Chapters 1 & 2 C15-Chap-00-Tst-1-Exm-Sol-2015-Posted Page 1 of 6

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1 Chapters 1 & 2 C15-Chap-00-Tst-1-Exm-Sol-2015-Posted Page 1 of 6 Note: Chapter numbers for these tabs do not correspond to our 2016 textbook. First five questions are not subject to being included in a 2016 Acct 6120 test. 1 A 2 D 3 C 4 D 5 B 6 B 7 D Concord Corp, a domestic corp, had income, expenses and deductions: Gross receipts (Operating Revenues) $195,000 Operating Expenses, (not including cash contributions) 135,000 Net operating income before income tax & items below 60,000 Gross dividend income from IBM stock 10,000 Cash contributions to qualified charities 20,000 Concord s charitable contribution deduction for 2015? 7,000 8 B Dividends received deduction No. 8 No. 9 9 D Revenue from operations $500,000 $500,000 Expenses of operations (525,000) (533,000) Net Operating Income (25,000) (33,000) Dividend income from Cooper Corp. (10% owned) 100, ,000 Total 75,000 67,000 Dividend Received deduction percentage 70% 70% Dividend Received deduction amount-rule 1 70,000 70,000 Dividend Received deduction amount-rule 2 52,500 46,900 Taxable Income (loss) rule 1 5,000 (3,000) Taxable Income (loss) rule 2 $22,500 $20, A Big, Inc. bought 40% of Good Co. s stock for $200,000 on January 1, Big can exercise significant influence over Good s operating and financial policies. During 2014, Good earned $80,000 and paid dividends of $50,000. How much gross income (from Good) is reported on Big's 2014 income tax return? Big Good Revenue? Expense? Net Income $100,000 30% $30,000 Equity Method Dividends ($60,000) 30% $18,000 Cost Method Increase in Ret. Earnings $40,000 30% Difference $12, A Included in the determination of this amount were the following items: Corp. had book income before income taxes of $120,000 $120,000 Loss on sale of building depreciated on S/L method ($4,000) Gain on sale of land used in business $5,000 Net 1231 gain (capital gain) $1,000 Loss on sale of investments in securities (long-term) ($7,000) $6,000 The corporation's taxable income was: $126,000

2 Chapters 1 & 2 C15-Chap-00-Tst-1-Exm-Sol-2015-Posted Page 2 of 6 12 C Charlotte Corporation Taxable income $20,000 $10,000 15% 1,500 $5,000 25% 1,250 $5,000 34% 1,700 $20,000 $4,450 $100,000 $50,000 15% 7,500 $25,000 25% 6,250 $25,000 34% 8,500 $100,000 $22,250 Good Corporation-started in Sales $200,000 $200,000 $200,000 Cost of Sales (120,000) (120,000) (120,000) Gross Margin 80,000 80,000 80,000 Operating Expenses (20,000) (20,000) (20,000) Net operating income 60,000 60,000 60,000 Short-term gain (loss) sale-ibm stock (4,000) 7,000 Long-term gain (loss) sale-abc stock 3,000 GAAP net income before tax 56,000 63,000 67,000 Loss Carryforward (4,000) (1,000) Amount of carryforward used (3,000) (1,000) Taxable Income on Form 1120 $60,000 $60,000 $66, B Federal taxable income for Good Corporation for 2014? 14 C Federal taxable income for Good Corporation for 2015? 15 D What is federal income tax before credits for Good Corp. for 2016? $50,000 15% $7,500 16,000 25% 4,000 Taxable income & Tax $66,000 $11, A Depreciation Recapture Selling Price $5,000 Cost $10,000 Accum. Depreciation (S/L) 6,000 Adjusted Basis 4,000 Gain 1,000 Section 1245 Gain (Ordinary) 1,000 Section 1231 Gain (Capital) $0

3 Chapters 1 & 2 C15-Chap-00-Tst-1-Exm-Sol-2015-Posted Page 3 of 6 Note the following question is actually no D Charlotte Corp's partial income statement after its first year of operations is: Income before income taxes $500,000 Federal & state income taxes payable $180,000 Deferred income taxes 20,000 Income tax expense 200,000 Net income $300,000 Charlotte estimates its annual warranty expense as a percentage of sales. Provision for warranty expense in its accounting records this year was $400,000. No difference existed between pretax accounting income and taxable income, except the warranty expense. Assuming a 40% income tax rate, what warranty payments were made? Income tax expense per books $200,000 Income tax paid 180,000 Difference in tax (20,000) Tax rate 40% Difference between book income & taxable income (50,000) Amount of warranty expense on books 400,000 Amount of warranty expense on tax return. $450,000 Note the following question is actually no A Net income per books of $300,000 before the provision for federal income taxes. Included in the net income were the following items: Dividend income from a 10% owned domestic taxable corporation 50,000 Bad debt expense 80,000 Begin. & end. balances on allowance were $30,000 & $40,000, respectively. Net income per books before the provision for federal income taxes. $300,000 Dividend received deduction (35,000) Remove bad debt deduction 80,000 Bad debt write-off (70,000) Taxable Income $275, C Modern Corporation Return Book income before tax (including the following) $100,000 $100,000 Provision for state income tax 1,000 Interest earned on N.C. Bonds 6,000 (6,000) Interest expense on loan to buy N.C. Bonds 2,000 2,000 Entertainment expense (meals for customers) 1, Taxable Income $96,500

4 Chapter 3 C15-Chap-00-Tst-1-Exm-Sol-2015-Posted Page 4 of 6 20 D Total Operations ($000) Total Makes Imports Sales $10,000 $6,000 $4,000 Cost of Sales ($5,000) ($3,000) ($2,000) Gross Margin $5,000 $3,000 $2,000 Other expenses ($1,000) Net Income $4,000 Total Operations ($000) Total Makes Imports Sales $10, % $6,000 $4,000 Cost of Sales ($5,000) 60.00% ($3,000) ($2,000) Gross Margin $5, % $3,000 $2,000 Other expenses ($1,000) 60.00% ($600) Net Income $4,000 QPAI $2,400 DPAD - 9% 9% DPAD ($216.00) $ Taxable income $3, Use Simplified Deduction Method What is taxable income for the year (2014)? 21 B 22 C AMT Exemption Unadjusted Exemption Amount $40,000 AMTI $180,000 Floor 150,000 Excess over Floor 30,000 Phase-out Rate 25% Reduction in exemption 7,500 Exemption allowed $32, A AMT Corporation - Alternative Minimum Tax Taxable income $100,000 Tax preference items & Adjustments 160,000 Alternative minimum taxable income 260,000 Minus: Exemption ($40, X [$270,000 - $150,000]) (12,500) Tax base for AMT 247,500 Tax (AMT base X 20%) 49,500 Minus: Regular tax liability (on $100,000) 22,250 Alternative Minimum Tax $27,250 AMT Exemption Unadjusted Exemption Amount $40,000 AMTI $260,000 Floor 150,000 Excess over Floor 110,000 Phase-out Rate 25% Reduction in exemption 27,500 Exemption allowed $12, D A manufacturing corp. has Accumulated E&P of $0 on January 1

5 Chapter 3 C15-Chap-00-Tst-1-Exm-Sol-2015-Posted Page 5 of 6 25 D No gain or loss for a corp. upon sale of its capital stock, including treasury stock. 26 B AMT Corporation - Alternative Minimum Tax. (Sec. 56(a)(3)) Revenue $2,000,000 Expenses $1,600,000 Taxable income $400,000 Tax Adjustments ($200,000) Alternative minimum taxable income $200,000 The contract was completed this year. Note: for AMT, percentage of completion was used resulting in additional revenue in each of the two preceding years. Regular taxable income is based on completed contract method that results in reporting profit of $300,000 in the year of completion. Need to remove $200,000 (profit recognized earlier for AMT) from the $300, B A corporation is classified as a personal holding company. Taxable income $300,000 Federal income tax liability ($100,250) Dividends received deduction $25,000 Dividends paid deduction ($50,000) Undistributed PHC income $174,750 PHC tax rate 20% PHC tax $34,950

6 Chapter 4 C15-Chap-00-Tst-1-Exm-Sol-2015-Posted Page 6 of 6 The remaining questions are not applicable to Test no. 2, A Betty transferred a building with a basis of $180,000 and FMV of $350, Compute Stockholder's Gain or Loss Value of all consideration received by stockholder: Value of Stock received $150,000 Liabilities assumed 100,000 Minus: Cost of all property transferred to corp. (180,000) Equals Gain Realized $70,000 Recognized Gain: Lesser of gain realized or boot (include excess debt) received $0 29 A Mary transferred property with a basis of $16,000 and a FMV of $25,000, to Corp. K 1. Compute Stockholder's Gain or Loss Value of all consideration received by stockholder: Value of Stock received $20,000 Cash received 5,000 Minus: Cost of all property transferred to corp. (16,000) Equals Gain Realized $9,000 Recognized Gain: Lesser of gain realized 29 A or boot (include excess debt) received $5, Compute Stockholder's Basis in Stock Basis of all property transferred $16,000 Plus gain recognized 5,000 Minus boot received (include all debt transferred) (5,000) Equals basis of stock received $16, Compute Corporation's Gain 0 4. Compute Corporation's Basis in Property Basis of property transferred by stockholder $16,000 (Property other than cash) Add: Gain recognized by stockholder 5, D Equals: basis of property to corporation $21, D In 2000, M, (Joint return), contributed $210,000 cash to Local Corp, for 80 shares of sec stock. Salary $225,000 Taxable income before losses $120,000 Sec loss (100,000) Additional capital loss (3,000) AGI $17, A Ann and Dan formed a corporation. Ann transferred equipment that had a FMV of $25,000 and zero adjusted basis. Dan transferred a building that had a FMV of $100,000 and a basis to him of $80,000.