66) Baxter Corporation is a personal service corporation. Baxter Corporation has taxable income of $10,000. Baxter Corporation's tax is A) $1,500. B) $3,400. C) $3,500. D) $3,900. Answer: C
Explanation: C) Personal service corporations pay an income tax liability equal to 35% of taxable income. Page Ref.: C:3-24 Objective: 4
67) Which of the following is not subject to classification as a personal service corporation? A) construction B) law
C) accounting
D) performing arts Answer: A
Page Ref.: C:3-24 Objective: 4
68) Identify which of the following statements is true.
A) Personal service corporations may be subject to the passive activity limitations. B) All C corporations may be subject to the passive activity limitations.
C) Personal service corporations may use passive losses and credits to offset net active income but not portfolio income.
D) Both A and B are true. Answer: A
Page Ref.: C:3-24 Objective: 4
69) Joker Corporation owns 80% of Klue Corporation. Joker Corporation also owns 45% of Lion
Corporation and 45% of Mark Corporation. Klue Corporation owns 40% of Lion Corporation and 10% of Mark Corporation. Which corporations are members of a controlled group? A) Klue, Lion, and Mark Corporations
B) Joker, Klue, Lion, and Mark Corporations C) Joker, Klue, and Lion Corporations D) Joker and Klue Corporations Answer: C
Page Ref.: C:3-25 and C:3-26. Objective: 4
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70) Identify which of the following statements is false. A) Brown Corporation owns 60% of Clark Corporation and 65% of Davis Corporation. Davis Corporation owns 10% of Clark Corporation, and Clark Corporation owns 10% of Davis Corporation. The remaining stock is owned by an individual shareholder. Brown, Davis, and Clark Corporations are a parent-subsidiary controlled group.
B) There are three categories of control groups: parent-subsidiary, brother-sister, and combined. C) The controlled group test is applied on December 31.
D) A controlled group must apportion certain tax benefits among its members. Answer: A
Page Ref.: C:3-25 through C:3-28 Objective: 4
71) Andy owns 20% of North Corporation and 60% of Tent Corporation. North and Tent have only one class of stock outstanding. Barbara owns 50% of North Corporation and 20% of Tent Corporation. North and Tent Corporations will be brother-sister corporations if A) no stock ownership change occurs.
B) Barbara acquires an additional 10% of North stock.
C) Andy acquires an additional 10% of North stock and Barbara acquires an additional 10% of Tent stock. D) Barbara acquires an additional 10% of North stock and an additional 10% of Tent stock. Answer: C
Page Ref.: C:3-26 and C:3-27 Objective: 4
72) Sun and Moon Corporations each have only one class of stock outstanding. Their stock ownership is shown below. Shareholder Sun Corporation Moon Corporation Arthur 50% 60% Brenda 20% 40% Charles 30% --- Which of the four stock ownership changes that are illustrated is the minimum change that is needed if Sun and Moon Corporations are to be brother-sister corporations? (Assume the two corporations are equally valued.)
A) No stock ownership change is required.
B) Charles must acquire an additional 10% of Sun Corporation. C) Charles must acquire an additional 5% of Moon Corporation. D) Arthur must acquire an additional 30% of Moon Corporation. Answer: B
Page Ref.: C:3-26 through C:3-28 Objective: 4
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73) Grant Corporation is not a large corporation for estimated tax purposes and reports on a calendar-year basis. Grant expects the following results: Regular tax $248,000 Alternative minimum tax 40,000 Total tax due $288,000 Grant's tax liability for last year was $240,000. Grant's minimum total estimated tax payment for this year to avoid a penalty is A) $240,000. B) $248,000. C) $288,000. D) $280,000. Answer: A
Explanation: A) The estimated tax liability for a small corporation is the lesser of 100% of the current year's tax liability (regular tax and alternative minimum tax), or 100% of last year's tax liability, or $240,000.
Page Ref.: C:3-35 and C:3-36 Objective: 5
74) Identify which of the following statements is true.
A) A corporate tax return must be filed by the fifteenth day of the fourth month following the close of the corporation's tax year.
B) A corporation is required to file a tax return even if it has no taxable income.
C) A corporation with gross receipts, total income, and total assets of $1,000,000 or less is permitted to file Form 1120-A.
D) All of the above are false. Answer: B
Page Ref.: C:3-38 and C:3-39 Objective: 6
75) Identify which of the following statements is false. A) A corporation must file a tax return annually.
B) A corporation can obtain an automatic six-month extension of time to file its tax return.
C) The IRS will permit an extension of time to file a corporate return beyond the original due date only when the corporation's delay is reasonable. D) The IRS can rescind the extension period. Answer: C
Page Ref.: C:3-38 and C:3-39 Objective: 6
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76) Identify which of the following statements is true.
A) Form 1120 Schedule L contains the corporation's income statement.
B) Schedule M-1 (Form 1120) is an analysis of the corporation's retained earnings.
C) Organizational expense amortized over fifteen years for purposes of determining taxable income
results in an upper adjustment in the initial years to book income on the Schedule M-1 when the expense is being amortized over ten years for book income purposes. D) All of the above are false. Answer: C
Page Ref.: C:3-39 through C:3-43 Objective: 6
77) Bishop Corporation reports taxable income of $700,000 on its tax return. Given the following
information from the corporation's records, determine Bishop's net income per its financial accounting records. Deduction for federal income taxes per books $240,000 Depreciation claimed on the tax return 135,000 Depreciation reported on the financial accounting books 75,000 Life insurance proceeds on death of a corporate officer 100,000 A) $520,000 B) $620,000 C) $660,000 D) $560,000 Answer: B
Explanation: B) Taxable income $700,000 Plus: excess of tax depreciation over book depreciation 60,000 Plus: nontaxable life insurance proceeds 100,000 Minus: federal income taxes (240,000) Net income $620,000 Page Ref.: C:3-40 and C:3-41 Objective: 6
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78) Dreyfuss Corporation reports the following items:
Unappropriated retained earnings, beginning of year: $800,000 Net income: 700,000
Federal income tax refund for last year taken directly to retained earnings: 50,000 Cash dividends paid this year: 500,000
The unappropriated retained earnings at year-end are A) $1,000,000. B) $1,050,000. C) $1,500,000. D) $2,050,030. Answer: B
Explanation: B) Beginning balance $ 800,000 Plus: net income 700,000 Plus: tax refund 50,000 Minus: dividends paid ( 500,000) Ending balance $1,050,000 Page Ref.: C:3-42; Example C:3-52 Objective: 6
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