Accounting for Income Taxes
Exam Questions
Course Introduction
Accounting for Income Taxes explores the principles, standards, and procedures involved in accounting for income taxes under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The course covers topics such as deferred tax assets and liabilities, temporary and permanent differences, tax provision calculations, income tax disclosures, and the impact of changing tax laws on financial statements. Students will also examine the practical implications of tax accounting in corporate settings, including recent developments and case studies that highlight real-world challenges in preparing tax-related financial information. Through lectures, problem-solving exercises, and analysis of real financial statements, students will gain the knowledge needed to understand and apply income tax accounting concepts in various business environments.
Recommended Textbook
South Western Federal Taxation 2009 Corporations Partnerships Estates and Trusts 32nd Edition
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2
Chapter 1: Understanding and Working With the Federal Tax Law
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Sample Questions
Q1) Revenue measures typically originate in the Senate Finance Committee of the U.S.Congress.
A)True
B)False
Answer: False
Q2) What are the two major types of conventional tax services?
Answer: Tax services are either annotated or topical.However,today with hypertext linking,most of the electronic tax services may be entered using either a Code Section or a topical search.The two major paper annotated services are organized by Internal Revenue Code Sections,whereas most of the services are organized by major topics.The following major services are available:Standard Federal Tax Reporter,Commerce Clearing House.(annotated)
United States Tax Reporter,Research Institute of America (entitled Federal Taxes prior to July 1992).(annotated)
Mertens Law of Federal Income Taxation,West Group.(topical)
Federal Tax Coordinator 2d,Research Institute of America.(topical)
Tax Management Portfolios,Bureau of National Affairs.(topical)
CCH's Tax Research Consultant,Commerce Clearing House.(topical)
Analysis of Federal Taxes: Income,Research Institute of America.(topical)
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Chapter 2: Corporations: Introduction and Operating Rules
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Sample Questions
Q1) Eagle Corporation owns stock in Hawk Corporation and has taxable income of $233,000 for the year before considering the dividends received deduction.Hawk Corporation pays Eagle a dividend of $300,000,which was considered in calculating the $233,000.What amount of dividends received deduction may Eagle claim if it owns 25% of Hawk's stock?
A)$0.
B)$186,400.
C)$240,000.
D)$300,000.
E)None of the above.
Answer: C
Q2) Coyote Enterprises,an S corporation,had a capital loss of $50,000 during the year.Gerald,who owns 40% of Coyote's stock,may report $20,000 of Coyote's capital loss on his individual Federal income tax return (Form 1040).
A)True
B)False
Answer: True
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Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Arlene,an advertising executive,pays a contractor to build a lodge on property she owns in Colorado.If Arlene sells the lodge,the proceeds (less the cost of the land)will be DPGR.
A)True
B)False
Answer: False
Q2) Andrew,a process engineer for an oil company,inherited a beachfront lot from an uncle.In his spare time,he builds a beach cottage on the lot and later sells the property through a realtor.The sale proceeds Andrew receives are not DPGR.
A)True
B)False
Answer: True
Q3) For testing purposes as to DPAD,taxable income is replaced by modified adjusted gross income in the case of an individual.
A)True
B)False Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) A person who performs services for a corporation in exchange for stock cannot be treated as a member of the transferring group even if that person also transfers some property to the corporation.
A)True
B)False
Q2) The use of § 351 is not limited to the initial formation of a corporation,and it can apply to later transfers as well.
A)True
B)False
Q3) In order to retain the services of Eve,a key employee in Ted's sole proprietorship,Ted contracts with Eve to make her a 30% owner.Ted incorporates the business receiving in return 100% of the stock.Three days later,Ted transfers 30% of the stock to Eve.Under these circumstances,§ 351 will not apply to the incorporation of Ted's business.
A)True
B)False
Q4) If a corporation is thinly capitalized,all debt is reclassified as equity.
A)True
B)False
6
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Chapter 5: Corporations: Earnings and Profits and Dividend
Distributions
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Sample Questions
Q1) Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy)in 2008.
Q2) Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will always be taxed as dividend income.
A)True
B)False
Q3) Intangible drilling costs deducted currently.
Q4) State income taxes paid in 2008.
Q5) Nondeductible fines and penalties incurred in 2008.
Q6) Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.
A)True
B)False
Q7) A constructive dividend must satisfy the legal requirements of a dividend as set forth by applicable state law.
A)True
B)False
7
Q8) Gain realized (but not recognized)on a like-kind exchange.
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Flamingo Corporation (E & P of $700,000)has 1,000 shares of stock outstanding.Jaime owns 400 shares,Lupe (Jaime's daughter)owns 400 shares,and the remaining 200 shares are owned by unrelated individuals.In an effort to raise funds for another investment,Jaime convinces Flamingo to redeem all of his shares for $380,000.Jaime acquired the stock seven years ago for $60,000.After the redemption,Jaime continued to serve as Flamingo's controller but Gabriella assumed his role as a member of the corporation's board of directors.As a result of the transaction,Jaime must recognize:
A)$380,000 dividend income.
B)$380,000 long-term capital gain.
C)$320,000 dividend income.
D)$320,000 long-term capital gain.
E)None of the above.
Q2) In a corporate liquidation governed by § 332,what considerations should be given in the distribution of property to a minority shareholder?
Q3) Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation.
Q4) What are the tax consequences of a qualifying stock redemption to the distributing corporation?
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Chapter 7: Corporations: Reorganizations
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Q1) In a ___________________ reorganization,assets of the acquiring corporation are transferred to the target.The acquiring must acquire at least ___________________ percent of the target's stock.
Q2) The objective of the § 382 limitation is to restrict the use of tax carryover benefits to a hypothetical future income stream from the former loss corporation's assets,based on its stock value at the time of the reorganization.
A)True
B)False
Q3) Bark and Wood Corporations are created by Tree Corporation.Tree transfers its calculator business to Bark in exchange for all of Bark's stock.Tree distributes the Bark stock to its shareholders in exchange for 60% of their Tree stock.Next,Tree transfers its slide ruler division to Wood for all of its stock.Tree distributes the Wood stock to its shareholders in exchange for their remaining Tree stock.Tree then liquidates.Tree had operated both lines of business for 35 years.
Q4) Causes the § 382 limitation to apply to loss carryovers and excess credits acquired from a loss corporation.
Q5) Prevents transactions that appear to be a sale from qualifying as nontaxable reorganizations.
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Chapter 8: Consolidated Tax Returns
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Q1) Legislative Regulations are the basis for most of the consolidated return rules. The Code offers few details in this area.
A)True
B)False
Q2) How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
Q3) Most of the rules governing the use of consolidated returns are found in _________________________ regulations adopted since 1969.
Q4) In computing consolidated taxable income,the purchase of database services by Subsidiary from Parent is an example of a(n)_________________________ transaction.
Q5) A Federal consolidated group can claim a dividends received deduction for payments among the affiliates.
A)True B)False
Q6) In an affiliated group,the parent must own 100 percent of each of the subsidiaries.
A)True B)False
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Chapter 9: Taxation of International Transactions
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Sample Questions
Q1) Which of the following situations requires the filing of an information return with the U.S.government?
A)A domestic corporation that is 25% or more foreign owned.
B)A foreign corporation carrying on a trade or business in the United States.
C)U.S. persons who acquire or dispose of an interest in a foreign partnership.
D)All of the above.
E)None of the above.
Q2) Which of the following statements best describes the purpose of § 482?
A)To place a controlled entity on a tax parity with an uncontrolled entity with regard to prices charged by the entities.
B)To allow the IRS to select the best method for determining transfer prices for U.S. taxpayers.
C)To alleviate double taxation problems generated by related entities doing business in two or more countries.
D)To provide tax benefits to U.S. multinationals that export U.S. produced property.
E)None of the above.
Q3) Foreign tax credit allowed for withholding taxes on payments from foreign sources.
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Page 11
Chapter 10: Partnerships: Formation, operation, and Basis
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Sample Questions
Q1) Harry and Sally are considering forming a partnership.Both taxpayers use the calendar year and are cash basis taxpayers.The partnership will not be a tax shelter.The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting.Also,the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership. As their tax adviser,identify the issues that must be considered in selecting an accounting method and tax year for the partnership.
Q2) John and Ken formed the equal JK Partnership during the current year,with John contributing $50,000 in cash and Ken contributing land (basis of $30,000,fair market value of $20,000)and equipment (basis of $0,fair market value of $30,000).Ken recognizes no gain or loss on the contribution and his basis in his partnership interest is $30,000.
A)True
B)False
Q3) Substituted
Q4) Profits interest
Q5) Carryover
Q6) Cost versus percentage depletion decision
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Payment to a limited partner for $10,000 of goodwill,where goodwill is not provided for in the partnership agreement.
Q2) The ABC Partnership makes a proportionate distribution of its assets to Charles,in complete liquidation of his partnership interest.The distribution consists of $30,000 in cash and capital assets with a basis to the partnership of $20,000 and a fair market value of $28,000.None of the payment is for partnership goodwill.At the time of the distribution,Charles's partnership basis is $42,000 and the partnership has no liabilities and no "hot assets." If the partnership makes an optional basis adjustment election on a timely filed return,it recognizes:
A)Capital gain of $16,000 and increases the basis of its remaining assets by $8,000.
B)Capital loss of $8,000 and decreases the basis of its remaining assets by $16,000.
C)No gain or loss and increases the basis of its remaining assets by $8,000.
D)No gain or loss and decreases the basis of its remaining assets by $16,000.
E)None of the above.
Q3) Unstated goodwill
Q4) Technical termination
Q5) Substantially appreciated inventory
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Chapter 12: S Corporations
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Sample Questions
Q1) During 2008,Houston Nutt,the sole shareholder of a calendar year S corporation,received a distribution of $16,000.On December 31,2007,his stock basis was $4,000.The corporation earned $11,000 ordinary income during the year.It has no accumulated E & P.Which statement is correct?
A)Nutt recognizes a $1,000 LTCG.
B)Nutt's stock basis will be $2,000.
C)Nutt's ordinary income is $15,000.
D)Nutt's return of capital is $11,000.
E)None of the above.
Q2) ____________________ husband and wife must consent if they own their stock jointly.
Q3) Distribution of _________________ property should be avoided.
Q4) Which of the following items are increases on Schedule M-3 on the Form 1120S,for an S corporation with $230,000 in ordinary income?
A)An IRS agent's determination of unreasonable compensation of $43,000.
B)Charitable contributions of $15,000.
C)Receipt of $220,000 in tax-exempt insurance proceeds.
D)Business gifts in excess of $25.
E)a and d
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) Net capital gain.
Q2) Net capital loss.
Q3) Which of the following business entity forms are subject to single taxation on the profits and which are subject to double taxation?
a.Sole proprietorship.
b.Partnership.
c.C corporation.
d.S corporation.
e.LLC.
Q4) Section 1244 ordinary loss treatment is available to shareholders in a C corporation but not to those in an S corporation.
A)True
B)False
Q5) C corporation.
Q6) The tax treatment of S corporation shareholders with respect to fringe benefits is not the same as the tax treatment for C corporation shareholders.
A)True
B)False
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Chapter 14: Exempt Entities
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Sample Questions
Q1) Which of the following exempt organizations are required to file Form 990 (Return of Organization Exempt from Income Tax)?
A)Federal agencies.
B)Churches.
C)Exempt organizations whose annual gross receipts do not exceed $25,000.
D)Private foundations.
E)None of these entities must file Form 990.
Q2) Under what part of § 501(c)are most organizations exempt from Federal income taxation?
Q3) Which of the following are consequences of tax-exempt status?
A)Not necessary to file a Federal income tax return.
B)Generally exempt from Federal income tax.
C)Contributions to the exempt organization always are deductible by the donor.
D)Only a.and b.
E)a.,b.,and c.
Q4) Tax on excess business holdings
Q5) Membership lists
Q6) Kentwood Rodeo Club
Q7) Tax on self-dealing
Q8) Form 2758
Page 16
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Chapter 15: Multistate Corporate Taxation
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Q1) A ____________________ tax is designed to complement the local sales tax structure.
Q2) Ace Corporation owns all of the stock of Junior Corporation,a Delaware passive investment company.Ace operates strictly in nonunitary State B,which levies a 6% income tax.This year,Junior earned $200,000 of portfolio interest income and paid $150,000 of this amount to Ace in the form of a dividend.In which state(s)will the interest income create an income tax liability?
A)In both B and Delaware, according to the apportionment formulas of each.
B)Only in Delaware.
C)Only in B.
D)In neither state.
Q3) Define the terms allocation and apportionment as they are used in multistate income taxation.
Q4) Use tax would be due if an individual purchased an auto in State A and used it at his home in State B.
A)True
B)False
Q5) Operating an office to interview and hire employees
Q6) Summarize the principles of multistate tax planning.
Page 17
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Chapter 16: Tax Practice and Ethics
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Q1) A tax preparer and his/her client hold a privilege of confidentiality from the IRS,as to their discussions about completing a tax return.
A)True B)False
Q2) Dana underpaid his taxes by $170,000.Portions of the underpayment were attributable to negligence ($90,000)and to civil fraud ($80,000).Compute the total penalties incurred.
Q3) Kim underpaid her taxes by $30,000.Of this amount,$20,000 was due to negligence on her part,as her record-keeping system is highly inadequate.Determine the amount of any negligence penalty.
Q4) When a practitioner discovers an error in a client's prior return,AICPA tax ethics rules require that an amended return immediately be filed.
A)True B)False
Q5) The AICPA's Statements on Standards for Tax Services are advisory,not mandatory,on its members.
A)True B)False
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Chapter 17: The Federal Gift and Estate Taxes
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Q1) Which,if any,of the following is a correct statement regarding the filing of a gift tax return (Form 709)?
A)A donor must file a Form 709 in the same year in which the gift was made.
B)The due date of a Form 709 is the same as the due date of the donor's Form 1040.
C)A Form 709 may have to be filed even though the value of the gift was less than the amount of the annual exclusion.
D)Melody gives her husband a new Mercedes convertible for his birthday. Melody must file a Form 709 to report the gift even though no gift tax results.
E)None of the above.
Q2) Some states impose inheritance taxes,but the Federal tax system does not.
A)True
B)False
Q3) Derek and Tanya are husband and wife and live in Arizona,a community property state.If Derek receives a gift of land from his father,the land is their community property.
A)True
B)False
Q4) Note receivable issued by a grandson and forgiven by the decedent in her will.
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19
Chapter 18: Family Tax Planning
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Sample Questions
Q1) A decedent owned 15% of the voting stock of Falcon Corporation.Falcon has 43 shareholders.The decedent's estate can qualify for the § 6166 election.
A)True
B)False
Q2) No step-up in basis at death.
Q3) Christine makes a gift of stock (basis of $700,000; fair market value of $1,000,000)to her son,Jordan.As a result of the transfer,Christine paid a gift tax of $100,000.What is Jordan's income tax basis in the stock if the gift occurred in: a.1976?
b.2008?
Q4) Donee's basis for gain.
Q5) Derrick dies,and under the terms of his will,all of his property passes outright to Dion (Derrick's surviving wife).Under these circumstances,there is no need for Derrick's executor to make a QTIP election.
A)True
B)False
Q6) Made lifetime gifts.
Q7) Paid medical expenses prior to death.
Page 20
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Chapter 19: Income Taxation of Trusts and Estates
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Q1) The Williamson Estate generated distributable net income (DNI)this year of $120,000,one-third of which was tax-exempt interest,and the balance of which was long-term capital gain.Muffy Williamson,the sole income beneficiary of the estate,received a distribution of the entire $150,000 fiduciary accounting income of the entity.How is this distribution accounted for by Muffy?
A)$150,000 ordinary income.
B)$120,000 ordinary income.
C)$80,000 long-term capital gain, $40,000 exempt interest.
D)$100,000 long-term capital gain, $50,000 exempt interest.
Q2) For a calendar-year entity,the Form 1041 has an unextended due date of April 15.
Q3) Trusts are created exclusively to reduce tax liabilities.
A)True
B)False
Q4) The Gable Trust reports $20,000 business income and $10,000 exempt interest income,and it paid a $3,000 fiduciary fee.Gable's distributable net income is computed net of the full $3,000 deduction for the fees.
A)True
B)False
Q5) The entity is an information-reporting,not a tax-paying,taxpayer.
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