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Exam 2: Corporations: Introduction and Operating Rules

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Question 31

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Luis is the sole shareholder of a C corporation, and Eduardo owns a sole proprietorship. Both businesses were started in 2011, and each business has a long-term capital gain of $20,000 for the year. Neither business made any distributions during the year. With respect to this information, which of the following statements is incorrect?

A) Eduardo must report a $20,000 long-term capital gain on his 2011 tax return.
B) Louis's corporation does not receive a preferential tax rate on the $20,000 long-term capital gain.
C) Luis must report a $20,000 long-term capital gain on his 2011 tax return.
D) Eduardo receives a preferential tax rate on a long-term capital gain of $20,000.
E) None of the above.

F) C) and E)
G) B) and C)

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Question 32

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Which of the following statements is incorrect regarding the taxation of C corporations?

A) The highest corporate marginal tax rate is 39%.
B) Taxable income of a personal service corporation is taxed at a flat rate of 35%.
C) A tax return must be filed whether or not the corporation has taxable income.
D) Similar to those applicable to individuals, the marginal tax rate brackets for corporations are adjusted for inflation.
E) None of the above.

F) A) and D)
G) C) and E)

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Question 33

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Compare the basic tax and nontax factors of doing business as a partnership, an S corporation, and a C corporation. Circle the correct answers.

A corporation may elect to amortize startup expenditures over the 60-month period beginning with the month in which the corporation begins business.

Briefly describe the accounting methods available for adoption by a C corporation.

In the current year, Oriole Corporation donated a painting worth $75,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting 5 years ago for $25,000. Oriole's charitable contribution deduction is $25,000 (ignoring the taxable income limitation).

On December 31, 2011, Lavender, Inc., an accrual basis C corporation, accrues a $90,000 bonus to Barry, its vice president and a 70% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 15, 2012. Lavender can deduct the bonus in 2012, the year in which it is included in Barry's gross income.

An expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1.

Jason, an architect, is the sole shareholder of Purple Corporation, a personal service corporation. The corporation paid Jason a salary of $225,000 during its fiscal year ending October 31, 2011. How much salary must Purple pay Jason during the period November 1 through December 31, 2011, to permit the corporation to continue to use its fiscal year without negative tax effects?

Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the year. In addition, Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss. Elk's taxable income is:

Briefly describe the charitable contribution deduction rules applicable to C corporations.

Ostrich, a C corporation, has a net short-term capital gain of $40,000 and a net long-term capital loss of $180,000 during 2011. Ostrich also has taxable income from other sources of $1 million. Prior years' transactions included the following:

Red Corporation, which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $28,000. Which of the following statements is correct?

Double taxation of corporate income results because dividend distributions are included in a shareholder's gross income but are not deductible by the corporation.

The due date (not including extensions) for filing a 2010 Federal income tax return for a calendar year C corporation (Form 1120) is April 15, 2011.

Eagle Corporation owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 25% of Hawk's stock?

Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.

Income that is included in net income per books but not included in taxable income is an addition item on Schedule M-1.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is a subtraction on Schedule M-1?

Beige Corporation, a C corporation, purchases a warehouse on December 4, 2002, for $500,000. Straight-line depreciation is taken in the amount of $104,701 before the property is sold on February 8, 2011, for $600,000. What is the amount and character of the gain recognized by Beige on the sale of the realty?