28) Dallas Corporation, not a dealer in securities, realizes taxable income of $60,000 from the operation of its business. Additionally, in the same year, Dallas realizes a long-term capital loss of $10,000 from the sale of marketable securities. If the corporation realizes no other capital gains or losses, what is the proper treatment for the $10,000 long-term capital loss on the tax return?
A) Use $3,000 of the loss to reduce taxable income and carry $7,000 of the long-term capital loss forward for five years.
B) Use $6,000 of the loss to reduce taxable income and carry $4,000 of the long-term capital loss forward for five years.
C) Use $10,000 of the long-term capital loss to reduce taxable income.
D) Carry the $10,000 long-term capital loss back three years as a short-term capital loss, then forward five years.
Answer: D
Page Ref.: C:3-7 Objective: 2
29) Evans Corporation has a $15,000 net capital loss in 2011. The corporation reported the following capital gain net income during the past three years. Identify which of the following statements is true. Capital Gain Year Net Income 2008 $10,000 2009 11,000 2010 5,000 A) The loss is used to offset the gains from 2010 and then carried back to offset $10,000 of the gains in 2008.
B) The loss is used to offset the $11,000 of the 2009 gains and then carried back to offset $4,000 of the year 2008 net gain.
C) The loss is used to offset $3,000 of the current year ordinary income, all of the year 2008 capital gains, and $7,000 of the year 2009 net gain.
D) The loss is used to offset the year 2008 net gains, then $5,000 of the year 2009 net gains. Answer: D
Explanation: D) The net capital loss is carried back to the year 2008 and then used to offset capital gains in subsequent tax years.
Page Ref.: C:3-7; Example C:3-3 Objective: 2
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30) Booth Corporation sells a building classified as a residential rental property for $200,000. The MACRS straight-line depreciation taken is $20,000 and the adjusted basis of the building is $170,000. Booth Corporation must recognize ordinary income of A) $30,000. B) $20,000. C) $4,000. D) $0.
Answer: C
Explanation: C) Sales price $200,000 Minus: adjusted basis (170,000) Realized gain $ 30,000 Minus: ordinary income under (4,000) (Lesser of: (1) $20,000 depreciation Sec. 291 recapture under Sec. 1245 × 0.20 or (2) $30,000 realized gain × 0.20) Sec. 1231 gain $ 26,000 Page Ref.: C:3-7; Example C:3-4 Objective: 2
31) Which of the following items indicate that a company does not need a valuation allowance? A) existing sales contracts that will produce sufficient income to realize the deferred tax asset B) excess of appreciated asset value over tax basis sufficient to realize the deferred tax asset C) a strong history of earnings without considering the deferred tax asset D) All of the above are correct. Answer: D
Page Ref.: C:3-44 Objective: 7
32) Which of the following statements is correct?
A) Deferred tax assets/liabilities are always classified as current on the balance sheet.
B) The classification of deferred tax assets/liabilities depends on whether the related asset is current or noncurrent.
C) Deferred tax assets are classified based on their expected reversal dates.
D) Deferred tax assets/liabilities are classified as noncurrent on the balance sheet. Answer: B
Page Ref.: C:3-45 and C:3-46 Objective: 7
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33) Organizational expenditures include all of the following except for A) costs incurred when issuing stock.
B) legal costs incident to the creation of the corporation. C) expenses of organizational meetings. D) fees paid to the state of incorporation. Answer: A
Page Ref.: C:3-9 Objective: 2
34) Green Corporation is incorporated on March 1 and begins business on June 1. Green's first tax year ends on October 31, i.e., a short year. Green incurs the following expenses during the year: Month Type Amount February Draft charter $ 2,000 March Stock commission 30,000 March Accounting fees to set up books 2,000 April Temporary director fees 2,000 December Charter modification fee 1,000 What is the deduction for organizational expenses if Green chooses to deduct its costs as soon as possible? A) $36,000 B) $5,028 C) $667 D) $500 Answer: B
Explanation: B) Amortization of organizational expenses does not include the stock commission, which reduces paid-in capital, and the charter modification, which is incurred after the initial year-end.
$2,000 + $2,000 + $2,000 = $6,000 - $5,000 = $1,000/180 mo. × 5 mo. = $28 $5,000 + 28 = $5,028
Page Ref.: C:3-8 and C:3-9; Example C:3-5 Objective: 2
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35) Edison Corporation is organized on July 31. The corporation starts business on August 10. The
corporation adopts a November 30 fiscal year end. The following expenses are incurred during the year: Date Type Amount Attorney's fees associated with obtaining charter 6-30 Underwriter fees for stock sale $ 10,000 7-10 Transfer cost for property contributed to the corporation for 25,000 7-15 stock 3,000 6-30 Costs of organizational meetings 2,000 12-6 Legal fees to modify charter 4,000 What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending November 30? A) $16,000 B) $12,000 C) $5,156 D) $800 Answer: C
Explanation: C) The underwriter fees and asset transfer cost are not organizational costs. The legal fee to modify charter is incurred after the November 30 initial year end.
$10,000 + $2,000 = $12,000 - $5,000 = $7,000 ($7,000/180) × 4 = $156; $5,000 + 156 = $5,156 Page Ref.: C:3-8 and C:3-9; Example C:3-5 Objective: 2
36) Identify which of the following statements is true.
A) Organizational expenditures incurred by a corporation do not include the cost of accounting services necessary to create the corporation.
B) Organizational expenditures incurred by a corporation do not include the cost of printing stock. C) Unamortized organizational expenses cannot be deducted when the corporation is liquidated. D) All of the above are false. Answer: B
Page Ref.: C:3-9 Objective: 2
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37) Identify which of the following statements is true.
A) A corporation that accrues compensation payable to an employee must pay the amount within two and one-half months after the close of the taxable year to deduct the amount in the year of the accrual. B) Accrued compensation that is deductible in the year of accrual is considered to be part of an IRS deferred compensation plan.
C) Accrued compensation not paid within three and one-half months after the close of the corporation tax year is deducted in the year following the accrual. D) All of the above are false. Answer: A
Page Ref.: C:3-10 Objective: 2
38) Super Corporation gives a painting to a museum for public display on August 6. The painting was purchased on April 3 of the same year for $20,000 and is worth $30,000 at the date of gift. Also, Super accrues a charitable contribution on December 30 and pays the $12,000 contribution on February 1 of the next year. Super Corporation is a calendar-year corporation that uses the accrual method of accounting. Before considering the 10% limitation rule, the maximum deduction for the current year is A) $12,000. B) $20,000. C) $30,000. D) $32,000. Answer: D
Explanation: D) The $20,000 basis for the painting is used to compute the deduction since it is held less than one year and the appreciation would be a short-term capital gain if sold. As long as the pledge is paid in the first 2 1/2 months of the next tax year, the corporation may deduct the entire $12,000 in the current year. The total deduction is $32,000 ($12,000 + $20,000). Page Ref.: C:3-11 and C:3-12 Objective: 2
39) Identify which of the following statements is true.
A) \property whose sale would have produced a short-term capital gain.
B) The Twilight Corporation purchases inventory for $5,000. Its FMV on the date it is donated to the Blue-Gray Hospital for the care of the needy is $14,000. The maximum charitable contribution deduction available for the donation is $9,000.
C) Corporations' charitable deductions are limited to 20% of their adjusted taxable income. D) All of the above are false. Answer: B
Page Ref.: C:3-11 Objective: 2
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