...CHAPTER 2 CORPORATIONS: INTRODUCTION AND OPERATING RULES SOLUTIONS TO PROBLEM MATERIALS Question/ Problem Learning Objective 1 LO 1 2 LO 1 3 LO 1, 7 4 LO 1, 2 5 6 LO 1, 2 LO 1, 2 7 8 9 10 LO 1 LO 1 LO 1 LO 2 11 LO 2 12 LO 2 13 LO 2 14 LO 2 15 LO 2 16 17 LO 2 LO 2 18 LO 2 Topic Choice of entity: tax and nontax factors in entity selection Corporation versus S corporation: treatment of operating income and tax-exempt income; no distributions Corporation versus proprietorship: treatment of losses Corporation versus partnership: treatment of operating income and STCG Corporation versus LLC and S corporation Closely held corporations: shareholder transactions Double taxation LLCs: single member LLCs: multi-owner default rule Accounting periods: general rule and fiscal year limitation Accounting periods: PSC fiscal year limitation Accounting methods: limitation on cash method Accounting methods: limitation on accrual of expenses to cash basis related party Net capital gain: corporate and individual tax rates contrasted Net capital loss: corporation and individual contrasted Recapture of depreciation: § 291 adjustment Passive loss rules: closely held C corporations and PSCs contrasted Passive loss rules: closely held C corporation Status: Present Edition Q/P in Prior Edition Unchanged 1 Unchanged 2 Unchanged 3 Unchanged ...
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...royalty income that is not derived in the ordinary course of a business is classified as: (Points : 5) portfolio income. Answer active income. passive income. None of the above Question 2. 2. (TCO F) When comparing corporate and individual taxation, the following statements are true, except: (Points : 5) Individuals have exemptions and a standard deduction; corporations do not. Both types of taxpayers have percentage limitations on the charitable contribution deduction, coupled with a carryover of the excess contribution. All taxpayers may carry net operating losses back two years, forward 20 years. Both corporate and individual taxpayers may have a long-term capital loss carryforward. Answer Question 3. 3. (TCO H) Al and Amy file a joint return for the 2012 tax year. Their adjusted gross income is $80,000. They had net investment income of $7,000. In 2012, they had the following interest expenses: Personal credit card interest: $4,000 Home mortgage interest: $8,000 Investment interest (on loans used to buy stocks): $10,000 What is the interest deduction for Al and Amy for the 2012 tax year? (Points : 5) $8,000 $15,000 Answer $12,000 $18,000 Question 4. 4. (TCO B) Charitable contribution deductions for capital gains property made by individuals without a reduction for long-term capital gains to public charities are limited to: (Points : 5) 50% of AGI. 40%...
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... | Student Answer: | | active income. | | | | portfolio income. | | | | passive income. | | | | None of the above | | Instructor Explanation: | Chapter 7; See the definition of portfolio income in Section 7205 of the textbook. | | | | Points Received: | 5 of 5 | | Comments: | | | | Question 2. | Question : | (TCO F) When comparing corporate and individual taxation, the following statement is true: | | | Student Answer: | | Unlike individual taxpayer, corporate may not have a long-term capital loss carryforward. | | | | Both types of taxpayers have percentage limitations on the charitable contribution deduction, coupled with a carryover of the excess contribution. | | | | All taxpayers may carry net operating losses back two years, forward 20 years. | | | | All of the above | | Instructor Explanation: | Chapter 14, 14.315; Corporate capital loss carryforwards are all treated as short term. | | | | Points Received: | 5 of 5 | | Comments: | | | | Question 3. | Question : | (TCO H) Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows (Becker CPA Review Course): * $700 interest on federal income tax refund. * $600 interest on state income tax refund....
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...Midterm 10.20.12 Anti-Stuffing and Net Operating Loss Anti-Stuffing is actually something that I have been whiteness to on a few occasions with an old business partner that I had a acquired. Unfortunately the partnership did not succeed, so I am going to share my love for business and what I had found out about Anti-Stuffing, but not limited to Net Operating Loss companies and how this affects them. Before 1986, the history of capital gain tax came back to one court ruling. This case was General Utilities and Operating Company v. Helvering, 296 U.S. 200 (1935), which resulted in the General Utilities doctrine. Under this doctrine companies could distribute their corporate properties or stock to shareholders without having to pay a capital gains tax at the corporate level. Before this doctrine was repealed courts did not take into account the built in tax liability when determining the value of a company. As a result of this companies were finding ways around these taxes and saving themselves a fair amount of money. In 1986 the Tax Reform Act was passed making it much harder on companies trying to liquidate. It stated that if a company tries to liquidate it must identify its gains or losses at the time of sale, as if it were being sold on the open market. Under this act any such sale will be taxable. This gave us a double-edged sword, as a result of this act. Their two options both would result in losses for the company buying the stock. The first is called...
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...Becker CPA Review, PassMaster Questions Lecture: Financial 1 CPA PassMaster Questions-Financial 1 Export Date: 10/30/08 1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved. Becker CPA Review, PassMaster Questions Lecture: Financial 1 Sources of GAAP CPA-00001 Type1 M/C A-D Corr Ans: D PM#1 F 1-01 1. CPA-00001 FARE Nov 95 #1, Released 2006 Page 6 According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on: a. Generally accepted accounting principles. b. Reporting on management's stewardship. c. The need for conservatism. d. The needs of the users of the information. CPA-00001 Explanation Choice "d" is correct. The FASB conceptual framework states that the objectives of financial reporting stem from the informational needs of the external users of the information. SFAC 1 para. 28 ...
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...Assignment 1 | Net Operating Loss Rules Assignment The Garvey Corporation, a C corporation, during its first five years of operation, reported the following taxable incomes (losses): Year | Taxable Income | Effective Tax Rate | | | | 1 | $ 60,000 | 25 % | 2 | 20,000 | 20 | 3 | (90,000) | - | 4 | 30,000 | 15 | 5 | (40,000) | 18 | | | | Required: a. Explain the net operating loss provisions of the tax code as they would relate to the Garvey Corporation. Garvey must pay the taxes in Years 1& 2 as they come due. In year three, Garvey can carry back the $90,000 net operating loss first to year 1 for the amount of $60,000 and then to year 2 for the amount of $20,000. They can then carry the remaining $10,000 forward to future years up to 20 years. b. Determine the tax liability for the Garvey Corporation for years one and two. Year 1: $60,000 * 25% = $15,000 Year 2: $20,000 * 20% = $4,000 c. Determine the income tax refund that Garvey Corporation would realize in year three, assuming the corporation elected to use the carryback provision for its net operating loss. d. Determine the required income tax payments for year four. e. Determine the income tax liability (refund) realized in year five. There is no tax liability because of the loss year, but a refund can be realized if part of the $40,000 loss is carried back to year 4. The refund would the tax payment of $3,000 from the previous year. The remaining $20,000 can...
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...analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. People and groups interested in cash flow statements include: * Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses * Potential lenders or creditors, who want a clear picture of a company's ability to repay * Potential investors, who need to judge whether the company is financially sound * Potential employees or contractors, who need to know whether the company will be able to afford compensation * Shareholders of the business. Contents [hide] * 1 Purpose * 2 History & variations * 3 Cash flow activities o 3.1 Operating activities o 3.2 Investing activities o 3.3 Financing activities * 4 Disclosure of non-cash activities * 5 Preparation methods o 5.1 Direct method o 5.2 Indirect method + 5.2.1 Rules (Operating Activities) ...
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...position and operating results? a. Notes to the financial statements b. Management discussion and analysis section c. Balance sheet d. Auditor’s report e. None of the options listed 2. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? a. Monetary unit assumption b. Economic entity assumption c. Time period assumption d. Going concern assumption e. None of the options listed Johnny’s Car Repair Shop started the year with total assets of $60,000 and total liabilities of $40,000. During the year the business recorded $100,000 in car repair revenues, $55,000 in expenses, and dividends of $10,000. ____ 3. The net income reported by Johnny’s Car Repair Shop for the year was a. $35,000. b. $45,000. c. $20,000. d. $90,000. e. none of the options listed 4. The purchase of an office building by issuing long-term notes payable should be reported as a a. cash outflow in the financing section of the statement of cash flows. b. cash outflow in the investing section of the statement of cash flows. c. cash outflow in the operating section of the statement of cash flows. d. noncash investing and financing activity. e. none of the options listed 5. If beginning capital was $25,000, ending capital is $37,000, and the owner's withdrawals were $23,000, the amount of net income or net loss for the period was: a. net loss of $35,000 b. net income of $35,000 c. net income of $14,000 d. net loss of $14,000...
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...Assignment 1 | Net Operating Loss Rules Assignment The Garvey Corporation, a C corporation, during its first five years of operation, reported the following taxable incomes (losses): Year | Taxable Income | Effective Tax Rate | | | | 1 | $ 60,000 | 25 % | 2 | 20,000 | 20 | 3 | (90,000) | - | 4 | 30,000 | 15 | 5 | (40,000) | 18 | Required: a. Explain the net operating loss provisions of the tax code as they would relate to the Garvey Corporation. Corporate tax law allows for a recovery of taxes paid in prior years before a loss year. The amount can be immediately refunded by offset ting against prior profitable years. NOL can be elected to carry forward . A tax loss in any given year can be carried back to offset taxable income. b. Determine the tax liability for the Garvey Corporation for years one and two. 60,000x25%=15,000 20,000x20%=4,000 c. Determine the income tax refund that Garvey Corporation would realize in year three, assuming the corporation elected to use the carryback provision for its net operating loss. 60,000+20,000= 80,000 loss for previous two years 90,000-80,000=10,000 The remaining would carry forward to the next profitable year. Yr 1- 60,000-60,000=0 refund of 15,000 for previous paid income taxes Yr 2 – 20,000-20,000=0 refund of 4,000 for paid income taxes The income tax refund would be 19,000 d. Determine the required income tax payments for year four. 30,000-10,000=20,000 x 15%=3,000 The 10,000 unused NOL from...
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...brought to my attention that you are unclear about why the additional information was requested on the adjusting lower cost of market inventory on valuation, the capitalizing interest on building construction, the recording of gains or losses on asset disposal, and the adjusting goodwill for impairment. The adjusting lower cost of market inventory on valuation is specified in Accounting Research Bulletin No. 43 (ARB No. 43). Statement of Financial Accounting Standards (SFAS) No. 34 is the statement, which deals with capitalization of interest as part of the cost of the asset. SFAS No. 144 addresses the reporting and accounting for the impairment of the disposal of long-lived assets (Federal Accounting Standards Advisory Board, n.d.). New rules for the accounting for goodwill has been addressed in SFAS No. 142. I will be explaining each of these items in full detail. I will include the accounting principles and practices in hopes of improving your organization's practices and knowledge from this analysis. Adjusting lower cost of market inventory on valuation The lower-of-cost or market (LCM) is defined by “a basis whereby inventory is stated at the lower of either its cost or its market cost as determined by current replacement cost” (Kimmel, Weygandt, & Kieso, 2007, p. 280). The market is also both the market in which the merchandise was purchased by the company as well as the one in which it sells the merchandise LCM may be applied in one of three ways according to Generally...
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...times. The equation is- Current Ratio = Current AssetCurrent Liability * The general rule of thumb calls for a current ratio of at least 2:1. If it is greater than 2 then it creates income problem and if it is less than 2 then it creates liquidity problem. For Northern Insurance Company Years | 2007 | 2008 | 2009 | 2010 | 2011 | Ratios | 1.59 | 1.66 | 1.89 | 1.72 | 1.91 | Interpretation: From the above table and graph we can see that the ratios and the curve were consistently increasing during the calculated year except 2010. From Balance sheet we can see that Current Asset in the calculated year is significantly increase than the Current Liability. So Current Ratio is increasing in a consistant basis and the ratio which indicates that NORTHERN INSURANCE CO. has few problem with liquidity but they are generating profit efficiently. Underwriting Ratios 2. Loss Ratio: A company’s loss ratio is calculated by dividing loss adjustments expenses by premiums earned. And los adjustment measured by dividing claim payment by net premium. Now this los ratio shows what percentage of payouts are being settled with recipients. It means lower the ratio better that is. If the ratio value is increase or higher that means the claim payment of that insurance increase and that indicates that, the management of that insurance is inefficient and ineffective. The equation is- Loss Ratio = Loss AdjustmentEarn Payment For Northern Insurance Company Years | 2007 | 2008 | 2009 | 2010 |...
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...COST ACCOUNTING II MARGINAL COSTING AND DECISION MAKING Prepared by Teddy Ossei Kwakye Lesson Objectives Distinguish between relevant and irrelevant revenues and costs Analyze relevant costs and indicate how they differ under alternative decision scenarios Apply differential analysis to decision scenarios, including discontinuation decisions; to accept a special order; to make or buy and to sell or further process a product Allocate limited resources for purposes of maximizing short-run profit Decision Making Process Objectives Setting • Relates to the future, hence decisions are future oriented Determination of Alternatives • Different alternatives to achieving the objectives, hence decision is a choice of alternatives Evaluating the alternatives • Requires complete, timely, relevant and reliable information Choosing the best alternative • Alternative chosen should be the one that maximizes the objectives Relevant Information Information that is affected by a decision • Information that is independent or has nothing to do with decision is irrelevant Types / Kinds • Quantitative information - Elements that can be expressed in monetary terms • Qualitative information - Factors that are difficult to quantify in monetary terms e.g. moral of employees, customer goodwill etc. Quantitative Relevant Information Relevant Costs and Revenues • Costs (revenues) that flow from the decision • Future or expected costs (revenues) • Must...
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..."eligible" taxpayers with regard to special ordinary loss treatment of IRC Section 1244 stock? (5 pts.) Individuals report ordinary losses from the sale or exchange (including worthlessness) of section 1244 (small business) stock on line 10. To qualify as section 1244 stock, all six of the following requirements must be met. 1. You acquired the stock after June 30, 1958, upon original issuance of the shares from a domestic corporation (or the stock was acquired by a partnership in which you were a partner continuously from the date the stock was issued until the time of the loss). 2. If the stock was issued before November 7, 1978, it was issued under a written plan that met the requirements of Regulations section 1.1244(c)-1(f), and when that plan was adopted, the corporation was treated as a small business corporation under Regulations section 1.1244(c)-2(c). 3. If the stock was issued after November 6, 1978, the corporation was treated as a small business corporation at the time the stock was issued under Regulations section 1.1244(c)-2(b). To be treated as a small business corporation, the total amount of money and other property received by the corporation for its stock as a contribution to capital and paid-in surplus generally may not exceed $1 million. 4. The stock was issued for money or other property (excluding stock or securities). 5. The corporation, for its 5 most recent tax years ending before the date of the loss, derived more than 50% of its gross receipts from...
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...proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return. | a. | True | | b. | False | ANSWER: | True | RATIONALE: | Proprietorship profits flow through to the owner and are reported on the owner’s individual income tax return. It does not matter how much of the profit is withdrawn from the proprietorship. Thus, Tomas must report the net profit of $60,000 on his Form 1040 (Schedule C). Shareholders are required to report income from a C corporation only to the extent of dividends received. Consequently, Lucy has no income to report from the corporation for the current year. | POINTS: | 1 | DIFFICULTY: | Easy | LEARNING OBJECTIVES: | SCPE.HRMY.15.LO: 17-01 - LO: 17-01 | NATIONAL STANDARDS: | United States - BUSPORG: Analytic | STATE STANDARDS: | United States - AK - AICPA: FN-Reporting | KEYWORDS: | Bloom's: Application | OTHER: | Time: 2 min. | | 2. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income – $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income. | a. | True | ...
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...records and communicates relevant, reliable, and comparable information about an organizations business activities. B. Users of Accounting Information 1. External Information Users—those not directly involved with running the company. Examples: shareholders (investors), lenders, customers, suppliers, regulators, lawyers, brokers, the press etc. a. Financial Accounting—area of accounting aimed at serving external users by providing them with generalpurpose financial statements. b. General-Purpose Financial Statement—statements that have broad range of purposes which external users rely on. 2. Internal Information Users—those directly involved in managing and operating an organization. a. Managerial Accounting—is the area of accounting that serves the decision-making needs of internal users. b. Internal Reports—not subject to same rules as external reports. They are designed with special needs of external users in mind. 3. Internal Controls—procedures set up to protect company property and equipment, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. C. Opportunities in Accounting Four broad areas of opportunities are financial, managerial, taxation, and accounting related. 1. Private accounting offers the most opportunities. 2. Public accounting offers the next largest number of opportunities 3. Government (and not-for-profit) agencies, including business regulation and investigation of law violations also offer opportunities. Notes ...
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