Accounting for Income Taxes Test Bank
Course Introduction
Accounting for Income Taxes explores the principles, standards, and applications involved in recognizing, measuring, presenting, and disclosing income taxes in financial statements. The course covers key concepts such as temporary and permanent differences between taxable and accounting income, deferred tax assets and liabilities, valuation allowances, and the impact of tax laws on financial reporting. Students will learn to prepare and analyze journal entries for income tax expense, deferred tax accounts, and tax provisions under relevant accounting standards (such as ASC 740 or IAS 12). Real-world case studies and contemporary issues, including uncertain tax positions and global tax considerations, are also examined to equip students with practical skills for financial reporting and decision-making.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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18 Chapters
1798 Verified Questions
1798 Flashcards
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Page 2
Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Mr Dodd resides in a state with a 6% sales and use tax. He recently traveled to another state to buy furniture and paid that state's 4% sales tax. Which of the following statements is true?
A) Mr. Dodd's use tax liability to his home state equals 2% of the purchase price of the furniture.
B) Mr. Dodd does not owe a use tax to his home state.
C) Mr. Dodd's use tax liability to his home state equals 6% of the purchase price of the furniture.
D) None of the above is true.
Answer: A
Q2) A tax on net income is an example of a transaction-based tax.
A)True
B)False
Answer: False
Q3) A user fee entitles the payer to a specific good or service from the government.
A)True
B)False
Answer: True
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Which of the following statements concerning income tax rate structures is false?
A) Under a progressive rate structure, the marginal rate and the average rate are equal.
B) Under a regressive rate structure, the average rate for low-income individuals is more than the average rate for high-income individuals.
C) Under either a regressive, proportionate, or progressive rate structure, high-income taxpayers pay more dollars of tax than low-income individuals.
D) In theory, a progressive rate structure results in equal economic sacrifice across taxpayers.
Answer: A
Q2) Which of the following taxes is most convenient for individuals to pay?
A) Sales tax
B) Use tax
C) Federal income tax
D) Real property tax
Answer: A
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4
Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.
A)True
B)False
Answer: True
Q2) Which of the following statements about related party transactions is false?
A) The transaction may lack the economic tension characteristic of a transaction between unrelated parties.
B) The transaction may reflect a fictitious market.
C) The parties to the transaction may have compatible financial objectives.
D) None of the above is false.
Answer: D
Q3) The tax cost of a transaction depends on the taxpayer's average tax rate for the year.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Mrs Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?
A) If Mrs Stout's regular marginal tax rate is 22%, she can elect to recharacterize the capital gain as ordinary income.
B) If Mrs Stout's regular marginal tax rate is 24%, the preferential tax rate has no value to her.
C) If Mrs Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax.
D) None of the above is false.
Q2) Which of the following statements about tax deferral is true?
A) The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases.
B) Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time.
C) The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms.
D) Both A. and C. are true.
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Page 6
Chapter 5: Tax Research
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Sample Questions
Q1) The U.S. Supreme Court:
A) Typically hears hundreds of tax cases each year.
B) May deny certiorari for a tax case because the court believes that the case involves a significant principle of law.
C) May grant certiorari for a tax case because two or more appellate courts have rendered conflicting opinions on the proper resolution of a tax issue.
D) Does not hear cases on tax issues.
Q2) Which of the following is not a primary authority?
A) Section 465 of the Internal Revenue Code
B) Munro v. Comm., 267 F.3d 1918 (CA-8, 2004)
C) CCH Master Tax Guide
D) All of the above are primary authorities.
Q3) When the Supreme Court denies certiorari, the decision of the appellate court is final.
A)True
B)False
Q4) Tax judicial decisions each have a single, unique citation.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Which of the following statements about the cash method of accounting is false?
A) Under the cash method, annual taxable income equals annual net cash inflow.
B) The revenue from a sale of goods is recognized when payment is received.
C) An expense is recognized when the expense is paid.
D) None of the above is false.
Q2) A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.
A)True
B)False
Q3) Mr Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2018. Mr Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2019. Mr Stern does not recognize the interest as income in 2018.
A)True
B)False
Q4) An unfavorable temporary book/tax difference generates a deferred tax asset.
A)True
B)False
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes.
A)True
B)False
Q2) Which of the following statements about the computation of cost of goods sold is true?
A) Manufacturing and retail businesses must use the specific identification method for tax purposes.
B) Manufacturing and retail businesses must use the FIFO costing convention for tax purposes.
C) Manufacturing and retail businesses must use the LIFO costing convention for tax purposes.
D) Manufacturing and retail businesses that use the LIFO costing convention for tax purposes must also use LIFO for book purposes.
Q3) An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Tullia Inc. recognized $500,000 ordinary income, $22,600 net Section 1231 gain, and $6,000 net capital loss this year. Tullia's taxable income is $522,600.
A)True
B)False
Q2) Blitza Inc. owned real property used for 12 years in its business that was subject to a $294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the property's appraised FMV was $260,000. Which of the following statements is true?
A) Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage. B) Blitza recognizes a $40,000 Section 1231 loss.
C) Blitza recognizes a $5,500 Section 1231 loss.
D) Both Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage and Blitza recognizes a $5,500 Section 1231 loss is true.
Q3) The sale of business inventory always generates ordinary income or loss.
A)True
B)False
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) A taxpayer who exchanges property for an interest in a partnership never recognizes gain or loss on the exchange.
A)True B)False
Q2) Mr Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Partnership in exchange for a partnership interest. Which of the following statements is true?
A) If Mr. Jamail owns a 14% partnership interest immediately after the exchange, he must recognize a $157,100 gain.
B) If Mr. Jamail owns 34% partnership interest immediately after the exchange, he recognizes no gain on the exchange.
C) If Mr. Jamail owns a 14% partnership interest immediately after the exchange, his tax basis in the interest is $187,000.
D) Statements a. and c. are true.
Q3) The wash sale rule can result in the nonrecognition of both gains and losses.
A)True B)False
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11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) If a partner's share of partnership losses exceeds basis, the excess is not deductible in the current year and cannot be carried forward for deduction in the future.
A)True
B)False
Q2) Jackie contributed $60,000 in cash to a partnership for a 50% interest. This year, the partnership earned $200,000 ordinary business income, made a $20,000 contribution to the United Way, and distributed $25,000 cash to Jackie. Her tax basis in the partnership at year end is:
A) $110,000
B) $85,000
C) $125,000
D) $215,000
Q3) A limited liability company that has only one member is generally treated as a disregarded entity for federal tax purposes.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) The only alternative to double taxation of corporate earnings is to treat corporations as passthrough entities, similar to partnerships.
A)True
B)False
Q2) Borough, Inc. is entitled to a rehabilitation credit of $500,000 for its current tax year. The corporation's regular tax liability is $450,000. No estimated tax payments have been made. Which of the following statements is true?
A) The corporation should receive a tax refund for the current year.
B) The portion of the rehabilitation credit that cannot be used this year will be lost.
C) The current year credit equals 20 percent of the total credit allowed for rehabilitation of a certified historic structure.
D) The credit is available for restoration of a building that is at least ten years old.
Q3) The dividends-received deduction is equal to 65% of any dividends-received by a corporate taxpayer.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Which of the following statements regarding the tax treatment of start-up losses is false?
A) Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit.
B) Start-up losses of a business organized as a partnership are deductible by the partners, potentially generating immediate tax savings.
C) Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit.
D) Start-up losses of a business organized as an S corporation are deductible by the shareholders, potentially generating immediate tax savings.
Q2) Compute Dodger's accumulated earnings tax, assuming that it had accumulated $130,000 after-tax income in prior years.
A) $0
B) $100,000
C) $76,000
D) $50,000
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) The foreign tax credit is available for income taxes paid to a foreign country.
A)True
B)False
Q2) Albany, Inc. does business in states C and D. State D uses an apportionment formula that double-weights the sales factor; state C apportions income using an equally-weighted three-factor formula. Albany's before tax income is $3,000,000, and its sales, payroll, and property factors are as follows. Calculate Albany's income taxable in each state.
A) State C, $1,100,000; State D, $1,800,000.
B) State C, $1,100,000; State D, $1,900,000.
C) State C, $1,200,000; State D, $1,800,000.
D) State C, $1,300,000; State D, $1,700,000.
Q3) Which of the following taxes is eligible for the foreign tax credit?
A) Property taxes paid to a foreign country on the value of property owned in that country.
B) Value-added taxes assessed on the value of inventory manufactured in a foreign country.
C) Income tax assessed by a local government within a foreign country.
D) Sales tax assessed on the purchase of consumer goods in a foreign country.
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Mr and Mrs Liddy, ages 39 and 41, file a joint return and have no dependents for the year. Here is their relevant information. Standard Deduction Table.
Salaries $ 47,000
Taxable interest income 5,000
Above-the-line deductions 1,800
Itemized deductions 16,250
A) AGI $50,200; taxable income $26,200.
B) AGI $52,000; taxable income $35,750.
C) AGI $52,000; taxable income $33,950.
D) AGI $50,200; taxable income $9,950.
Q2) Mr and Mrs Kain reported $80,000 AGI on their joint return. The couple has four dependent children: Beatrice, age 19; Bruce, age 16; Angie, age 11, and Arnold, age 8.
Compute the Kains' child credit.
A) $1,000
B) $3,000
C) $6,000
D) $8,000
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) A corporation that transfers restricted stock to an employee as compensation may deduct the stock's fair market value in the year of transfer even if the employee doesn't recognize the value as gross income in the year of transfer.
A)True
B)False
Q2) Lars withdrew $20,000 from a retirement account and used the money to buy a new car. Assuming that his marginal rate on ordinary income is 32%, compute the tax cost of the withdrawal in each of the following cases.
a. Lars is 40 years old. He withdrew the money from a personal savings account.
b. Lars is 40 years old. He withdrew the money from his employer-sponsored qualified plan after resigning from his job.
c. Lars is 65 years old. He withdrew the money from a Roth IRA.
Q3) A cafeteria plan allows employees to select between a variety of nontaxable fringe benefits or taxable cash compensation.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Emil Nelson paid $174,500 for an annuity that will pay him $1,300 per month for life. Based on Emil's age, his expected return is $405,813. This year, Emil received 12 payments totaling $15,600. How much of this total is taxable income?
A) $0
B) $5,300
C) $6,708
D) None of the above.
Q2) Mr Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 interest on his loan and earned $3,500 interest income from the bonds. None of the interest expense is deductible.
A)True
B)False
Q3) Income generated from an investment activity is primarily attributable to invested capital rather than the owner's personal involvement in the activity.
A)True
B)False
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18
Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Mr Haugh owns a sporting goods store as a sole proprietorship. This year, he donated baseball equipment (bats, gloves, balls) to the local YMCA to use in their community sports programs. His cost basis in the inventory items was $45,700, and their retail value was $68,200. Which of the following statements about this donation is true?
A) Mr. Haugh must recognize $22,500 ordinary business income and is allowed a $68,200 business deduction.
B) Mr. Haugh must recognize $22,500 ordinary business income and is allowed a $68,200 charitable contribution deduction.
C) Mr. Haugh is allowed a $45,700 charitable contribution deduction.
D) Mr. Haugh is allowed a $68,200 charitable contribution deduction.
Q2) Recipients of the Nobel Peace Prize must include the prize in gross income.
A)True
B)False
Q3) The federal income tax system provides incentives for individual taxpayers to meet their housing needs by purchasing instead of renting a home.
A)True
B)False
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Page 19
Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) An individual taxpayer is not required to give the IRS an explanation for extending the filing date for Form 1040.
A)True
B)False
Q2) Mr Fiocchi filed his unextended 2017 Form 1040 on July 22, 2018, and had no reasonable cause for the delinquency. The return showed a $1,906 overpayment of tax (refund due). Compute Mr Fiocchi's late-filing and late-payment penalty.
A) -0-
B) $191
C) $286
D) $381
Q3) Employees who deliberately have excess income tax withheld from their salaries in order to receive a tax refund are making an interest-free loan of the excess withholding to the government.
A)True
B)False
Q4) Only one spouse must sign a jointly filed Form 1040.
A)True
B)False
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