firm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0 and two investment choices. Investment 1 will generate $12,000 taxable cash flow annually for years 1 through 5. In
KNB sold real property to Firm P for $15,000 cash and Firm P’s assumption of the $85,000 mortgage on the property.a. What is KNB’s amount realized on sale?b. Compute KNB’s after-tax cash flow
Rocky Corporation is experiencing cash flow problems. It needs to generate an additional $60,000 of working capital and is considering selling off assets to meet this need. Rocky's marginal tax rate
Firm UT sold realty to an unrelated buyer for $40,000 cash plus the buyer’s assumption of a $166,700 mortgage on the property. UT’s initial cost basis in the realty was $235,000, and accumulated
In its first taxable year, Corporation NM generated a $25,000 net operating loss and recognized an $8,000 net capital loss. The corporation’s tax return for its second year reported $15,000 taxable
Refer to the facts in the preceding problem and assume that TPW uses the installment sale method of accounting.a. Compute the difference between TPW’s book and tax income resulting from the
Refer to the facts in the preceding problem.a. Compute the difference between TPW’s book and tax income resulting from the installment sale method.b. Is this difference favorable or unfavorable?c.
Alto Corporation sold two capital assets this year. The first sale resulted in a $13,000 capital gain, and the second sale resulted in a $41,000 capital loss. Alto was incorporated five years ago.
Zeno Inc. sold two capital assets in 2018. The first sale resulted in a $53,000 capital loss, and the second sale resulted in a $25,600 capital gain. Zeno was incorporated in 2014, and its tax
In its first taxable year, Band Corporation recognized $957,500 ordinary business income and a $5,500 capital loss. In its second taxable year, Band recognized $1,220,000 ordinary business income, a
In its first year, Firm KZ recognized $427,300 ordinary business income and a $13,590 loss on the sale of an investment asset. In its second year, Firm KZ recognized $500,800 ordinary business
Corporation Q, a calendar year taxpayer, has incurred the following Section 1231 net gains and losses since its formation in 2015.a. In 2018, Corporation Q sold only one asset and recognized a $4,000
Firm R owned depreciable real property subject to a $300,000 non-recourse mortgage. The property’s FMV is only $250,000. Consequently, the firm surrendered the property to the creditor rather than
Twelve years ago, Mr. and Mrs. Chang purchased a business. This year, they sold the business for $750,000. On date of sale, the business balance sheet showed the following assets.The sales contract
LN Consulting is a calendar year, cash basis unincorporated business. The business is not required to provide audited financial statements to any external user. LN's accounting records show the
DM Inc. incurred a $25,000 net capital loss last year that has carried forward into the current year. During the current year, a hurricane destroyed business assets with a $120,000 basis. DM received
On April 1, 2018, Bullen Company transferred machinery used in its business to Eaton Inc. in exchange for Eaton common stock. Both Bullen and Eaton use the calendar year for tax purposes. Bullen's
In 2016, an office building owned by Firm F was completely destroyed by fire. F’s adjusted basis in the building was $485,000, and its insurance reimbursement was $550,000. On its 2016 tax return,
In 2016, an industrial plant owned by Company C, a calendar year taxpayer, was destroyed in a flood. C’s adjusted basis in the plant was $1.65 million, and the company received a $2 million
For each of the following actions, indicate in which of the six steps (1 through 6) of the tax research process the action would occur.a. Write an email to the client, requesting additional
In 2017, transportation equipment owned by Corporation ABC was stolen. The adjusted basis in the equipment was $105,000, and ABC received a $400,000 insurance reimbursement. It immediately paid
XYZ exchanged an old building for a new like-kind building. XYZ's adjusted basis in the old building was $13,000 ($30,000 initial cost - $17,000 accumulated depreciation), and its FMV was $20,000.
OCD exchanged old realty for new like-kind realty. OCD's adjusted basis in the old realty was $31,700 ($60,000 initial cost - $28,300 accumulated depreciation), and its FMV was $48,000. Because the
On June 2, 2018, a tornado destroyed the building in which FF operated a fast-food franchise. FF’s adjusted basis in the building was $214,700. In each of the following cases, determine FF’s
On January 10, 2016, a fire destroyed a warehouse owned by NP Company. NP’s adjusted basis in the warehouse was $530,000. On March 12, 2016, NP received a $650,000 reimbursement from its insurance
Refer to the facts in question 9. Using an electronic research database such as Checkpoint, CCH IntelliConnect, or LexisNexis, run the keyword searches you proposed in question 9. Include both
Use the legend provided to identify the type of primary authority indicated by each of the following citations.
Why is it important for a tax researcher to understand the client’s motivation in undertaking a transaction? How will this knowledge assist the tax professional in serving her client?
Firm W, which has a 32 percent marginal tax rate, plans to operate a new business that should generate $40,000 annual cash flow/ordinary income for three years (years 0, 1, and 2). Alternatively,
Moto Inc. pays state income tax at a 6 percent rate and federal income tax at a 21 percent rate. Moto recently engaged in a transaction in Country N, which levied a $97,300 tax on the transaction.
Mr. G has $15,000 to invest. He is undecided about putting the money into tax-exempt municipal bonds paying 3.5 percent annual interest or corporate bonds paying 4.75 percent annual interest. The two
At the beginning of the year, Mr. L put $50,000 cash into Investment X. At the end of the year, he received a check for $2,800, representing his annual return on the investment. Mr. L's marginal tax
For each of the following scenarios, indicate which of the four basic tax planning variables (entity, character, time period, jurisdiction) impacts after-tax value. Note that more than one variable
Assume that Congress amends the tax law to provide for a maximum 20 percent rate on royalty income. Calculate the annual tax savings from this new preferential rate to each of the following
Firm L has $500,000 to invest and is considering two alternatives. Investment A would pay 6 percent ($30,000 annual before-tax cash flow). Investment B would pay 4.8 percent ($24,000 annual before
Which of the following statements regarding the tax research process is FALSE?a. A tax researcher should be as precise as possible in formulating tax research questions.b. Judicial decisions
Indicate whether each of the following statements regarding the tax research process is TRUE or FALSE.a. In performing step 2 of the tax research process, research questions should be stated as

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