Taxation 2 Pre-Assessment UPDATED
ACTUAL Exam Questions and CORRECT
Answers
1. Which type of business organization combines the tax treatment of a partnership with the legal
accountability of a corporation?
A. Limited liability companies
B. Sole proprietorships
C. C corporations
D. S corporations - CORRECT ANSWER - A. Limited liability companies
2. What is one of the tax disadvantages of a sole proprietorship?
A. Business losses will carry forward, negatively affecting the net income of future years.
B. The corporate tax rate may be lower than the personal income tax rate.
C. Assets withdrawn from the business will be subject to double taxation.
D. Profits are taxed first as they are recognized by the business and again as they are distributed
to the shareholder. - CORRECT ANSWER - B. The corporate tax rate may be lower than
the personal income tax rate.
3. Which example shows a disadvantage of operating as a partnership?
A. Partnership profits are taxed when distributed regard less of when they are earned.
B. Some tax-exempt fringe benefits, such as life insurance, are not available to partners.
C. Partnership income is taxed on the partner's individual return.
D. A partner's basis is increased by the partner's share of the partnership's income - CORRECT
ANSWER - B. Some tax-exempt fringe benefits, such as life insurance, are not available
to partners.
,4. Which example demonstrates a disadvantage of being a C corporation?
A. Shareholder-employees must fund fringe benefits such as life insurance and health plans
funded with before-tax dollars.
B. The first $50,000 of income of a C corporation is taxed at 15%.
C. Shareholders employed by the corporation are considered employees.
D. The C corporation's earnings are taxed to the shareholders when they are distributed as
dividends. - CORRECT ANSWER - D. The C corporation's earnings are taxed to the
shareholders when they are distributed as dividends.
5. Which favorable rule applies to S corporations?
A. The entity can retain earnings without being subject to the accumulated earnings tax.
B. The entity may be taxed on built-in gains rather than distributed gains.
C. The entity's owners can deduct more losses because their stock basis increases with the
entity's debt.
D. The entity has no restrictions on the number and type of owners. - CORRECT
ANSWER - A. The entity can retain earnings without being subject to the accumulated
earnings tax.
6. Corporation A is a publicly traded U.S. corporation with $27 million in average gross receipts
over the last three years. Which method of accounting must Corporation A use in computing its
federal taxable income?
A. Accrual
B. Hybrid
C. Cash
D. Installment - CORRECT ANSWER - A. Accrual
7. A corporation expects to have $500,000 in gross income, but wants to lower its tax bill. To do
this, they donate a painting that the corporation has owned for the last 6 months to an art
, museum, so that the corporation may deduct a charitable contribution. The museum intends to
sell the painting to help fund the cost of the purchase of a different exhibit. The painting
originally cost the corporation $10,000 and is now valued at $30,000. In addition, the corporation
has $20,000 of trade or business deductions it intends to claim this year. What is the
corporation's taxable income?
A. $440,000
B. $470,000
C. $480,000
D. $490,000 - CORRECT ANSWER - Gross Income: $500,000
Deductions: ($20,000)
Charitable contribution (ordinary income property): ($10,000)=
B. $470,000
8. A corporation expects to have $600,000 in taxable income but wants to lower its tax bill. To
do this, it donates a painting that the corporation has owned for the last 10 years to a history
museum, so it may claim a charity deduction. The corporation does not know the museum
intends to sell the painting to help fund the cost of a new exhibit. The painting originally cost the
corporation $50,000 and is now valued at $90,000.
What is the corporation's new taxable income?
A. $550,000
B. $510,000
C. $460,000
D. $540,000 - CORRECT ANSWER - D. $540,000
9. A corporation has taxable income of $250,000. What's the corporate income tax liability for
2019?
A. $47,500
ACTUAL Exam Questions and CORRECT
Answers
1. Which type of business organization combines the tax treatment of a partnership with the legal
accountability of a corporation?
A. Limited liability companies
B. Sole proprietorships
C. C corporations
D. S corporations - CORRECT ANSWER - A. Limited liability companies
2. What is one of the tax disadvantages of a sole proprietorship?
A. Business losses will carry forward, negatively affecting the net income of future years.
B. The corporate tax rate may be lower than the personal income tax rate.
C. Assets withdrawn from the business will be subject to double taxation.
D. Profits are taxed first as they are recognized by the business and again as they are distributed
to the shareholder. - CORRECT ANSWER - B. The corporate tax rate may be lower than
the personal income tax rate.
3. Which example shows a disadvantage of operating as a partnership?
A. Partnership profits are taxed when distributed regard less of when they are earned.
B. Some tax-exempt fringe benefits, such as life insurance, are not available to partners.
C. Partnership income is taxed on the partner's individual return.
D. A partner's basis is increased by the partner's share of the partnership's income - CORRECT
ANSWER - B. Some tax-exempt fringe benefits, such as life insurance, are not available
to partners.
,4. Which example demonstrates a disadvantage of being a C corporation?
A. Shareholder-employees must fund fringe benefits such as life insurance and health plans
funded with before-tax dollars.
B. The first $50,000 of income of a C corporation is taxed at 15%.
C. Shareholders employed by the corporation are considered employees.
D. The C corporation's earnings are taxed to the shareholders when they are distributed as
dividends. - CORRECT ANSWER - D. The C corporation's earnings are taxed to the
shareholders when they are distributed as dividends.
5. Which favorable rule applies to S corporations?
A. The entity can retain earnings without being subject to the accumulated earnings tax.
B. The entity may be taxed on built-in gains rather than distributed gains.
C. The entity's owners can deduct more losses because their stock basis increases with the
entity's debt.
D. The entity has no restrictions on the number and type of owners. - CORRECT
ANSWER - A. The entity can retain earnings without being subject to the accumulated
earnings tax.
6. Corporation A is a publicly traded U.S. corporation with $27 million in average gross receipts
over the last three years. Which method of accounting must Corporation A use in computing its
federal taxable income?
A. Accrual
B. Hybrid
C. Cash
D. Installment - CORRECT ANSWER - A. Accrual
7. A corporation expects to have $500,000 in gross income, but wants to lower its tax bill. To do
this, they donate a painting that the corporation has owned for the last 6 months to an art
, museum, so that the corporation may deduct a charitable contribution. The museum intends to
sell the painting to help fund the cost of the purchase of a different exhibit. The painting
originally cost the corporation $10,000 and is now valued at $30,000. In addition, the corporation
has $20,000 of trade or business deductions it intends to claim this year. What is the
corporation's taxable income?
A. $440,000
B. $470,000
C. $480,000
D. $490,000 - CORRECT ANSWER - Gross Income: $500,000
Deductions: ($20,000)
Charitable contribution (ordinary income property): ($10,000)=
B. $470,000
8. A corporation expects to have $600,000 in taxable income but wants to lower its tax bill. To
do this, it donates a painting that the corporation has owned for the last 10 years to a history
museum, so it may claim a charity deduction. The corporation does not know the museum
intends to sell the painting to help fund the cost of a new exhibit. The painting originally cost the
corporation $50,000 and is now valued at $90,000.
What is the corporation's new taxable income?
A. $550,000
B. $510,000
C. $460,000
D. $540,000 - CORRECT ANSWER - D. $540,000
9. A corporation has taxable income of $250,000. What's the corporate income tax liability for
2019?
A. $47,500
