Income Tax Fundamentals 2017 35th Edition by Gerald E. Whittenburg – Test Bank

1. Corporations pay a flat 30 percent federal income tax.

a. True

b. False

ANSWER:   False
RATIONALE:   Corporate marginal rates range from 15 percent to 39 percent.
POINTS:   1
DIFFICULTY:   Easy
QUESTION TYPE:   True / False
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Knowledge

2. The corporate tax rates favor large corporations.

a. True

b. False

ANSWER:   False
RATIONALE:   The corporate tax rates range from 15 percent to 39 percent. For large corporations with taxable income over $18,333,333, the corporate tax rate is a flat 35 percent.
POINTS:   1
DIFFICULTY:   Easy
QUESTION TYPE:   True / False
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Knowledge

3. For 2016, what is the maximum tax rate for personal service corporations?

a. 25 percent

b. 28 percent

c. 34 percent

d. 35 percent

e. None of the above

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Knowledge

4. Which of the following companies is taxed at a flat rate of 35 percent?

a. An auto parts manufacturing corporation with taxable income of $73,000.

b. A consulting corporation of owner-employee CPAs with taxable income of $1,000,000.

c. A family-owned shoe store with earnings of $224,000 in 2016.

d. All of the above are taxed at a flat rate of 35 percent.

ANSWER:   b
POINTS:   1
DIFFICULTY:   Easy
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Knowledge

5. In 2016, Apricot Corporation had taxable income of $120,000. Included in taxable income was a $10,000 capital gain. The $120,000 of taxable income does not include a $15,000 capital loss carryforward available from the previous year. What is Apricot Corporation’s 2016 income tax liability before any tax credits?

a. $24,200

b. $26,150

c. $28,550

d. $30,050

e. None of the above

ANSWER:   b
RATIONALE:   $22,250 + 39% × ($120,000 – $10,000 – $100,000)
POINTS:   1
REFERENCES:   Easy
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
ITF.WABG.16.LO:11-02 – LO:11-02
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Knowledge
NOTES:   Additional tables, rates or other schedules may be required to assist the student in completing this test question.

6. Which of the following statements is true of corporations?

a. Income of all corporations is taxed in the same way that income of partnerships is taxed.

b. A corporation’s charitable contribution deduction is limited to 25 percent of the corporation’s taxable income.

c. Capital losses of a corporation may be deducted from ordinary income, subject to an annual limitation.

d. If a corporation has a long-term capital loss that is carried back, it is treated as a short-term capital loss.

e. A corporation may deduct organizational expenditures as they are incurred.

ANSWER:   d
POINTS:   1
DIFFICULTY:   Easy
QUESTION TYPE:   Multiple Choice
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
ITF.WABG.16.LO:11-02 – LO:11-02
ITF.WABG.16.LO:11-03 – LO:11-03
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Knowledge

7. For the year ended June 30, 2016, the Rosaceae Corporation, a regular C corporation, has a long-term capital loss of $25,000.

a.Assuming that in addition to the capital loss, the corporation has taxable income, before capital gains and losses, of $25,000 for 2016, calculate the corporation’s tax liability before any credits.

b.Assuming that in addition to the long-term capital loss of $25,000 the corporation has taxable income, before capital gains and losses, of $90,000 and a short-term capital gain of $10,000 for 2016, calculate the corporation’s tax liability before any credits.

ANSWER:
a. $3,750 = 15% × $25,000
b. $18,850, $13,750 + [($90,000 – $75,000) x 34%]

POINTS:   1
DIFFICULTY:   Moderate
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
ITF.WABG.16.LO:11-02 – LO:11-02
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Comprehension
NOTES:   Additional tables, rates or other schedules may be required to assist the student in completing this test question.

8. During the current year, the Squamata Corporation, a regular C corporation, has $30,000 in ordinary income, a long-term capital loss of $20,000, and a short-term capital gain of $10,000.

a.Calculate the Squamata Corporation’s tax liability for the current year.

b.Explain the nature and amount of any carrybacks or carryforwards that the corporation is entitled to use.
ANSWER:
a.$4,500 = 15% × $30,000.

b.$10,000 long-term capital loss. It becomes a short-term capital loss and can be carried back 3 years and forward 5 years to offset capital gains in those years.

POINTS:   1
DIFFICULTY:   Moderate
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
ITF.WABG.16.LO:11-02 – LO:11-02
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Knowledge
NOTES:   Additional tables, rates or other schedules may be required to assist the student in completing this test question.

9. Calculate the corporate tax liability in each of the following circumstances:

a. X Corporation has taxable income of $250,000 for its current calendar tax year.
b. Y Corporation has $1,600,000 in taxable income for the current tax year.

c. Z Corporation has taxable income of $100,000, before capital gains and losses, a short-term capital loss of $30,000, and a long-term capital gain of $10,000 in the current tax year.

ANSWER:
a. $80,750 = $22,250 + 39% × ($250,000 – $100,000)
b. $544,000 = $113,900 + 34% × ($1,600,000 – $335,000)
c. $22,250 on taxable income of $100,000

POINTS:   1
DIFFICULTY:   Moderate
QUESTION TYPE:   Subjective Short Answer
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
ITF.WABG.16.LO:11-02 – LO:11-02
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Comprehension
NOTES:   Additional tables, rates or other schedules may be required to assist the student in completing this test question.

10. Is it correct to state that the maximum corporate tax rate is 35 percent? Please describe the structure of the corporate tax rate schedule in your answer.

ANSWER:

For income between $100,000 and $335,000 the effective rate is 39 percent, that is, 34 percent plus the 5 percent surcharge. For income between $15,000,000 and $18,333,333 the effective rate is 38 percent, that is, 35 percent plus the 3 percent surcharge. The higher effective rates within these dollar limits are sometimes referred to as the “bubble” rates.

The higher bubble rates represent a phaseout of the benefit of the lower corporate rates on lower amounts of corporate income. Although there are marginal rates higher than 35 percent on some corporate income, the effective tax rate on corporate income does not exceed 35 percent of the total income of a corporation.

POINTS:   1
DIFFICULTY:   Moderate
QUESTION TYPE:   Essay
HAS VARIABLES:   False
LEARNING OBJECTIVES:   ITF.WABG.16.LO:11-01 – LO:11-01
NATIONAL STANDARDS:   United States – BUSPROG: Analytic
STATE STANDARDS:   United States – AK – AICPA: FN-Reporting
KEYWORDS:   Bloom’s: Analysis