Principles of Taxation for Business and Investment Planning 2018 Edition 21st Edition by Sally Jones TB
Principles of Tax for Bus and Invest Plan 2018 Ed , 21e (Jones)
Chapter 6 Taxable Income from Business Operations
1) For federal tax purposes, gross income from the sale of tangible goods is reduced by the seller’s cost of goods sold.
2) Taxable income is defined as gross income minus allowable deductions and credits.
3) 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.
4) A firm’s choice of taxable year is usually dictated by the annual operating cycle of the firm’s business.
5) Rydel Inc. was incorporated on August 9 and elected to use a calendar year for tax purposes. Rydel must annualize the income reported on its first tax return for the short period from August 9 to December 31.
6) A taxpayer that operates more than one business may use a different method of accounting for each business.
7) PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can’t make this change without receiving permission from the IRS.
8) Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.
9) Accurate measurement of taxable income is the only objective of the federal income tax laws.
10) Federal and state political lobbying expenses are nondeductible.
11) The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.
12) Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2017, and received a check in full payment from the client on January 12, 2018. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2017.
13) Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2017 and mailed a check to the telephone company on January 4, 2018. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2018.
14) Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2017. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2018. Mr. Stern does not recognize the interest as income in 2017.
15) A cash basis taxpayer must account for any prepayment of interest expense under the accrual method.
16) Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months’ worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.
17) Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.
18) Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.
19) Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.
20) Marz Services Inc. is a personal service corporation with $60 million average annual gross receipts. Marz must use the accrual method of accounting for tax purposes.
21) Laine Services, a calendar year taxpayer, billed a client for $8,450 of services on November 30, 2017, and received a check in full payment from the client on January 12, 2018. If Poole is an accrual basis taxpayer, it reports $8,450 taxable income in 2017.
22) Keagan Company, a calendar year taxpayer, incurred $1,490 of long-distance telephone charges in December 2017 and mailed a check to the telephone company on January 4, 2018. If Poole is an accrual basis taxpayer, it reports a $1,490 tax deduction in 2018.
23) According to the GAAP principle of conservatism, firms should delay the realization of uncertain revenues and gains and accelerate the realization of uncertain expenses and losses.
24) The principle of conservatism reflected by GAAP is identical to the principle of conservatism reflected in the tax law.
25) A permanent difference between book income and taxable income affects only one taxable year.
26) A temporary difference between book income and taxable income results when an item of income reflected on the books is never included in taxable income.
27) Income tax expense per books is based on book income adjusted for all book/tax differences.
28) An unfavorable temporary book/tax difference generates a deferred tax asset.
29) A corporation can’t have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.
30) If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.
31) If an accrual basis taxpayer prepays interest expense, the payment results in an unfavorable temporary book/tax difference.
32) For tax purposes, income is recognized when all events have occurred that fix the taxpayer’s right to receive the income and the amount of income can be determined with reasonable accuracy.
33) An accrual basis taxpayer must account the expense of a legal settlement resulting from a tort under the cash method.
34) An accrual basis taxpayer that accrues a liability at year-end for unpaid state income tax can deduct the accrued tax expense in the computation of federal taxable income.
35) Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.
36) At the end of its taxable year, Gong Company accrued an expense for an account payable to Mexance Inc. Even if Gong and Mexance are related parties, Gong can deduct the accrued expense if Mexance also uses the accrual method of accounting for tax purposes.
37) The tax law does not allows deductions based on estimated expenses that result in an allowance or reserve for financial statement purposes.
38) Murray Inc., a calendar year, accrual basis corporation, accrued $946,000 salary and wage expense at the end of 2016. Murray paid the entire amount of the accrued liability on January 13, 2017. Murray can deduct the entire $946,000 accrued expense in 2016.
39) Molton Inc., which operates a chain of retail toy stores, prepares GAAP based financial statements. Molton must use the allowance method to account for business bad debts for both book and tax purposes.
40) Bolton Inc., a calendar year taxpayer, generated a $296,400 net operating loss this year. Bolton can carry the loss back five years and forward 20 years for tax purposes.
41) For its first taxable year, UY Products Inc. generated a $124,950 net operating loss. The loss resulted in a deferred tax liability that will reverse over future years in which UY is allowed an NOL carryforward deduction.