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business
south western federal taxation

Questions and Answers of South Western Federal Taxation

LO.6 Your client makes the comment, “Unitary corporate income taxation is a bad idea for the business community.” Is her characterization correct? Elaborate.
LO.6 State A enjoys a prosperous economy, with high real estate values and compensation levels. State B’s economy has seen better days—property values are depressed, and unemployment is higher
LO.6, 8 In no more than three PowerPoint slides, list at least four of the Code’s penalties that could be assessed against paid preparers of tax returns. Name the violation that triggers the
LO.5 Megan is a telecommuter and works most days from her home in Tennessee.Twice a month, she travels to Georgia for a staff meeting at the Atlanta headquarters. In which state’s payroll factor
LO.5 Continue with the facts of Question 12.Another large shipment was made in May to a customer in South Dakota, a state that does not impose any corporate income tax.Is this sale to be included in
LO.6 Compute the failure to pay and failure to file penalties for John, who filed his 2011 income tax return on December 20, 2012, paying the $10,000 amount due at that time. On April 1, 2012, John
LO.3 Indicate whether each of the following items should be allocated or apportioned by the taxpayer in computing state corporate taxable income. Assume that the state follows the general rules of
LO.6 Olivia, a calendar year taxpayer, does not file her 2011 return until December 12, 2012. At this point, she pays the $40,000 balance due on her 2011 tax liability of $70,000.Olivia did not apply
LO.3 Albro, a C corporation, makes profitable sales in about a dozen U.S. states. It owns a headquarters building in one of those states and a fulfillment center in a different state. How does Albro
LO.6 Orville, a cash basis, calendar year taxpayer, filed his income tax return 70 days after the due date. Orville never extended his return, and he paid the taxes that were due when he filed the
LO.2 In no more than three PowerPoint slides, list some general guidelines that a taxpayer can use to determine if it has an obligation to file an income tax return with a particular state. (Hint:
LO.6 LaVonn underpaid her taxes by $250,000. A portion of the underpayment was shown to be attributable to LaVonn’s negligence ($200,000). A court found that a portion of that deficiency
LO.6 Compute the overvaluation penalty for each of the following independent cases involving the fair market value of charitable contribution property. In each case, assume a marginal income tax rate
LO.1 Many states “outsource” their responsibility to write income tax rules to the MTC.Evaluate this statement.
LO.6 Compute the undervaluation penalty for each of the following independent cases involving the value of a closely held business in the decedent’s gross estate. In each case, assume a marginal
LO.1 In designing and drafting corporate income tax statutes and regulations, is each of the U.S. states “on its own”? (Hint: Use the terms Multistate Tax Commission, MTC, and UDITPA in your
LO.1 Complete the following chart by indicating whether each item is true or false.Explain your answers by reference to the overlap of rules appearing in Federal and most state income tax laws.Item
LO.6 Moose, a former professional athlete, now supplements his income by signing autographs at collectors’ shows. Unfortunately, Moose has not been conscientious about reporting all of this income
LO.6 Kold Services Corporation estimates that its 2013 taxable income will be$500,000. Thus, it is subject to a flat 34% income tax rate and incurs a $170,000 liability.For each of the following
LO.7 What is the applicable statute of limitations in each of the following independent situations?a. No return was filed by the taxpayer.b. The taxpayer incurred a bad debt loss that she failed to
LO.7 Loraine (a calendar year taxpayer) reported the following transactions, all of which were properly included in a timely filed return.Gross receipts $ 975,000 Cost of sales (850,000)Gross profit
LO.5, 7 On April 3, 2009, Mark filed his 2008 income tax return, which showed a tax due of $80,000. On June 1, 2011, he filed an amended return for 2008 that showed an additional tax of $10,000. Mark
LO.7 Chee owed $4,000 in Federal income tax when she filed her Form 1040 for 2012.She attached a sticky note to the 1040 that read, “My inventory computations on last year’s (2011) return were
LO.8 Rod’s Federal income tax returns (Form 1040) for the indicated three years were prepared by the following persons.Year Preparer 2011 Rod 2012 Ann 2013 Cheryl Ann is Rod’s next-door neighbor
LO.8 Christie is the preparer of the Form 1120 for Yostern Corporation. On the return, Yostern claimed a deduction that the IRS later disallowed on audit. Compute the tax preparer penalty that could
LO.2 Based on the facts and results of Problems 49–55, provide the income tax footnote rate reconciliation for Kantner.
LO.2 Based on the facts and results of Problems 49–54, calculate Kantner’s total provision for income tax expense reported on its financial statement and its book net income after tax.
LO.2 Provide the journal entry to record Kantner’s current tax expense as determined in Problem 53.
LO.2 In addition to the temporary differences identified in Problems 49–52, Kantner had two permanent differences between book and taxable income. It earned $7,800 in tax-exempt municipal bond
LO.2 Based on the facts and results of Problems 49–51, determine Kantner’s change in net deferred tax asset or net deferred tax liability for the current year. Provide the journal entry to record
LO.2 Based on the facts and results of Problems 41–47, provide the income tax footnote rate reconciliation for Relix.
LO.2 Based on the facts and results of Problems 41–46, calculate Relix’s total provision for income tax expense reported in its financial statements and its book net income after tax.
LO.2 Provide the journal entry to record Relix’s current tax expense as determined in Problem 45.
LO.2 Based on the facts and results of Problems 41–43, determine Relix’s change in net deferred tax asset or net deferred tax liability for the current year. Provide the journal entry to record
LO.2 Continue with the results of Problem 39.Prepare the GAAP journal entries for Willingham’s year 1 income tax expense
LO.2 Willingham, Inc., an accrual basis C corporation, reports year 1 book and taxable income of $2 million, before accounting for its investment activities. The applicable tax rate is 35% for year 1
LO.2 Continue with the results of Problem 37.Determine Rubio’s income tax expense and GAAP income for the year.
LO.2 Rubio, Inc., an accrual basis C corporation, reports the following amounts for the tax year. The applicable income tax rate is 30%. Compute Rubio’s taxable income.Book and taxable income
LO.2 Continue with the results of Problem 35.Prepare the GAAP journal entries for Sing-Li’s year 1 income tax expense.
LO.2 Sing-Li, Inc., an accrual basis C corporation, sells widgets on credit. Its book and taxable income for year 1 totals $42,000, before accounting for bad debts. Sing-Li’s book allowance for
LO.2 Continue with the results of Problem 33.Prepare the GAAP journal entries for Phillips’s year 1 income tax expense.
LO.6 Comment on this statement: Benchmarking book-tax differences among entities requires more than just financial accounting skills.
LO.6 HippCo and HoppCo operate in the same industry and report the following tax rate reconciliations in their tax footnotes.HippCo HoppCo Hypothetical tax at U.S. rate 35.0% 35.0%State and local
LO.6 LawnCo and TreeCo operate in the same industry, and both report a 30% effective tax rate. Their book income and current, deferred, and total tax expense are reported below.LawnCo TreeCo Book
LO.6 RoofCo reports total book income before taxes of $20 million and a total tax expense of $8 million. FloorCo reports book income before taxes of $30 million and a total tax expense of $12
LO.4 Zhang, the CFO of TechCo, Inc., has used ASC 740-30 (APB 23) to avoid reporting any U.S. deferred tax expense on $30 million of the earnings of TechCo’s foreign subsidiaries. All of these
LO.4 RadioCo, a domestic corporation, owns 100% of TVCo, a manufacturing facility in Ireland. TVCo has no operations or activities in the United States. The U.S. tax rate is 35%, and the Irish tax
LO.6 Lydia is the CFO of FarmTime, Inc. FarmTime’s tax advisers have recommended two tax planning ideas that will each provide $8 million of current-year cash tax savings.One idea is based on a
LO.3 Timber, Inc., hopes to report a total book-tax expense of $50,000 in the current year. This $50,000 expense consists of $80,000 in current tax expense and a $30,000 tax benefit related to the
LO.3 What is a valuation allowance? Why is such a book account created? Be specific.
LO.2 Using the facts of Problem 18, determine the 2014 end-of-year balance in Mini’s deferred tax asset and deferred tax liability balance sheet accounts.
LO.2 Mini, in Problem 16, reports $800,000 of pretax book net income in 2014. Mini did not deduct any bad debt expense for book purposes but did deduct $15,000 in bad debt expense for tax purposes.
LO.2 Using the facts of Problem 16, determine the 2013 end-of-year balance in Mini’s deferred tax asset and deferred tax liability balance sheet accounts.
LO.2 Mini, Inc., earns pretax book net income of $750,000 in 2013. Mini deducted$20,000 in bad debt expense for book purposes. This expense is not yet deductible for tax purposes. Mini has no other
LO.2 Using the facts of Problem 14, determine the 2013 end-of-year balance in Skipper’s deferred tax asset and deferred tax liability balance sheet accounts.
LO.2 Skipper, in Problem 12, reports $600,000 of pretax book net income in 2013.Skipper’s book depreciation exceeds tax depreciation in this year by $50,000. Skipper has no other temporary or
LO.2 Using the facts of Problem 12, determine the 2012 end-of-year balance in Skipper’s deferred tax asset and deferred tax liability balance sheet accounts.
LO.2 Skipper, Inc., earns pretax book net income of $500,000 in 2012. Skipper acquires a depreciable asset in 2012, and first-year tax depreciation exceeds book depreciation by $80,000. Skipper has
LO.2 Cramer, a stock analyst, wants to understand how the income tax expense reported in financial statements will affect stock prices. Briefly describe the objective of ASC 740 (SFAS 109) with
LO.1 Evaluate the following statement: The primary purpose of the Schedule M–1 and Schedule M–3 is to help the IRS craft its audits of the taxpayer. (Hint: Focus on the primary reason the IRS
LO.2 Indicate whether the following temporary differences produce deferred tax assets or deferred tax liabilities (considered independently).a. Book depreciation in excess of tax depreciation.b. Tax
LO.1 Indicate whether the following items create temporary or permanent differences.a. Book depreciation in excess of tax depreciation.b. Tax depreciation in excess of book depreciation.c. Municipal
LO.1 Define the terms temporary difference and permanent difference as they pertain to the financial reporting of income tax expenses. Describe how these two book-tax differences affect the gap
LO.1 Parent, a domestic corporation, owns 100% of Block, a foreign corporation, and Chip, a domestic corporation. Parent also owns 45% of Trial, a domestic corporation.Parent receives no
LO.6 Damon Allred is going to purchase either the stock or the assets of Platinum Corporation.All of the Platinum stock is owned by Charley. Damon and Charley agree that Platinum is worth $900,000.
LO.6 Gail and Harry own the GH Partnership, which has conducted business for 10 years. The bases for their partnership interests are $100,000 for Gail and $150,000 for Harry. GH Partnership has the
LO.6 Hector and Walt are purchasing the Copper Partnership from Jan and Gail for$700,000, with Hector and Walt being equal partners. Based on the negotiations, Jan and Gail have succeeded in having
LO.6 Emily and Freda are negotiating with George to purchase the business he operates in corporate form (Pelican, Inc.). The assets of Pelican, Inc., a C corporation, are as follows:Asset Basis FMV
LO.5 Megan owns 55% and Vern owns 45% of a business entity. The owners would like to share profits with 55% for Megan and 45% for Vern and to share losses with 80% for Vern and 20% for Megan.
LO.5 Jo and Velma are equal owners of the JV Partnership, with Jo investing $500,000 and Velma contributing land and a building (adjusted basis of $125,000; fair market value of $500,000). In
LO.5 Indigo, Inc., a personal service corporation, has the following types of income and losses for 2012:Active income $325,000 Portfolio income 49,000 Passive loss 333,000a. Calculate Indigo’s
LO.5 An entity engages in the following transactions during the taxable year:• Sells stock held for four years as an investment for $50,000 (adjusted basis of$28,000).• Sells land used in the
LO.5 Melinda has a 30% ownership interest in an entity for which she initially contributed$180,000. She is one of the original owners of the business. None of the owners are related. During the life
LO.5 Agnes, Becky, and Carol form a business entity with each contributing the following:Adjusted Basis Fair Market Value Ownership Percentage Agnes: Cash $100,000 $100,000 40%Becky: Land 60,000
LO.5 Andrew and Evans form a business entity with each contributing the following property:Andrew Evans Cash $400,000 Land $400,000** Fair market value. Adjusted basis is $125,000.Three months later,
LO.4 Clay Corporation has been an electing S corporation since its incorporation 10 years ago. During the first three years of operations, it incurred total losses of $250,000.Since then, Clay has
LO.3, 4 Flower, Inc., a C corporation, has taxable income of $800,000 for 2012. It has used up the accumulated earnings credit and has no additional “reasonable needs of the business” for the
LO.4 Marci and Jennifer each own 50% of the stock of Lavender, a C corporation. After each of them is paid a “reasonable” salary of $125,000, the taxable income of Lavender is normally around
LO.4 Parrott, Inc., a C corporation, is owned by Abner (60%) and Deanna (40%).Abner is the president, and Deanna is the vice president for sales. All three are cash basis taxpayers. Late in 2011,
LO.4 A business entity’s taxable income before the cost of certain fringe benefits paid to owners and other employees is $400,000. The amounts paid for these fringe benefits are as follows:Owners
LO.4 Three sisters and their brother, all unmarried, own and operate a dairy farm.They live on the farm and take their meals on the farm for the “convenience of the employer.” The fair market
LO.3 Falcon Corporation, a calendar year taxpayer, is a deepwater offshore drilling company that is planning to sell drilling equipment that it no longer needs. The drilling equipment has an adjusted
LO.3 Owl is a closely held corporation owned by eight shareholders (each has 12.5%of the stock). Selected financial information provided by Owl follows:Taxable income $6,250,000 Positive AMT
LO.3 Sand Corporation will begin operations on January 1.Earnings for the next five years are projected to be relatively stable at about $95,000 per year. The shareholders of Sand are in the 33% tax
LO.2, 3 Jack, a married taxpayer, is going to establish a manufacturing business. He anticipates that the business will be profitable immediately due to a patent he holds. He anticipates that profits
LO.1, 2, 3 Amy and Jeff Barnes are going to operate their florist shop as a partnership or as an S corporation. After paying salaries of $45,000 to each of the owners, the shop’s earnings are
LO.3 Red, White, Blue, and Magenta have taxable income as follows:Corporation Taxable Income Blue $ 91,000 White 320,000 Red 800,000 Magenta 50,000,000a. Calculate the marginal tax rate and the
LO.2 Sea Green Enterprises has the following assets and liabilities on its balance sheet:Net Book Value Fair Market Value Assets $600,000 $925,000 Liabilities 200,000 200,000 Sea Green has just lost
LO.5, 6 Green Partnership, a general partnership, has many opportunities to use special allocations. One of the special allocations available to Green is the optional adjustment-to-basis election
LO.5 Using the legend provided, indicate which form of business entity each of the following characteristics describes. Some of the characteristics may apply to more than one form of business
LO.2, 3, 4, 5, 6 Using the legend provided, indicate which form of business entity each of the following characteristics describes. Some of the characteristics may apply to more than one form of
LO.6 Vladimir owns all of the stock of Rose, Inc., a C corporation. The fair market value of the stock (and Rose’s assets) is about five times Vladimir’s adjusted basis for the stock. He is
LO.6 Boswell wants to sell his sole proprietorship, a hair salon, to Eleanor for $450,000.a. Does it matter to Boswell whether the form of the transaction is a sale of the business or a sale of the
LO.5 A partner’s ability to pass through and deduct his or her share of the partnership loss is limited by the partnership interest basis.a. Does the Code further limit the loss pass-through and
LO.5 Dexter, a partner in the Warbler Partnership, uses the cash method of accounting.a. Are the distributions of earnings by the partnership to Dexter taxed to him? Explain.b. Would the answer in
LO.5 The conduit concept applies to an S corporation. Are there any circumstances in which an S corporation is a taxpayer rather than merely a tax reporter? Explain.
LO.5 Why are special allocations either permitted or required for the partners in a partnership, yet are not permitted for the shareholders in a C corporation or an S corporation?
LO.4 Tammy and Willy own 40% of the stock of Roadrunner, an S corporation. The other 60% is owned by 99 other shareholders (all are single and unrelated). Tammy and Willy have agreed to a divorce and
LO.4, 5 Arnold is going to conduct his business in corporate form. What factors should he consider in deciding whether to operate as a C corporation or as an S corporation?
LO.4 Orange and Rust have both been in business for approximately nine years. Each corporation has 14 shareholders and taxable income of about $350,000 per year. Neither corporation has made any

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