ACC 455 FINAL EXAM | VERIFIED SOLUTION

ACC 455 FINAL EXAM 1. Regulations are A. equal in authority to legislation if interpretative B. equal in authority to legislation if statutory C. equal in authority to legislation D. presumed to be valid & to have almost the same weight as the IRC 2) Identify which of the following statements is false. A. All are false. B. Members from both the House & the Senate are on the Conference Committee. C. When tax advisors speak of the tax law, they usually have in mind just the Internal Revenue Code. D. Records of committee hearings are helpful in determining Congressional intent. 3) Which of the following statements regarding proposed regulations is not correct? A. Proposed regulations do not provide any insight into the IRS's interpretation of the tax law. B. Practitioners & other interested parties may comment on proposed regulations. C. Proposed regulations expire after 3 years. D. Proposed & temporary regulations are generally issued simultaneously. 4) Which of the following statements about a partnership is true? A. Partners are considered employees of the partnership. B. Partners are taxed on distributions from a partnership. C. A partnership is a taxpaying entity. D. Partners are taxed on their allocable share of income whether it is distributed or not. 5) Which of the following is an advantage of a sole proprietorship over other business forms? A. Ease of formation B. The deduction for compensation paid to the owner C. Tax-exempt treatment of fringe benefits D. Low tax rates on dividends 6) Which of the following statements is incorrect? A. S corporation losses can offset shareholder income from other sources. B. The number of S corporation shareholders is unlimited. C. S corporations must allocate income & expenses to their shareholders based on their proportionate ownership interest. D. S corporation income is taxed to shareholders when earned. 7) Three members form an LLC in the current year. Which of the following statements is incorrect? A. If the LLC elects to use its default classification, it can elect to change its status to being taxed as a C corporation beginning with the third tax year after the initial classification. B. The LLC can elect to have its default classification ignored. C. The LLC's default classification under the check-the-box rules is as a partnership. D. The LLC can elect to be taxed as a C corporation with no special tax consequences. 8) Identify which of the following statements is true. A. Under the check-the-box regulations, an LLC that has one member (owner) may be disregarded as an entity separate from its owner. B. An unincorporated business may not be taxed as a corporation. C. A new LLC that is owned by four members elects to be taxed under its default classification (as a partnership) in its first year of operations. The entity is prohibited from changing its tax classification at any time in the future. D. All are false. 9) Identify which of the following statements is false. A. Once an election is made to change its classification, an entity cannot change again for 60 months. B. Under the check-the-box regulations, an LLC that has only two members (owners) must be taxed as a partnership. C. The check-the-box regulations permit an LLC to be taxed as a C corporation. D. A business need not be incorporated under state or federal law to be taxed as a corporation. 10) Barry, Dan, & Edith together form a new corporation; Barry & Dan each contribute property in exchange for stock. Within 2 weeks after the formation, the corporation issues additional stock to Edith in exchange for property. Barry & Dan each hold 10,000 shares & Edith will receive 9,000 shares. Which transactions will qualify for nonrecognition? A. Only the first transaction will qualify for nonrecognition. B. Both transactions will qualify under Sec. 351 if they are part of the same plan of incorporation. C. Only the second transaction will qualify for nonrecognition. D. Because of the step transaction doctrine neither transaction will qualify. 11) Matt & Sheila form Krupp Corporation. Matt contributes property with a FMV of $55,000 & a basis of $35,000. Sheila contributes property with a FMV of $75,000 & a basis of $40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will A. not qualify under Sec. 351 B. qualify under Sec. 351 only if an advance ruling has been obtained C. qualify under Sec. 351 if Matt can show the sale to Paul was not part of a prearranged plan D. qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not 12) Identify which of the following statements is true. A. A transferor's gain or loss that goes unrecognized when Sec. 351 applies is permanently exempt from taxation. B. If a taxpayer transfers property & services as part of a transaction meeting the Sec. 351 requirements, all of the stock received is counted in determining whether the property transferors have acquired control. C. If a taxpayer transfers property & services as part of a transaction meeting the Sec. 351 requirements, the nonrecognition of gain or loss will apply to the services. D. All are false. 13) Identify which of the following statements is false. A. A corporation's fiscal year generally must end on the last day of the month. B. A corporation's first tax year may not cover a full 12-month period. C. A fiscal year may not end on December 31. D. A new corporation can elect a fiscal year that runs from February 16 to February 15 of the following year. 14) Identify which of the following statements is true. A. A corporation that accrues compensation payable to an employee must pay the amount within two & one-half months after the close of the taxable year to deduct the amount in the year of the accrual. B. Accrued compensation that is deductible in the year of accrual is considered to be part of an IRS deferred compensation plan. C. Accrued compensation not paid within three & one-half months after the close of the corporation tax year is deducted in the year following the accrual. D. All are false. 15) Identify which of the following statements is true. A. A corporate NOL can be carried back 2 years & forward 15 years. B. All are false. C. An election to forgo an NOL carry back must be made on or before the return due date (including extensions) for the year in which the NOL is incurred. D. In computing an NOL for the current year, a deduction is allowed for NOLs from previous years. 16) Trail Corporation has gross profits on sales of $140,000 & deductible expenses of $180,000. In addition, Trail has a net capital gain of $60,000. Trail's taxable income is A. $20,000 loss B. $20,000 C. $40,000 loss D. $60,000 17) Richards Corporation has taxable income of $280,000 calculated before the charitable contribution deduction & before its dividends-received deduction of $34,000. Richards makes cash contributions of $35,000 to charitable organizations. What is Richards Corporation's charitable contribution deduction for the current year? A. $24,600 B. $35,000 C. $28,000 D. $31,400 18) Edison Corporation is organized on July 31. The corporation starts business on August 10. The corporation adopts a November 30 fiscal year end. The following expenses are incurred during the year: Date Type Amount 6-30 Attorneys fees associated with obtaining charter $10,000 7-10 Underwriter fees for stock sale 25,000 7-15 Transfer cost for property contributed to the corporation for stock 3,000 6-30 Costs of organizational meetings 2,000 12-6 Legal fees to modify charter 4,000 What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending November 30? A. $16,000 B. $800 C. $12,000 D. $5,156 19) Which of the following items are tax preference items for purposes of arriving at alternative minimum taxable income? A. Excess intangible drilling costs on oil & gas properties B. Excess of net long-term capital gains over short-term capital losses C. Interest income earned on federal obligations D. All depreciation claimed on pre-1987 real property acquisitions 20) Which of the following is not an adjustment in calculating AMTI? A. Gain on installment sales of noninventory property B. The difference between the gains for AMTI & regular tax purposes C. The regular tax NOL deduction D. Production activities deduction 21) When computing a corporation's alternative minimum taxable income, its taxable income is A. only increased (never decreased) by tax preference items B. increased by 75% of the excess of adjusted current earnings over taxable income C. only increased (never decreased) by adjustments D. increased by the statutory exemption of $40,000 22) Boxer Corporation buys equipment in January of the current year with a 7-year class life for $15,000. The corporation expensed the $15,000 under Sec. 179. The deduction in the year of purchase for E&P purposes due to the acquisition & expensing of the equipment is A. $1,500 B. $15,000 C. $3,000 D. $14,000 23) For purposes of determining current E&P, which of the following items cannot be deducted in the year incurred? A. Charitable contribution in excess of the 10% limitation B. Dividends-received deduction C. Capital losses in excess of capital gains D. Life insurance premiums (in excess of the increase in cash surrender value for the policy) paid on the lives of key employees 24) Identify which of the following increases Earnings & Profits. A. A capital contribution B. Life insurance proceeds payable to the spouse C. Tax-exempt interest income D. All of these increase E & P of a corporation. 25) Identify which of the following statements is true. A. If both the current & accumulated E&P have deficit balances, a corporate distribution cannot be characterized as a dividend. B. The shareholder's basis in property received in a nonliquidating distribution is the property's FMV reduced by liabilities assumed by the shareholder. C. A corporation recognizes gain when distributing money as a dividend to its shareholders. D. All are false. 26) Poppy Corporation was formed 3 years ago. Poppy's E&P history is as follows: Year Current E&P Distributions 2005 $6,000 $4,000 2006 5,000 1,000 2007 1,000 -0- Poppy Corporation's accumulated E&P on January 1 will be A. $0 B. $12,000 C. $7,000 D. $5,000 27) Identify which of the following statements is true. A. Section 179 property must be expensed ratably over a 5-year period when computing E&P. B. Losses on property sales to related parties are not deductible when computing E&P. C. Distributions made out of accumulated E&P are allocated ratably between multiple distributions made during the tax year. D. All are false. 28) Hogg Corporation distributes $30,000 to its sole shareholder, Ima. At the time of the distribution, Hoggs' E&P is $14,000 & Ima's basis in her stock is $10,000. Ima's gain from this transaction is A. $6,000 capital gain B. $30,000 capital gain C. $14,000 capital gain D. $20,000 capital gain 29) Wills Corporation, which has accumulated & current E&P totaling $65,000, distributes land to its sole shareholder, an individual. The land has a FMV of $75,000 & an adjusted basis of $55,000. The shareholder assumes a $15,000 liability associated with the land. The shareholder will recognize A. $60,000 of dividend income & have a $60,000 basis in the land B. $65,000 of dividend income & have a $65,000 basis in the land C. $65,000 of dividend income & have a $75,000 basis in the land D. $60,000 of dividend income & have a $75,000 basis in the land 30) Crossroads Corporation distributes $60,000 to its sole shareholder Harley. Crossroads has earnings & profits of $55,000 & Harley's basis in her stock is $20,000. After the distribution, Harley's basis is A. $5,000 B. $15,000 C. $20,000 D. $60,000 31) Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of A. $0 B. $8,000 C. $40,000 D. $50,000 32) Which of the following is not a reason for a stock redemption? A. desire by remaining shareholders to retain control B. desire by shareholders to reduce the corporate tax liability C. Redemption of shares is a good corporate investment. D. No outside market exists for the stock. 33) Which of the following is not a condition that permits a stock redemption to be treated as a sale? A. It provides funds for payment of income taxes. B. It is not essentially equivalent to a dividend. C. The redemption is substantially disproportionate. D. The redemption completely terminates the shareholder's interest. 34) The definition of a partnership does not include A. a syndicate B. a group C. a pool D. All are included 35) Identify which of the following statements is true. A. All of the partners in a limited partnership have limited liability. B. A limited partnership must have at least two general partners. C. A limited partnership cannot have a corporate general partner. D. All are false. 36) Which one of the following individuals or entities is ineligible to be an S corporation shareholder? A. An estate B. Resident alien of the United States C. A voting trust where all of the beneficiaries are U.S. citizens D. A partnership where all of the partners are U.S. citizens 37) Identify which of the following statements is true. A. An election for an S corporation to use the Sec. 179 expensing election is made by the corporation & not by its shareholders. B. The S corporation's separately stated items are in general the same ones that apply in partnership taxation. C. An S corporation cannot claim a dividends-received deduction. D. All are true. 38) In computing the ordinary income of a partnership, a deduction is allowed for A. net Sec. 1231 losses B. bad debts C. foreign income taxes paid D. charitable contributions 39) Cactus Corporation, an S Corporation, had accumulated earnings & profits of $100,000 at the beginning of 2008. Tex & Shirley each own 50% of the stock. Cactus does not make any distributions during 2008, but had $200,000 of ordinary income. In 2009, ordinary income was $100,000 & distributions were $100,000. What is Tex's ordinary income for 2009? A. $0 B. $50,000 C. $100,000 D. $200,000 40) Identify which of the following statements is true. A. Distribution of partnership income in the form of cash to partners is generally tax-free to the partners & the partnership. B. When partners receive cash distributions from the partnership, they pay taxes on those distributions. C. If money distributions exceed the partner's basis in the partnership interest, a partner would have to recognize gain on a distribution from the partnership. Such gain is usually an ordinary gain. D. All are true. 41) On the first day of the partnership's tax year, Karen purchases a 50% interest in a general partnership for $30,000 cash & she materially participates in the operation of the partnership for the entire year. The partnership has $40,000 in recourse liabilities when Karen enters the partnership. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. There is no minimum gain related to the nonrecourse liability. During the year the partnership incurs a $120,000 loss & a $20,000 increase in liabilities. How much of the loss can Karen report on her tax return for the current year? A. $30,000 B. $40,000 C. $50,000 D. $60,000 42) George pays $10,000 for a 20% interest in a general partnership which has recourse liabilities of $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. George's basis in his partnership interest is A. $10,000 B. $12,000 C. $14,000 D. $30,000 43) Identify which of the following statements is true. A. If a partner sells property received in a partnership distribution for a gain & the property was inventory in the hands of the distributing partnership, the partner will always recognize ordinary income. B. The primary purpose of Sec. 751 is to prevent partnerships from converting capital gains into ordinary income. C. Unrealized receivables include rights to payments on the sale of a capital asset. D. All are false. 44) Identify which of the following statements is true. . If a partnership asset with a deferred precontribution gain is distributed in a nonliquidating distribution to the partner who contributed the asset, the precontribution ain must be recognized by the partner. . The partner's basis in the partnership interest is normally reduced by the FMV of property distributed in a nonliquidating distribution. C. When a current distribution from a partnership reduces the basis of the partnership interest to zero, the partner's interest in the partnership is terminated. . All are false. 4) For purposes of Sec. 751, inventory includes all of the following EXCEPT . capital assets or 1231 property . items held for sale in the ordinary course of business . accounts receivable . All of the above are inventory per Sec. 751 46) dentify which of the following statements is false. A. A C corporation short year income tax liability must be determined on an annualized basis. . If the termination of an S election is considered to be inadvertent, then the election is permitted to continue in place as if the termination had never occurred. . If an S election is terminated & the termination is not considered to be inadvertent, a 10-tax-year waiting period is required before making a new election. . A corporation can obtain relief for a late S election if the IRS consents. 4) Identify which of the following statements is true. . All of the shareholders of an S corporation must consent to a revocation of the S election. B. A revocation of an S corporation election can be retrospective to any date. . An S election will not be terminated due to excess passive income if the corporation does not have Subchapter C E&P. D. All are true. 4) On June 30 of the current year, the S election of Great Corporation is terminated thus creating a 6-month S short year & a 6-month C short year. Geat Corporation is a calendar-year taxpayer. The S short year return is due A. September 15 December 15 . March 15 of the next year . June 30 of the next year 11) On September 3, 2008, Jackson Corporation purchases goods for a U.S. dollar equivalent of $17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The payment is made on October 10. The exchange rates were September 3: 1 Swiss franc = $.85 October 10: 1 Swiss franc = $.90 What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on October 10? A) A Foreign Currency Transaction Loss: 1000 Accounts Payable (SFr): 1000 B) Accounts Payable (SFr): 850 Foreign Currency Transaction Gain: 850 C) Foreign Currency Transaction Loss: 850 Accounts Payable (SFr): 850 D) Accounts Payable (SFr): 1000 Foreign Currency Transaction Gain: 200 - Option A - Option C - Option B - Option D 12) On March 1, 2008, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to a Thai company. The transaction is denominated in Thai bahts. The payment is received on May 10. The exchange rates were: March 1: 1 baht = $.031 May 10: 1 baht = .034 What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on May 10? A) Accounts Receivable (baht): 93 Foreign Currency Transaction Gain: 93 B) Accounts Receivable (baht): 3000 Foreign Currency Transaction Gain: 3000 C) Foreign Currency Transaction Loss: 3000 Accounts Receivable (baht): 3000 D) Sales: 93 Foreign Currency Transaction Gain: 93 - Option A - Option C - Option B - Option D 13) If the U.S. dollar is the currency in which the foreign affiliate's books & records are maintained, & the U.S. dollar is also the functional currency, - the translation method should be used for restatement - either translation or re-measurement could be used for restatement - the re-measurement method should be used for restatement - no restatement is required 14) The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 2008, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 2008. (2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's local currency unit (LCU) on January 15, 2009. The U.S. dollar–equivalent of the payable was $50,000 on the December 1, 2008, invoice date & $53,000 on December 31, 2008. In Newsprint's 2008 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the U.S. dollar is the functional currency & the re-measurement method is appropriate? - $12,000 - $25,000 - $10,000 - $30,000