@PROFDOCDIGITALLIBRARIES
TEST BANK
Taxation for Decision Makers, 2020
Shirley Dennis-Escoffier; Karen A. Fortin
10th Edition
PR
O
FD
O
C
,@PROFDOCDIGITALLIBRARIES
Chapter 1 Summary of Testbank Revisions
2019 Edition 2018 Edition 2019 Edition Modification
Problem Number Problem Number
True-False 1 True-False 1
True-False 2 True-False 2
True-False 3 True-False 3
True-False 4 True-False 4
True-False 5 True-False 5
True-False 6 True-False 6
True-False 7 True-False 7 Problem modified
True-False 8 True-False 8
True-False 9 True-False 9
True-False 10 True-False 10
PR
True-False 11 True-False 11
True-False 12 True-False 12
True-False 13 True-False 13
True-False 14 True-False 14
True-False 15 True-False 15 Problem and solution modified
True-False 16 True-False 16
O
True-False 17 True-False 17
Short Answer 1 Short Answer 1
Short Answer 2 Short Answer 2
FD
Short Answer 3 Short Answer 3
Short Answer 4 Short Answer 4 Solution modified
Short Answer 5 Short Answer 5
Short Answer 6 Short Answer 6
Short Answer 7 Short Answer 7 Solution modified
O
Short Answer 8 Short Answer 8
Short Answer 9 Short Answer 9
Short Answer 10 Short Answer 10
C
Problem 1 Problem 1 Problem and solution modified
Problem 2 Problem 2 Problem and solution modified
Problem 3 Problem 3 Problem and solution modified
Problem 4 Problem 4 Problem and solution modified
Problem 5 Problem 5 Problem and solution modified
Problem 6 Problem 6 Problem and solution modified
Problem 7 Problem 7
Problem 8 Problem 8 Problem and solution modified
Problem 9 Problem 9 Problem and solution modified
Other Objective a Other Objective a
Other Objective b Other Objective b
Other Objective c Other Objective c
Other Objective d Other Objective d
, C
O
FD
O
PR
,@PROFDOCDIGITALLIBRARIES
Other Objective e Other Objective e
Other Objective f Other Objective f
Other Objective g Other Objective g
Other Objective h Other Objective h
Other Objective i Other Objective i
Other Objective j Other Objective j
Multiple Choice 1 Multiple Choice 1
Multiple Choice 2 Multiple Choice 2
Multiple Choice 3 Multiple Choice 3
Multiple Choice 4 Multiple Choice 4
Multiple Choice 5 Multiple Choice 5
Multiple Choice 6 Multiple Choice 6
Multiple Choice 7 Multiple Choice 7
Multiple Choice 8 Multiple Choice 8
Multiple Choice 9 Multiple Choice 9
PR
Multiple Choice 10 Multiple Choice 10 Problem modified
Multiple Choice 11 Multiple Choice 11
Multiple Choice 12 Multiple Choice 12 Problem and solution modified
Multiple Choice 13 Multiple Choice 13 Problem modified
Multiple Choice 14 Multiple Choice 14 Problem and solution modified
O
Multiple Choice 15 Multiple Choice 15
Multiple Choice 16 Multiple Choice 16 Problem modified
Multiple Choice 17 Multiple Choice 17
FD
Multiple Choice 18 Multiple Choice 18 Problem modified
Multiple Choice 19 Multiple Choice 19
Multiple Choice 20 Multiple Choice 20
Multiple Choice 21 Multiple Choice 21
Multiple Choice 22 Multiple Choice 22 Problem and solution modified
O
Multiple Choice 23 Multiple Choice 23 Problem and solution modified
Multiple Choice 24 Multiple Choice 24
Multiple Choice 25 Multiple Choice 25
C
Multiple Choice 26 Multiple Choice 26
Multiple Choice 27 Multiple Choice 27
Multiple Choice 28 Multiple Choice 28 Problem and solution modified
Multiple Choice 29 Multiple Choice 29 Problem modified
Multiple Choice 30 Multiple Choice 30 Problem and solution modified
Multiple Choice 31 Multiple Choice 31
Multiple Choice 32 Multiple Choice 32
Multiple Choice 33 Multiple Choice 33
Multiple Choice 34 Multiple Choice 34
Multiple Choice 35 Multiple Choice 35
Multiple Choice 36 Multiple Choice 36 Problem and solution modified
Multiple Choice 37 Multiple Choice 37 Problem and solution modified
Multiple Choice 38 Multiple Choice 38
Multiple Choice 39 Multiple Choice 39
,@PROFDOCDIGITALLIBRARIES
Multiple Choice 40 Multiple Choice 40 Problem and solution modified
Multiple Choice 41 Multiple Choice 41
Multiple Choice 42 - New Problem
Multiple Choice 43 Multiple Choice 43
Multiple Choice 44 Multiple Choice 44
Multiple Choice 45 Multiple Choice 45
Multiple Choice 46 Multiple Choice 46
Multiple Choice 47 Multiple Choice 47
Multiple Choice 48 Multiple Choice 48
Multiple Choice 49 Multiple Choice 49
Multiple Choice 50 Multiple Choice 50
Multiple Choice 51 Multiple Choice 51 Problem modified
Multiple Choice 52 Multiple Choice 52 Problem modified
Multiple Choice 53 Multiple Choice 53
Multiple Choice 54 Multiple Choice 54
PR
Multiple Choice 55 Multiple Choice 55
Multiple Choice 56 Multiple Choice 56
Multiple Choice 57 Multiple Choice 57
Multiple Choice 58 Multiple Choice 58
Multiple Choice 59 Multiple Choice 59
O
Multiple Choice 60 Multiple Choice 60 Problem and solution modified
Multiple Choice 61 Multiple Choice 61 Problem and solution modified
Multiple Choice 62 Multiple Choice 62 Problem and solution modified
FD
Multiple Choice 63 Multiple Choice 63 Problem and solution modified
Multiple Choice 64 Multiple Choice 64 Problem and solution modified
Multiple Choice 65 Multiple Choice 65 Problem and solution modified
Multiple Choice 66 Multiple Choice 66 Problem and solution modified
Multiple Choice 67 Multiple Choice 67 Problem modified
O
Multiple Choice 68 Multiple Choice 68 Problem modified
Multiple Choice 69 Multiple Choice 69 Problem and solution modified
Multiple Choice 70 Multiple Choice 70 Problem and solution modified
Multiple Choice 71 Multiple Choice 71 Problem modified
C
Multiple Choice 72 Multiple Choice 72 Problem modified
Multiple Choice 42 Deleted
,@PROFDOCDIGITALLIBRARIES
Chapter 1
Introduction to Taxation
Note to Instructor: The reference tables in the appendix of the text may be required for a limited number
of answers to the questions and problems in this chapter. This is indicated by ―REFERENCE TABLES
REQUIRED‖ after the learning objective.
True-False: Insert T for True and F for False before the questions.
1. A hidden tax is one that is included with a payment but not specifically identified.
ANSWER True LO 1.1
DIFFICULTY: Easy
PR
2. Both sales and use taxes are collected in the state in which the sale takes place.
ANSWER False LO 1.1
DIFFICULTY: Easy
O
3. The person receiving the gift pays the gift tax.
ANSWER False LO 1.1
DIFFICULTY: Easy
FD
4. The value added tax is a type of consumption tax.
ANSWER True LO 1.1
DIFFICULTY: Easy
O
5. The type and degree of connection between a business and a state necessary for a state to
impose a tax is referred to as nexus.
C
ANSWER True LO 1.1
DIFFICULTY: Easy
6. The 13th Amendment to the US Constitution that provided for an income tax was ratified in
1916.
ANSWER False LO 1.1
DIFFICULTY: Easy
7. Any current changes to the tax laws are now amendments to the Internal Revenue Code of
2018.
ANSWER False LO 1.1
DIFFICULTY: Easy
8. A flat tax generally would be considered a regressive tax.
,@PROFDOCDIGITALLIBRARIES
ANSWER False LO 1.2
DIFFICULTY: Easy
9. Adam Smith’s four canons of taxation are Equity, Certainty, Economy and Convenience.
ANSWER True LO 1.3
DIFFICULTY: Easy
10. Vertical equity asserts that persons in similar circumstances should face similar tax burdens.
ANSWER False LO 1.3
DIFFICULTY: Easy
11. There are three basic taxable entities: the individual, the fiduciary, and the C corporation.
PR
ANSWER True LO 1.4
DIFFICULTY: Easy
12. All interest paid to a taxpayer must be included in gross income.
ANSWER False LO 1.4
DIFFICULTY: Moderate
O
13. The lowest tax rate on the tax rate schedules for taxable incomes is the same for individuals
and C corporations.
FD
ANSWER False LO 1.4 REFERENCE TABLES REQUIRED
DIFFICULTY: Easy
14. A $100 tax deduction is more valuable to a taxpayer than a $100 tax credit.
O
ANSWER False LO 1.4
DIFFICULTY: Easy
C
15. A corporation incurring a net operating loss in 2018 can only carry that loss forward to offset
profits in future years.
ANSWER True LO 1.5
DIFFICULTY: Moderate
16. All limited liability companies (LLCs) can file their tax returns as partnerships.
ANSWER False LO 1.5
DIFFICULTY: Moderate
17. Partnerships and S corporations are flow-through entities.
ANSWER True LO 1.5
DIFFICULTY: Easy
,@PROFDOCDIGITALLIBRARIES
Short-Answer Questions: Provide a brief written answer to each of the following questions.
1. Name and describe two types of taxes other than the income tax. Give example of each.
ANSWER Wealth taxes are those taxes levied on the value of property owned by a taxpayer.
Examples include real estate taxes, tangible taxes, intangible taxes, and inventory taxes.
Wealth transfer taxes are those taxes levied on the value of property transferred to another. Examples are
the gift, estate, and inheritance taxes. Consumption taxes are taxes levied on the value of goods or
services that are purchased for consumption. Examples include sales, use, excise, and value added taxes.
LO 1.1
DIFFICULTY: Easy
2. Compare a sales tax to a use tax.
PR
ANSWER A sales tax is levied on a purchase at the point of sale regardless of the state of residence
of the purchaser. A use tax is levied on a purchased item brought into a different state for use when a sales
tax is not paid by the purchaser in the state where the item was purchased. Normally the sales and use
taxes in a specific state are levied at identical rates.
LO 1.1
DIFFICULTY: Moderate.
O
3. Differentiate a wealth tax from a wealth transfer tax and give an example of each.
ANSWER: A wealth tax is a tax levied on the value of a person’s possessions at a specific point in
FD
time; common wealth taxes would be real estate taxes that are levied on the owner of real property or
intangible taxes on stocks. The wealth transfer tax is levied on the value of a person’s possessions that are
transferred to another person; the gift and estate taxes are examples of wealth transfer taxes.
LO 1.1
DIFFICULTY: Moderate
O
4. Compare progressive, proportional, and regressive taxes.
ANSWER The tax rate in a progressive system of taxation increases at a greater rate than the rate of
C
increase in income. The higher the income, the greater the percentage of taxes paid. The tax in a
proportional system of taxation increases at the same rate as the rate of increase in income. The
percentage of taxes paid would be the same over all income levels. The tax rate in a regressive system of
taxation increases at a slower rate than the rate of increase in income. The higher the income, the smaller
the percentage of taxes paid.
LO 1.2
DIFFICULTY: Moderate
5. What are Adam Smith’s four canons of taxation? Briefly describe each.
ANSWER Certainty—a taxpayer knows what the tax consequences of a transaction will be when the
transaction is undertaken. Equity—the tax is fair relative to the taxpayer’s level of income and
circumstances. Economy—the costs of administering and complying with the tax are small relative to the
amount of taxes collected. Convenience—the payment of taxes is simple and easy.
LO 1.3
DIFFICULTY: Easy
,@PROFDOCDIGITALLIBRARIES
6. Explain how horizontal equity differs from vertical equity.
ANSWER Horizontal equity would require taxpayers with similar incomes to pay a like amount of
taxes. Vertical equity would require taxpayers with greater (lesser) incomes to pay a greater (lesser)
amount of taxes.
LO 1.3
DIFFICULTY: Easy
7. What tax provision encourages the fiduciary of an estate or a trust to distribute the income annually to
the beneficiaries?
ANSWER: The tax rates applicable to the income that a trust or an estate receives are far more
progressive than any other entity; they have no 12 or 32 percent tax rates and the highest tax rate (37%)
begins at $12,500 of taxable income.
LO 1.4
PR
DIFFICULTY: Easy
8. Briefly compare a sole proprietorship to a corporation as a business entity.
ANSWER A sole proprietorship has only one owner; a corporation can have one or an unlimited
number of owners. The corporation has limited liability; the sole proprietor is responsible for the
liabilities of the business. There generally are few if any legal requirements to establish a sole
O
proprietorship; a corporation must be incorporated under the laws of one of the states and can issue
different classes of stock and bonds. The sole proprietor cannot take advantage of employee status and
reports all results of operations on his or her own tax return. A shareholder-employee of a corporation is
FD
eligible for fringe benefits and the corporation files a completely separate tax return from that of any
owner. The sole proprietor is fully liable for all debts of the business; shareholders are only at risk for
their capital investment and are not liable for the debts of the corporation. There are other differences as
well, too numerous to mention.
LO 1.5
DIFFICULTY: Moderate
O
9. Why are S corporations and partnerships called flow-through entities?
C
ANSWER S corporations and partnerships are called flow-through entities because they do not pay
taxes on their incomes and gains. Instead the revenue and expense items flow through to the entity’s
owners and are included in and taxed along with the owners’ other income.
LO 1.5
DIFFICULTY: Easy
10. What are the fiduciary entities and how are they created?
ANSWER The two fiduciary entities are the trust and the estate. A trust is created by a grantor who
places assets in trust for the benefit of another person. A trustee manages the trust assets. An estate is
created anytime a person who owns or has an interest in assets subject to estate taxes dies.
LO 1.5
DIFFICULTY: Easy
, @PROFDOCDIGITALLIBRARIES
Problems: Provide numerical solutions for each of the following.
1. Cragen Corporation has gross income of $625,000 and operating expenses of $418,000. What is its
taxable income? What is its income tax liability in 2018?
ANSWER $207,000 taxable income; $43,470 tax
Taxable income = $625,000 - $418,000 = $207,000.
Income tax =.21 x $207,000 = $43,470
LO 1.4
DIFFICULTY: Easy
2. The Shoe Market Inc. (a regular corporation) had $1,875,000 of shoe sales and its cost for these shoes
was $688,000. In addition, Shoe Market received $5,000 of corporate bond interest income and $6,000
interest income on State of California bonds. It paid $512,000 for salaries and had $552,000 of other
operating expenses. What is Shoe Market’s taxable income? What is its income tax liability for 2018?
PR
ANSWER $128,000 taxable income; $26,880 tax
Taxable income = $1,875,000 - $688,000 + $5,000 corporate bond interest - $512,000 salaries - $552,000
expenses = $128,000. [Interest on state bonds is tax exempt.]
Income tax = .21 x $128,000 = $26,880.
LO 1.4
DIFFICULTY: Moderate
O
3. Walter is married and files a joint return. If his adjusted gross income is $64,000 and he has $32,850
of deductions in 2018. What is his taxable income? What is his income tax liability?
FD
ANSWER $31,150 taxable income; $3,357 tax
Taxable income = $64,000 - $32,850 in deductions = $31,150.
Income tax = [($31,150 - $19,050) x .12] + $1,905 = $1,452 + $1,905 = $3,357.
LO 1.4 REFERENCE TABLES REQUIRED
DIFFICULTY: Moderate
O
4. Susie is single, has salary income of $26,000, and $12,000 of deductions in 2018. What is her taxable
income? What is her income tax liability?
C
ANSWER $14,000 taxable income; $1,489.50 tax
Taxable income = $26,000 – $12,000 deduction = $14,000
Income tax = $952.50 + [($14,000 - $9,525) x .12] = $952.50 + $537 = $1,489.50
LO 1.4 REFERENCE TABLES REQUIRED
DIFFICULTY: Moderate
5. Chloe and Bill, both single with no dependents, plan to marry either immediately before or
immediately after year-end. Chloe’s income for 2018 is $89,000 and Bill’s is $86,000 before
subtracting $12,000 for the standard deduction for each. Would they have a marriage penalty or a
marriage benefit if they married at the end of 2018?
ANSWER Neither, the tax liability remains the same as a married couple.
As single taxpayers: Chloe’s taxable income: $89,000 - $12,000 standard deduction = $77,000. Bill’s
taxable income: $86,000 - $12,000 standard deduction = $74,000. Chloe’s income tax: ($9,525 x .10) +
($29,175 x .12) + ($38,300 x .22) = $952.50 + $3,501 + $8,426 = $12,879.50. Bill’s income tax: ($9,525
TEST BANK
Taxation for Decision Makers, 2020
Shirley Dennis-Escoffier; Karen A. Fortin
10th Edition
PR
O
FD
O
C
,@PROFDOCDIGITALLIBRARIES
Chapter 1 Summary of Testbank Revisions
2019 Edition 2018 Edition 2019 Edition Modification
Problem Number Problem Number
True-False 1 True-False 1
True-False 2 True-False 2
True-False 3 True-False 3
True-False 4 True-False 4
True-False 5 True-False 5
True-False 6 True-False 6
True-False 7 True-False 7 Problem modified
True-False 8 True-False 8
True-False 9 True-False 9
True-False 10 True-False 10
PR
True-False 11 True-False 11
True-False 12 True-False 12
True-False 13 True-False 13
True-False 14 True-False 14
True-False 15 True-False 15 Problem and solution modified
True-False 16 True-False 16
O
True-False 17 True-False 17
Short Answer 1 Short Answer 1
Short Answer 2 Short Answer 2
FD
Short Answer 3 Short Answer 3
Short Answer 4 Short Answer 4 Solution modified
Short Answer 5 Short Answer 5
Short Answer 6 Short Answer 6
Short Answer 7 Short Answer 7 Solution modified
O
Short Answer 8 Short Answer 8
Short Answer 9 Short Answer 9
Short Answer 10 Short Answer 10
C
Problem 1 Problem 1 Problem and solution modified
Problem 2 Problem 2 Problem and solution modified
Problem 3 Problem 3 Problem and solution modified
Problem 4 Problem 4 Problem and solution modified
Problem 5 Problem 5 Problem and solution modified
Problem 6 Problem 6 Problem and solution modified
Problem 7 Problem 7
Problem 8 Problem 8 Problem and solution modified
Problem 9 Problem 9 Problem and solution modified
Other Objective a Other Objective a
Other Objective b Other Objective b
Other Objective c Other Objective c
Other Objective d Other Objective d
, C
O
FD
O
PR
,@PROFDOCDIGITALLIBRARIES
Other Objective e Other Objective e
Other Objective f Other Objective f
Other Objective g Other Objective g
Other Objective h Other Objective h
Other Objective i Other Objective i
Other Objective j Other Objective j
Multiple Choice 1 Multiple Choice 1
Multiple Choice 2 Multiple Choice 2
Multiple Choice 3 Multiple Choice 3
Multiple Choice 4 Multiple Choice 4
Multiple Choice 5 Multiple Choice 5
Multiple Choice 6 Multiple Choice 6
Multiple Choice 7 Multiple Choice 7
Multiple Choice 8 Multiple Choice 8
Multiple Choice 9 Multiple Choice 9
PR
Multiple Choice 10 Multiple Choice 10 Problem modified
Multiple Choice 11 Multiple Choice 11
Multiple Choice 12 Multiple Choice 12 Problem and solution modified
Multiple Choice 13 Multiple Choice 13 Problem modified
Multiple Choice 14 Multiple Choice 14 Problem and solution modified
O
Multiple Choice 15 Multiple Choice 15
Multiple Choice 16 Multiple Choice 16 Problem modified
Multiple Choice 17 Multiple Choice 17
FD
Multiple Choice 18 Multiple Choice 18 Problem modified
Multiple Choice 19 Multiple Choice 19
Multiple Choice 20 Multiple Choice 20
Multiple Choice 21 Multiple Choice 21
Multiple Choice 22 Multiple Choice 22 Problem and solution modified
O
Multiple Choice 23 Multiple Choice 23 Problem and solution modified
Multiple Choice 24 Multiple Choice 24
Multiple Choice 25 Multiple Choice 25
C
Multiple Choice 26 Multiple Choice 26
Multiple Choice 27 Multiple Choice 27
Multiple Choice 28 Multiple Choice 28 Problem and solution modified
Multiple Choice 29 Multiple Choice 29 Problem modified
Multiple Choice 30 Multiple Choice 30 Problem and solution modified
Multiple Choice 31 Multiple Choice 31
Multiple Choice 32 Multiple Choice 32
Multiple Choice 33 Multiple Choice 33
Multiple Choice 34 Multiple Choice 34
Multiple Choice 35 Multiple Choice 35
Multiple Choice 36 Multiple Choice 36 Problem and solution modified
Multiple Choice 37 Multiple Choice 37 Problem and solution modified
Multiple Choice 38 Multiple Choice 38
Multiple Choice 39 Multiple Choice 39
,@PROFDOCDIGITALLIBRARIES
Multiple Choice 40 Multiple Choice 40 Problem and solution modified
Multiple Choice 41 Multiple Choice 41
Multiple Choice 42 - New Problem
Multiple Choice 43 Multiple Choice 43
Multiple Choice 44 Multiple Choice 44
Multiple Choice 45 Multiple Choice 45
Multiple Choice 46 Multiple Choice 46
Multiple Choice 47 Multiple Choice 47
Multiple Choice 48 Multiple Choice 48
Multiple Choice 49 Multiple Choice 49
Multiple Choice 50 Multiple Choice 50
Multiple Choice 51 Multiple Choice 51 Problem modified
Multiple Choice 52 Multiple Choice 52 Problem modified
Multiple Choice 53 Multiple Choice 53
Multiple Choice 54 Multiple Choice 54
PR
Multiple Choice 55 Multiple Choice 55
Multiple Choice 56 Multiple Choice 56
Multiple Choice 57 Multiple Choice 57
Multiple Choice 58 Multiple Choice 58
Multiple Choice 59 Multiple Choice 59
O
Multiple Choice 60 Multiple Choice 60 Problem and solution modified
Multiple Choice 61 Multiple Choice 61 Problem and solution modified
Multiple Choice 62 Multiple Choice 62 Problem and solution modified
FD
Multiple Choice 63 Multiple Choice 63 Problem and solution modified
Multiple Choice 64 Multiple Choice 64 Problem and solution modified
Multiple Choice 65 Multiple Choice 65 Problem and solution modified
Multiple Choice 66 Multiple Choice 66 Problem and solution modified
Multiple Choice 67 Multiple Choice 67 Problem modified
O
Multiple Choice 68 Multiple Choice 68 Problem modified
Multiple Choice 69 Multiple Choice 69 Problem and solution modified
Multiple Choice 70 Multiple Choice 70 Problem and solution modified
Multiple Choice 71 Multiple Choice 71 Problem modified
C
Multiple Choice 72 Multiple Choice 72 Problem modified
Multiple Choice 42 Deleted
,@PROFDOCDIGITALLIBRARIES
Chapter 1
Introduction to Taxation
Note to Instructor: The reference tables in the appendix of the text may be required for a limited number
of answers to the questions and problems in this chapter. This is indicated by ―REFERENCE TABLES
REQUIRED‖ after the learning objective.
True-False: Insert T for True and F for False before the questions.
1. A hidden tax is one that is included with a payment but not specifically identified.
ANSWER True LO 1.1
DIFFICULTY: Easy
PR
2. Both sales and use taxes are collected in the state in which the sale takes place.
ANSWER False LO 1.1
DIFFICULTY: Easy
O
3. The person receiving the gift pays the gift tax.
ANSWER False LO 1.1
DIFFICULTY: Easy
FD
4. The value added tax is a type of consumption tax.
ANSWER True LO 1.1
DIFFICULTY: Easy
O
5. The type and degree of connection between a business and a state necessary for a state to
impose a tax is referred to as nexus.
C
ANSWER True LO 1.1
DIFFICULTY: Easy
6. The 13th Amendment to the US Constitution that provided for an income tax was ratified in
1916.
ANSWER False LO 1.1
DIFFICULTY: Easy
7. Any current changes to the tax laws are now amendments to the Internal Revenue Code of
2018.
ANSWER False LO 1.1
DIFFICULTY: Easy
8. A flat tax generally would be considered a regressive tax.
,@PROFDOCDIGITALLIBRARIES
ANSWER False LO 1.2
DIFFICULTY: Easy
9. Adam Smith’s four canons of taxation are Equity, Certainty, Economy and Convenience.
ANSWER True LO 1.3
DIFFICULTY: Easy
10. Vertical equity asserts that persons in similar circumstances should face similar tax burdens.
ANSWER False LO 1.3
DIFFICULTY: Easy
11. There are three basic taxable entities: the individual, the fiduciary, and the C corporation.
PR
ANSWER True LO 1.4
DIFFICULTY: Easy
12. All interest paid to a taxpayer must be included in gross income.
ANSWER False LO 1.4
DIFFICULTY: Moderate
O
13. The lowest tax rate on the tax rate schedules for taxable incomes is the same for individuals
and C corporations.
FD
ANSWER False LO 1.4 REFERENCE TABLES REQUIRED
DIFFICULTY: Easy
14. A $100 tax deduction is more valuable to a taxpayer than a $100 tax credit.
O
ANSWER False LO 1.4
DIFFICULTY: Easy
C
15. A corporation incurring a net operating loss in 2018 can only carry that loss forward to offset
profits in future years.
ANSWER True LO 1.5
DIFFICULTY: Moderate
16. All limited liability companies (LLCs) can file their tax returns as partnerships.
ANSWER False LO 1.5
DIFFICULTY: Moderate
17. Partnerships and S corporations are flow-through entities.
ANSWER True LO 1.5
DIFFICULTY: Easy
,@PROFDOCDIGITALLIBRARIES
Short-Answer Questions: Provide a brief written answer to each of the following questions.
1. Name and describe two types of taxes other than the income tax. Give example of each.
ANSWER Wealth taxes are those taxes levied on the value of property owned by a taxpayer.
Examples include real estate taxes, tangible taxes, intangible taxes, and inventory taxes.
Wealth transfer taxes are those taxes levied on the value of property transferred to another. Examples are
the gift, estate, and inheritance taxes. Consumption taxes are taxes levied on the value of goods or
services that are purchased for consumption. Examples include sales, use, excise, and value added taxes.
LO 1.1
DIFFICULTY: Easy
2. Compare a sales tax to a use tax.
PR
ANSWER A sales tax is levied on a purchase at the point of sale regardless of the state of residence
of the purchaser. A use tax is levied on a purchased item brought into a different state for use when a sales
tax is not paid by the purchaser in the state where the item was purchased. Normally the sales and use
taxes in a specific state are levied at identical rates.
LO 1.1
DIFFICULTY: Moderate.
O
3. Differentiate a wealth tax from a wealth transfer tax and give an example of each.
ANSWER: A wealth tax is a tax levied on the value of a person’s possessions at a specific point in
FD
time; common wealth taxes would be real estate taxes that are levied on the owner of real property or
intangible taxes on stocks. The wealth transfer tax is levied on the value of a person’s possessions that are
transferred to another person; the gift and estate taxes are examples of wealth transfer taxes.
LO 1.1
DIFFICULTY: Moderate
O
4. Compare progressive, proportional, and regressive taxes.
ANSWER The tax rate in a progressive system of taxation increases at a greater rate than the rate of
C
increase in income. The higher the income, the greater the percentage of taxes paid. The tax in a
proportional system of taxation increases at the same rate as the rate of increase in income. The
percentage of taxes paid would be the same over all income levels. The tax rate in a regressive system of
taxation increases at a slower rate than the rate of increase in income. The higher the income, the smaller
the percentage of taxes paid.
LO 1.2
DIFFICULTY: Moderate
5. What are Adam Smith’s four canons of taxation? Briefly describe each.
ANSWER Certainty—a taxpayer knows what the tax consequences of a transaction will be when the
transaction is undertaken. Equity—the tax is fair relative to the taxpayer’s level of income and
circumstances. Economy—the costs of administering and complying with the tax are small relative to the
amount of taxes collected. Convenience—the payment of taxes is simple and easy.
LO 1.3
DIFFICULTY: Easy
,@PROFDOCDIGITALLIBRARIES
6. Explain how horizontal equity differs from vertical equity.
ANSWER Horizontal equity would require taxpayers with similar incomes to pay a like amount of
taxes. Vertical equity would require taxpayers with greater (lesser) incomes to pay a greater (lesser)
amount of taxes.
LO 1.3
DIFFICULTY: Easy
7. What tax provision encourages the fiduciary of an estate or a trust to distribute the income annually to
the beneficiaries?
ANSWER: The tax rates applicable to the income that a trust or an estate receives are far more
progressive than any other entity; they have no 12 or 32 percent tax rates and the highest tax rate (37%)
begins at $12,500 of taxable income.
LO 1.4
PR
DIFFICULTY: Easy
8. Briefly compare a sole proprietorship to a corporation as a business entity.
ANSWER A sole proprietorship has only one owner; a corporation can have one or an unlimited
number of owners. The corporation has limited liability; the sole proprietor is responsible for the
liabilities of the business. There generally are few if any legal requirements to establish a sole
O
proprietorship; a corporation must be incorporated under the laws of one of the states and can issue
different classes of stock and bonds. The sole proprietor cannot take advantage of employee status and
reports all results of operations on his or her own tax return. A shareholder-employee of a corporation is
FD
eligible for fringe benefits and the corporation files a completely separate tax return from that of any
owner. The sole proprietor is fully liable for all debts of the business; shareholders are only at risk for
their capital investment and are not liable for the debts of the corporation. There are other differences as
well, too numerous to mention.
LO 1.5
DIFFICULTY: Moderate
O
9. Why are S corporations and partnerships called flow-through entities?
C
ANSWER S corporations and partnerships are called flow-through entities because they do not pay
taxes on their incomes and gains. Instead the revenue and expense items flow through to the entity’s
owners and are included in and taxed along with the owners’ other income.
LO 1.5
DIFFICULTY: Easy
10. What are the fiduciary entities and how are they created?
ANSWER The two fiduciary entities are the trust and the estate. A trust is created by a grantor who
places assets in trust for the benefit of another person. A trustee manages the trust assets. An estate is
created anytime a person who owns or has an interest in assets subject to estate taxes dies.
LO 1.5
DIFFICULTY: Easy
, @PROFDOCDIGITALLIBRARIES
Problems: Provide numerical solutions for each of the following.
1. Cragen Corporation has gross income of $625,000 and operating expenses of $418,000. What is its
taxable income? What is its income tax liability in 2018?
ANSWER $207,000 taxable income; $43,470 tax
Taxable income = $625,000 - $418,000 = $207,000.
Income tax =.21 x $207,000 = $43,470
LO 1.4
DIFFICULTY: Easy
2. The Shoe Market Inc. (a regular corporation) had $1,875,000 of shoe sales and its cost for these shoes
was $688,000. In addition, Shoe Market received $5,000 of corporate bond interest income and $6,000
interest income on State of California bonds. It paid $512,000 for salaries and had $552,000 of other
operating expenses. What is Shoe Market’s taxable income? What is its income tax liability for 2018?
PR
ANSWER $128,000 taxable income; $26,880 tax
Taxable income = $1,875,000 - $688,000 + $5,000 corporate bond interest - $512,000 salaries - $552,000
expenses = $128,000. [Interest on state bonds is tax exempt.]
Income tax = .21 x $128,000 = $26,880.
LO 1.4
DIFFICULTY: Moderate
O
3. Walter is married and files a joint return. If his adjusted gross income is $64,000 and he has $32,850
of deductions in 2018. What is his taxable income? What is his income tax liability?
FD
ANSWER $31,150 taxable income; $3,357 tax
Taxable income = $64,000 - $32,850 in deductions = $31,150.
Income tax = [($31,150 - $19,050) x .12] + $1,905 = $1,452 + $1,905 = $3,357.
LO 1.4 REFERENCE TABLES REQUIRED
DIFFICULTY: Moderate
O
4. Susie is single, has salary income of $26,000, and $12,000 of deductions in 2018. What is her taxable
income? What is her income tax liability?
C
ANSWER $14,000 taxable income; $1,489.50 tax
Taxable income = $26,000 – $12,000 deduction = $14,000
Income tax = $952.50 + [($14,000 - $9,525) x .12] = $952.50 + $537 = $1,489.50
LO 1.4 REFERENCE TABLES REQUIRED
DIFFICULTY: Moderate
5. Chloe and Bill, both single with no dependents, plan to marry either immediately before or
immediately after year-end. Chloe’s income for 2018 is $89,000 and Bill’s is $86,000 before
subtracting $12,000 for the standard deduction for each. Would they have a marriage penalty or a
marriage benefit if they married at the end of 2018?
ANSWER Neither, the tax liability remains the same as a married couple.
As single taxpayers: Chloe’s taxable income: $89,000 - $12,000 standard deduction = $77,000. Bill’s
taxable income: $86,000 - $12,000 standard deduction = $74,000. Chloe’s income tax: ($9,525 x .10) +
($29,175 x .12) + ($38,300 x .22) = $952.50 + $3,501 + $8,426 = $12,879.50. Bill’s income tax: ($9,525
