ACCT 424 Week 1 Checkpoint

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ACCT 424 Week 1 Checkpoint

 1.Question :(TCO 2) Penguin Corporation, a C corporation, has two equal shareholders, Bob and Leo. Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder. Before considering the dividend, Bob is in the 10% marginal tax bracket and Leo is in the 28% marginal tax bracket. Which statement is incorrect?
Student Answer: $100,000 will be subject to double taxation.
 Penguin could have avoided paying corporate tax if, instead of paying a dividend, it had paid Bob and Leo a salary of $50,000 each (assuming a $50,000 salary for each is reasonable).
 A preferential tax rate will apply to the dividend income of both Bob and Leo.
 If Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less federal income tax on his salary than Leo would have paid on his salary.
 None of the above

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 2.Question :(TCO 2) Pelican Inc., a closely held corporation (not a PSC), has a $350,000 loss from a passive activity, $135,000 of active income, and $160,000 of portfolio income. How much is Pelican’s taxable income?
Student Answer: ($55,000)
 $0
 $135,000
 $295,000
 $160,000

 

 3.Question :(TCO 2) Copper Corporation owns stock in Bronze Corporation and has net operating income of $900,000 for the year. Bronze Corporation pays Copper a dividend of $150,000. Which amount of dividends received deduction may Copper claim if it owns 65% of Bronze stock (assuming Copper’s dividends received deduction is not limited by its taxable income)?
Student Answer: $0
 $105,000
 $120,000
 $150,000
 None of the above

 

 4.Question :(TCO 1) Jane and Walt form Yellow Corporation. Jane transfers equipment worth $950,000 (basis of $200,000) and cash of $50,000 to Yellow Corporation for 50% of its stock. Walt transfers a building and land worth $1,050,000 (basis of $400,000) for 50% of Yellow’s stock and $50,000 in cash.
Student Answer: Jane recognizes no gain; Walt recognizes gain of $50,000.
 Jane recognizes a gain of $50,000; Walt has no gain.
 Neither Jane nor Walt recognizes gain.
 Jane recognizes a gain of $750,000; Walt recognizes gain of $650,000.
 None of the above

 

 5.Question :(TCO 1) Tim, a cash-basis taxpayer, incorporates his sole proprietorship. He transfers the following items to the newly created Wren Corporation.

AdjustedFair Market
BasisValue
Cash$  20,000$  20,000
Building  110,000  160,000
Mortgage payable (secured by the building and held for 15 years)        135,000  135,000

With respect to this transaction,

Student Answer: Wren Corporation’s basis in the building is $110,000.
 Tim has no recognized gain.
 Tim has a recognized gain of $25,000.
 Tim has a recognized gain of $5,000.
 None of the above

 

 6.Question :(TCO 1) Sarah and Tony (mother and son) form Dove Corporation with the following investment: cash by Sarah of $55,000 and land by Tony (basis of $35,000 and fair market value of $45,000). Dove Corporation issues 200 shares of stock, 100 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.
Student Answer: Section 351 cannot apply, because Sarah should have received 110 shares instead of only 100.
 Tony’s basis in the stock of Dove Corporation is $50,000.
 Tony’s basis in the stock of Dove Corporation is $50,000.
 Section 351 may apply, because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
 None of the above

 

 7.Question :(TCO 1) Joe and Kay form Gull Corporation. Joe transfers cash of $250,000 for 200 shares in Gull Corporation. Kay transfers property with a basis of $50,000 and fair market value of $240,000. She agrees to accept 200 shares in Gull Corporation for the property and for providing bookkeeping services to the corporation in its first year of operation. The value of Kay’s services is $10,000. With respect to the transfer,
Student Answer: Gull Corporation has a basis of $240,000 in the property transferred by Kay.
 neither Joe nor Kay recognizes gain or income on the exchanges.
 Gull Corporation has a business deduction under §162 of $10,000.
 Gull capitalizes $10,000 as organizational costs.
 None of the above

 

 8.Question :(TCO 11) Which statement, if any, does not reflect the rules governing the negligence accuracy-related penalty?
Student Answer: The penalty rate is 25%.
 The penalty is imposed only on the part of the deficiency attributable to negligence.
 The penalty applies to all
federal taxes, except when fraud is involved.
 The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.
 None of the above

 

 9.Question :(TCO 11) The rules of Circular 230 allow a tax preparer to
Student Answer: take a position on a tax return that is contrary to a decision of the U.S. Supreme Court.
 charge a $5,000 fee to prepare a Form 1040EZ.
 purposely delay the tax audit process.
 advertise their services on the Internet.
 All of the above

 

 10.Question :(TCO 11) Which statement correctly reflects the rules governing interest on an individual’s federal tax deficiency and a claim for refund?
Student Answer: The IRS has full discretion in determining the rate that will apply.
 The simple interest method for calculating interest is used.
 For noncorporate taxpayers, the rate of interest for assessments is the same as the rate of interest for refunds.
 The IRS must adjust the rate of interest semiannually.
 None of the above

 

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