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Exam 16: Corporate Operations

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Question 51

True/False

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Corporations are not allowed to deduct charitable contributions in excess of 10percent of the corporation's taxable income (before the charitable contribution and certain other deductions).

A) True
B) False

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Question 52

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In January 2019, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro. Because the company did not expect Miss Svaro to leave the company, the options vested at the time theywere granted with a total value of $52,250. In December of 2020, the company experienced a surge in its stock price, and Miss Svaro exercised the options. The total bargain element at the time of exercise was $64,500. For 2020, what is the book-tax difference due to the options exercised?

A) $12,250 unfavorable.
B) $12,250 favorable.
C) $52,250 unfavorable.
D) $64,500 favorable.

E) A) and C)
F) None of the above

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Question 53

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The dividends received deduction is subject to a limitation based on modified taxable income.

In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters: (Use Exhibit 16-10) What amount of estimated tax payments would Auto Rent pay each quarter to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?

Taxable income ofall C corporations is subject to a flat 21 percent tax rate.

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

Corporations are not allowed to deduct charitable contributions in excess of a percentage of modified taxable income limitation (before the charitable contribution and certain other deductions).

Imperial Construction Incorporated (IC)issued 100,000 incentive stock options (ISOs)to its employees on January 1, 2019, with an estimated value of $5.50 per option. The options vest (accrue)at 25 percent per year for four years (beginning in 2020). Each option allows the holder to purchase one share of stock at $8. On January 1, 2021, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2021 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?

NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while capital loss carrybacks are not.

LuxAir Incorporated (LA)has book income of $166,000. Included in this figure is income generated from ownership in JRC, of which LA owns 30 percent. JRC has $273,000 in earnings for the year and pays $32,450 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD)are its only book-tax differences, what is LA's tax liability for the year?

Atom Ventures Incorporated (AV)owns stock in the Primo and Faraday corporations. The following summarizes information relating to AV's investment in Primo and Faraday as follows: Assuming that AV follows the general rules for reporting its income from these investments and the value of AV's stock investments in Primo and Faraday is equal to AV's basis in these investments, what is the amount of AV's book-tax difference associated with the investment in these corporations (disregarding the dividends received deduction)? Is it favorable or unfavorable? Is it permanent or temporary?

AR Systems Incorporated (AR)had $120,000 of tax liability last year. It anticipates a current-year tax liability of $500,000. Assuming AR is considered a large corporation for purposes of estimating tax liability, what are the minimum estimated tax payments it should make to avoid underpayment penalties? Ignore the annualized income method.

Calendar-year C corporations that request an extension for filing their 2019 tax returns will have a tax return due date of October 15.

Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of $72,000. Its charitable contributions for the year were $7,500. What is Remsco's current-year charitable contribution deduction and contribution carryover?

TrendSetter Incorporated paid $50,000 in premiums for life insurance coverage for its key employees for which TrendSetter Incorporated is the beneficiary. What is the nature of the book-tax difference created by this expense?

Which of the following statements regarding incentive stock options (ISOs) is false?

Studios reported a net capital loss of $30,000 in Year 5. It reported net capital gains of $14,000 in Year 4 and $27,000 in Year 6. What is the amount and nature of the book-tax difference in Year 6 related to the net capital carryover?

What is the unextended due date of the tax return of a calendar-year C corporation for 2020?

Netgate Corporation's gross regular tax liability for 2020 was $189,000. What was its taxable income?

Jazz Corporation owns 50 percent of the Mitchell Corporation stock. Mitchell distributed a $16,000 dividend to Jazz Corporation. Jazz Corporations taxable income before the dividend was $100,600. What is the amount of Jazz's dividends received deduction on the dividend it received from Mitchell Corporation?