South Western Federal Taxation 2018 Corporations, Partnerships, Estates and Trusts 41st Edition by William Test Bank

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South Western Federal Taxation 2018 Corporations, Partnerships, Estates and Trusts 41st Edition by William Test Bank

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WITH ANSWERS
South Western Federal Taxation 2018 Corporations, Partnerships, Estates and Trusts 41st Edition by William Test Bank

Chapter_05_Corporations_Earnings_Profits_and_Dividend_Distributions

1. Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-01 LO: 5-01
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

2. A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporations E & P.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   A distribution is taxed as a dividend to the extent of E & P. Distributions in excess of E & P are tax-free recoveries of capital to the extent of stock basis. Distributions in excess of stock basis trigger taxable gain (usually capital gain).
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-01 LO: 5-01
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

3. All distributions that are not dividends are a return of capital and decrease the shareholders basis.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Distributions that are a return of capital first cause the shareholders stock basis to be reduced; once basis is reduced to zero, any remaining distribution is treated (and taxed) as a capital gain.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-01 LO: 5-01
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

4. All cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   A positive balance in accumulated E & P at the beginning of the year does not guarantee dividend treatment for distributions. If there is a deficit in current E & P during the year, dividend treatment may not result.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-03 LO: 5-03
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

5. A distribution in excess of E & P is treated as capital gain by shareholders.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Distributions in excess of both current and accumulated E & P are treated as a tax-free recovery of capital to the extent of stock basis. Distributions in excess of basis trigger capital gain.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-01 LO: 5-01
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

6. The terms earnings and profits and retained earnings are identical in meaning.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The notion of earnings and profits is similar in many respects to the accounting concept of retained earnings. Both are measures of the firms accumulated capital. A difference exists, however, in the way these figures are calculated. The computation of retained earnings is based on financial accounting rules while E & P is determined using rules specified in the tax laws.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

7. To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   To determine E & P, it is necessary to add all previously excluded income items back to taxable income.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

8. When computing E & P, taxable income is not adjusted for 179 expense.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   When determining E & P, 179 expense must be deducted over a period of five years on a straight-line basis (i.e., 20% per year).
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

9. When computing current E & P, taxable income must be adjusted for the deferred gain in a 1031 like-kind exchange.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Gains and losses deferred under 1031 do not affect E & P until recognized. So no adjustment is required.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

10. An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

11. Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   If MACRS cost recovery is used for income tax purposes, a positive or negative adjustment equal to the difference between MACRS and ADS must be made each year.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

12. No E & P adjustment is required for regular tax gains under the installment method.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The installment method is not available for E & P purposes. Consequently, the entire gain is recognized in the year of sale (with subsequent year adjustments also required as regular tax gains are recognized).
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

13. A corporation borrows money to purchase State of Texas bonds. The interest on the loan has no impact on either taxable income or current E & P.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The interest does not reduce taxable income, but it does reduce E & P.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

14. Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Federal income tax must be subtracted from taxable income.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

15. To determine current E & P, taxable income must be increased for any domestic production activities deduction.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

16. Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Nondeductible meal and entertainment expenses reduce current E & P.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

17. The dividends received deduction has no impact on E & P.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The dividends received deduction does not reflect a true reduction in the corporations ability to pay a dividend. Consequently, it is added back to taxable income to determine E & P.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

18. A realized gain from an involuntary conversion under 1033 that is not recognized for income tax purposes has no effect on E & P.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Gains and losses from property transactions affect the determination of E & P only to the extent that they are recognized for tax purposes.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

19. In the current year, Carnation Corporation has a  179 expense of $20,000. As a result, in the current year, taxable income must be increased by $16,000 to determine current E & P.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   For E & P purposes, only 20% of a  179 expense is deductible annually. As a result, in the year of election, 80% of the deduction is added back to taxable income. In each of the subsequent 4 years, 20% of the expense is deducted from taxable income to determine E & P.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Application
OTHER:   Time: 5 min.

 

20. A deficit in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Any loss in current E & P is usually treated as occurring ratably during the year. However, if the taxpayer can demonstrate that an identifiable event causes the loss (e.g., a capital loss from the sale of a particular stock), the loss may be fixed as of that time.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-03 LO: 5-03
CPET.SWFT.LO: 5-08 LO: 5-08
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

21. When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-03 LO: 5-03
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

22. When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The two accounts are not netted against each other. Instead, any distribution is a taxable dividend to the extent of the positive current E & P balance.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-03 LO: 5-03
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

23. Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Distributions are taxed as dividends to the extent that any positive balance in accumulated E & P exceeds the current E & P deficit at the date of distribution.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-03 LO: 5-03
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

24. Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-01 LO: 5-01
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

25. Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-04 LO: 5-04
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

26. Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   For dividends to be treated as investment income, they must be taxed at ordinary rates.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-04 LO: 5-04
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

27. Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   Dividends from certain foreign corporations are treated as qualified dividends. Foreign corporations that pay qualified dividends include those that are traded on a U.S. stock exchange and those that are located in countries that have a comprehensive tax treaty with the U.S. and that meet other requirements.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-04 LO: 5-04
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

28. During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will not be able to recognize a loss on the distribution.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   All distributions of appreciated property generate recognized gain to the distributing corporation, but distributions of loss property do not trigger recognition of losses.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-05 LO: 5-05
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

29. In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   The amount of dividend income recognized by a shareholder from a property distribution is always reduced by the amount of liabilities assumed by the shareholder.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-05 LO: 5-05
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

30. Property distributed by a corporation as a dividend is subject to a liability in excess of its basis. For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   The fair market value of the property is treated as being not less than the liability.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-05 LO: 5-05
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

31. A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   E & P must be reduced by the greater of the adjusted basis or fair market value of the property, less any liability on the property.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-05 LO: 5-05
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

32. Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Distributions cannot create or add to a deficit in E & P. Deficits in E & P can only arise through losses.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-05 LO: 5-05
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

33. Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

  a. True
  b. False

 

ANSWER:   True
RATIONALE:   A constructive dividend does not have to satisfy the legal requirements of a dividend as set forth by applicable state law.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-06 LO: 5-06
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

34. Constructive dividends have no effect on a distributing corporations E & P.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   Constructive dividends reduce E & P in the same manner as regular dividends.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-06 LO: 5-06
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

35. If a stock dividend is taxable, the shareholders basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-07 LO: 5-07
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

36. A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   For tax purposes, constructive distributions are treated the same as actual distributions. Thus, corporate shareholders can claim a dividends received deduction on constructive dividends received.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-06 LO: 5-06
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

37. If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholders option.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   If the stock rights are taxable, then their basis is equal to their fair market value at distribution.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-07 LO: 5-07
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Comprehension
OTHER:   Time: 2 min.

 

38. If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

  a. True
  b. False

 

ANSWER:   False
RATIONALE:   As a general rule, stock dividends are excluded from income only if they are pro rata distributions of stock or stock rights, paid on common stock. A non pro rata distribution would be taxable. The question provides no information about whether the distribution was (or was not) pro rata, so the correct answer is false.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-07 LO: 5-07
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

39. The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-07 LO: 5-07
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Reporting
KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

40. If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-07 LO: 5-07
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 2 min.

 

41. The tax treatment of corporate distributions at the shareholder level does not depend on:

  a. The character of the property being distributed.
  b. The earnings and profits of the corporation.
  c. The basis of stock in the hands of the shareholder.
  d. Whether the distributed property is received by an individual or a corporation.
  e. None of the above.

 

ANSWER:   a
RATIONALE:   While the character of distributed property can impact the tax treatment of gain recognized by the corporation, it will have no impact on the shareholder.
POINTS:   1
DIFFICULTY:   Easy
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-01 LO: 5-01
CPET.SWFT.LO: 5-05 LO: 5-05
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Knowledge
OTHER:   Time: 5 min.

 

42. Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year.

Federal income taxes paid $110,000
Net operating loss carryforward deducted currently 70,000
Gain recognized this year on an installment sale from a prior year 44,000
Depreciation deducted on tax return (ADS depreciation would have been $10,000) 40,000
Interest income on Iowa state bonds 8,000

Rose Corporations current E & P is:

  a. $254,000.
  b. $214,000.
  c. $194,000.
  d. $104,000.
  e. None of the above.

 

ANSWER:   a
RATIONALE:   To determine E & P, the Federal income tax is subtracted from taxable income and the net operating loss carryforward is added. The gain recognized currently from the prior years installment sale is subtracted. The excess of depreciation deducted on the tax return over ADS depreciation and the interest from Iowa state bonds are added.
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Application
OTHER:   Time: 10 min.

 

43. Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $25,000 of  179 expense. It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000. It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000. Terns current E & P is:

  a. $415,000.
  b. $350,000.
  c. $340,000.
  d. $320,000.
  e. None of the above.

 

ANSWER:   c
RATIONALE:   Taxable income is reduced by Federal income tax paid, the related party loss, and the nondeductible fine. Eighty percent of the  179 expense is added back ($500,000 $150,000 $20,000 $10,000 + $20,000 = $340,000). The involuntary conversion has no effect since realized gain was not recognized.
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Application
OTHER:   Time: 10 min.

 

44. Silver Corporation, a calendar year taxpayer, has taxable income of $550,000. Among its transactions for the year are the following:

Collection of proceeds from insurance policy on life of corporate  
officer (in excess of cash surrender value) $82,500
Realized gain (not recognized) on an involuntary conversion 11,000
Nondeductible fines and penalties 44,000

Disregarding any provision for Federal income taxes, Silver Corporations current E & P is:

  a. $500,500.
  b. $588,500.
  c. $599,500.
  d. $687,500.
  e. None of the above.

 

ANSWER:   b
RATIONALE:   To calculate taxable income, the proceeds from insurance policy on life of corporate officer (in excess of cash surrender value) is added and the nondeductible fines and penalties are subtracted. The realized gain (not recognized) on the involuntary conversion has no effect on E & P.
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NATIONAL STANDARDS:   United States BUSPORG: Comprehension BUSPORG:Comprehension
STATE STANDARDS:   United States AK AICPA: FN-Measurement

AICPA: FN-Measurement

KEYWORDS:   Blooms: Application
OTHER:   Time: 10 min.

 

45. Which of the following statements is incorrect with respect to determining current E & P?

  a. All tax-exempt income should be added back to taxable income.
  b. Dividends received deductions should be added back to taxable income.
  c. Current year charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.
  d. Federal income tax refunds should be added back to taxable income.
  e. None of the above statements are incorrect.

 

ANSWER:   e
RATIONALE:   All the adjustments are correct. Tax-exempt income and Federal income tax refunds are added to taxable income because they increase the companys capacity to pay a dividend (choices a. and d.). The dividends received deduction is added back because it does not represent a reduction in the companys assets available for distribution (choice b.). Finally, disallowed charitable contributions decrease the corporations ability to make distributions to shareholders, so they reduce E & P (choice c.).
POINTS:   1
DIFFICULTY:   Moderate
LEARNING OBJECTIVES:   CPET.SWFT.LO: 5-02 LO: 5-02
NAT

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