CH 5- ACCT 6150 Taxation of Business Entities- Quiz 2

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Regis University *

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Apr 3, 2024

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CHAPTER 5: Corporate Operations ACCT 6150- Taxation of Business Entities Quiz 2 1. LNS corporation reports book revenue of $2,720,000. Included in the $2,720,000 is $31,000 of tax-exempt interest income. LNS reports $2,485,000 in ordinary and necessary business expenses. What is LNS Corporation’s taxable income for the year? ANSWER: $204,000 Computed as follows: Description Amount Explanation (1) Total revenue $2,720,000 (2) Tax-exempt interest income (31,000) (3) Deductions (2,485,000) Taxable income $204,000 (1) + (2) + (3) Or the answer can be computed as shown below. Computed as follows: Description Amount Total revenue $2,720,000 Minus: Tax-exempt interest income (31,000) Minus: Deductions (2,485,000) Taxable income $204,000

CHAPTER 5: Corporate Operations ACCT 6150- Taxation of Business Entities Quiz 2 2. Assume Maple Corp. has just completed the third year of its existence (year 3). The table below indicates Maple’s ending book inventory for each year and the additional §263A costs it was required to include in its ending inventory. Maple immediately expensed these costs for book purposes. In year 2, Maple sold all of its year 1 ending inventory, and in year 3 it sold all of its year 2 ending inventory. Year 1 Year 2 Year 3 Ending book inventory $2,600,000 $2,982,500 $2,243,500 Additional §263A costs 41,000 77,000 50,750 Ending tax inventory $2,641,000 $3,059,500 $2,294,250 Required: 1. What book-tax difference associated with its inventory did Maple report in year 1? Was the difference favorable or unfavorable? Was it permanent or temporary? 2. What book-tax difference associated with its inventory did Maple report in year 2? Was the difference favorable or unfavorable? Was it permanent or temporary? 3. What book-tax difference associated with its inventory did Maple report in year 3? Was the difference favorable or unfavorable? Was it permanent or temporary? Req 1-3 ANSWERS Description Year 1 Req 1 Year 2 Req 2 Year 3 Req 3 Ending book inventory $2,600,000 $2,982,500 $2,243,500 Add: Additional §263A costs 41,000 77,000 50,750 Ending tax inventory $2,641,000 $3,059,500 $2,294,250 Book-tax difference $41,000 $36,000 $26,250 [A] [77,000-41,000] [77,000-50,750] Favorable / Unfavorable Unfavorable Unfavorable Favorable Permanent / Temporary Temporary Temporary Temporary Book-tax differences are always temporary because they adjust themselves in the future years.

CHAPTER 5: Corporate Operations ACCT 6150- Taxation of Business Entities Quiz 2 3. MWC Corp. is currently in the sixth year of its existence (2018). In 2013–2017, it reported the following income and (losses) (before net operating loss carryovers or carrybacks). 2013 : $ (85,500) 2014 : (23,500) 2015 : 64,000 2016 : 171,000 2017 : (8,500) 2018 : 392,500 a. If MWC elected to carry over the 2017 NOL, what is its 2018 taxable income after the NOL deduction? ANSWER: $384,000 REASON: 2018 taxable income: $384,000 ($392,500 – $8,500 NOL carryover from 2017). MWC would be able to offset up to 100% of taxable income in 2018 because the NOL comes from 2017. b. What is its 2018 book-tax difference associated with its NOL? Is it favorable or unfavorable? Is it permanent or temporary? ANSWER: The NOL carryover to 2018 creates a $8,500 temporary favorable book-tax difference in 2018. REASON: The book difference is the difference in net loss in 2017 as per taxable income and accounting income. Since accounting income is not mentioned, book difference is the operating loss in 2017, which is $8,500. Since the loss will decrease the overall tax payable, the amount is favorable.

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