53) Identify which of the following statements is false. A) The 70% dividends-received deduction is limited to 70% of the taxable income of the corporation
without regard to any NOL deduction, any capital loss carryback, and the dividends-received deduction itself unless the dividends-received deduction produces an NOL.
B) Members of an affiliated group can claim a 90% dividends-received deduction for dividends received from other group members that is not subject to a taxable income limitation.
C) A corporate dividends-received deduction is not allowed for dividends received on stock held for 40 days.
D) All of the above are false. Answer: B
Page Ref.: C:3-16 Objective: 2
54) Money Corporation has the following income and expenses for the tax year: Gross profit on sales: $200,000 Expenses: 700,000 Dividends received from less-than-20%-owned domestic corporations: 20,000 What is Money's net operating loss? A) $494,000 B) $480,000 C) $520,000 D) $220,000 Answer: A
Explanation: A) Gross income from operations $200,000 Plus: dividends 20,000 Gross income $220,000 Minus: expenses ( 700,000) Taxable income before DRD ($480,000) Minus: DRD ($20,000 x 0.70) ( 14,000) NOL ($494,000) Page Ref.: C:3-16 Objective: 2
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55) Miller Corporation has gross income of $100,000, which includes $40,000 of dividends from a 10%-owned corporation. In addition, Miller has $80,000 of expenses. Miller's taxable income or loss is A) $20,000. B) $6,000 C) $0.
D) ($8,000). Answer: D
Explanation: D) The dividends-received deduction of 70% of dividends received is not limited, since using the entire $28,000 amount will produce a NOL. Other income $ 60,000 Plus: dividends 40,000 Gross income $100,000 Minus: expenses ( 80,000) Taxable income before DRD $ 20,000 Minus: DRD (0.70 × $40,000 ( 28,000) Taxable income ($ 8,000) Page Ref.: C:3-16 Objective: 2
56) Two days before the ex-dividend date, Drexel Corporation buys 100 shares of Zebra Corporation stock (less than 1%) for $200,000. Drexel Corporation receives $10,000 of dividends from Zebra
Corporation. Two weeks after the ex-dividend date, Drexel Corporation sells the Zebra Corporation stock for $190,000. Which of the following statements is correct? A) Drexel Corporation cannot recognize a capital loss.
B) Drexel Corporation cannot take a dividends-received deduction on the Zebra Corporation dividend. C) Drexel Corporation will be allowed a 70% dividends-received deduction when reporting the Zebra Corporation dividend.
D) Drexel Corporation will receive no dividends-received deduction because the stock was purchased ex-dividend. Answer: B
Explanation: B) The forty-six-day minimum stock ownership requirement prevents taking a dividends-received deduction. Page Ref.: C:3-17 Objective: 2
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57) West Corporation purchases 50 shares (less than 1%) of Perch Corporation common stock on April 3. The ex-dividend date is April 4. West Corporation pays $50,000 for the stock and receives a dividend of $5,000 on the Perch stock. On May 1, West Corporation sells the Perch stock for $45,000. West's taxable income before the dividends-received deduction is $4,000. West's dividends-received deduction is A) $3,500. B) $3,200. C) $2,800. D) $0.
Answer: D
Explanation: D) The forty-six-day minimum stock ownership requirement prevents taking a dividends-received deduction. Page Ref.: C:3-17 Objective: 2
58) Identify which of the following statements is true.
A) A corporate NOL can be carried back two years and forward 15 years.
B) An election to forgo an NOL carryback must be made on or before the return due date (including extensions) for the year in which the NOL is incurred.
C) In computing an NOL for the current year, a deduction is allowed for NOLs from previous years. D) All of the above are false. Answer: B
Page Ref.: C:3-19 Objective: 2
59) Identify which of the following statements is true.
A) The charitable contribution deduction is computed after the deduction for an NOL.
B) The charitable contribution deduction is computed after the dividends-received deduction.
C) The NOL deduction claimed by a corporation must be taken after the dividends-received deduction. D) All of the above are false. Answer: C
Page Ref.: C:3-19 Objective: 2
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60) Webster, who owns all the Bear Corporation stock, purchases a dump truck from Bear Corporation in January. The truck cost $12,000 and has a $10,000 adjusted basis at the time of the sale. Webster pays Bear the truck's $8,000 FMV. Later in the same year, Webster sells the dump truck to an unrelated party for $6,000. Webster can recognize a loss of A) $4,000. B) $2,000. C) $3,000. D) $5,000. Answer: B
Explanation: B) Webster and Bear Corporation are related parties under Sec. 267(b). The $2,000 loss on Bear Corporation's sale to Webster is disallowed. However, no disallowance of the $2,000 loss occurs on the sale by the purchaser to an unrelated party. The disallowed loss on the first sale cannot be used by Webster when he sells the truck unless he has a gain to offset it against. In this problem, he has a $2,000 loss ($6,000 sales price - $8,000 basis). Page Ref.: C:3-21 Objective: 2
61) Walter, who owns all of the Ajax Corporation stock, purchases a truck from Ajax Corporation in January. The truck cost $12,000 and has a $10,000 adjusted basis. Walter pays the truck's $8,000 FMV. Later in the same year, Walter sells the truck to an unrelated party for $13,000. With respect to these transactions
A) Ajax Corporation reports a loss of $2,000 and Walter reports a gain of $5,000. B) Ajax Corporation reports no loss and Walter reports a gain of $3,000.
C) Ajax Corporation reports a loss of $4,000 and Walter reports a gain of $5,000. D) Ajax Corporation reports no loss and Walter reports a gain of $5,000. Answer: B
Explanation: B) Ajax recognized no loss on the sale because of the Sec. 267(a) related party sale
transaction rules (i.e., Ajax Corporation and Walter are related parties). When Walter sells the truck for a $5,000 ($13,000 - $8,000) gain, he is allowed to use the $2,000 disallowed loss as an offset. Page Ref.: C:3-21 Objective: 2
62) Davis Corporation, a manufacturer, has taxable income of $150,000. Davis's regular tax liability is A) $15,000. B) $41,750. C) $34,000. D) $35,000. Answer: B
Explanation: B) $50,000× 0.15 = $ 7,500 25,000 × 0.25 = 6,250 25,000 × 0.34 = 8,500 50,000 × 0.39 = 19,500 Regular tax $41,750 Page Ref.: C:3-23 Objective: 3
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63) Delux Corporation, a retail sales corporation, has a taxable income of $500,000. Delux Corporation's regular tax liability is A) $158,250. B) $162,200. C) $170,000. D) $175,000. Answer: C
Explanation: C) $ 50,000× 0.15 = $ 7,500 25,000 × 0.25 = 6,250 25,000 × 0.34 = 8,500 235,000 × 0.39 = 91,650 165,000 × 0.34 = 56,100 $170,000 Page Ref.: C:3-23 Objective: 3
64) Access Corporation, a large manufacturer, has a taxable income of $16,000,000. Access Corporation's tax is
A) $5,440,000. B) $5,530,000. C) $5,600,000. D) $5,680,000. Answer: B
Explanation: B) [(16,000,000 - 15,000,000) × 0.38] + 5,150,000 = 5,530,000 Page Ref.: C:3-23 Objective: 3
65) Glacier Corporation, a large retail sales company, has a taxable income of $20,000,000. What is Glacier Corporation's tax? A) $6,800,000 B) $7,000,000 C) $7,800,000 D) $7,200,000 Answer: B
Explanation: B) When taxable income equals or exceeds $18,333,333, the tax is calculated by using a flat 35% rate. Therefore, the tax is $7,000,000 (0.35 × $20,000,000). Page Ref.: C:3-24 Objective: 3
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