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If an accrual basis taxpayer prepays interest expense,the payment results in an unfavorable temporary book/tax difference.

A) True
B) False

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Stack Inc.owns a $1 million insurance policy on the life of Mary Stack,the corporate CEO.The corporation is the policy beneficiary.Stack's annual premium on the policy is $3,160.Which of the following statements is true?


A) Stack Inc.can deduct the annual premium as a business expense.If Stack ever collects the $1 million death benefit,the benefit is excluded from gross income.
B) Stack Inc.can deduct the annual premium as a business expense.If Stack ever collects the $1 million death benefit,the benefit is included in gross income.
C) Stack Inc.can't deduct the annual premium as a business expense.If Stack ever collects the $1 million death benefit,the benefit is included in gross income.
D) Stack Inc.can't deduct the annual premium as a business expense.If Stack ever collects the $1 million death benefit,the benefit is excluded from gross income.

E) B) and C)
F) All of the above

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Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.

A) True
B) False

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Which of the following statements concerning the cash method of accounting is true?


A) A cash basis taxpayer who is in constructive receipt of an income item must recognize that income,even if the item is not in the taxpayer's actual possession.
B) A cash basis taxpayer can deduct the purchase cost of business equipment.
C) A cash basis taxpayer does not recognize gross income on receipt of an economic benefit unless that benefit consists of money.
D) A cash basis taxpayer can deduct interest when it is paid,regardless of the time period for which the interest is charged.

E) A) and C)
F) B) and C)

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Which of the following statements about the domestic production activities deduction is false?


A) This deduction is a tax preference.
B) This deduction is intended to help U.S.businesses compete in the global marketplace.
C) This deduction improves the measurement of taxable business income.
D) This deduction creates a permanent difference between book income and taxable income.

E) None of the above
F) A) and B)

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Porter Inc.incurred a $20,000 expense only $13,400 of which was deductible.Which of the following is true?


A) This transaction resulted in a $6,600 unfavorable difference between book income and taxable income.
B) This transaction resulted in a $6,600 favorable difference between book income and taxable income.
C) If this transaction resulted in a temporary book/tax difference,it had no effect on Porter's deferred tax accounts.
D) If this transaction resulted in a permanent book/tax difference,it had no effect on the computation of Porter's tax expense per books.

E) A) and B)
F) None of the above

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Which of the following does not result in a permanent book/tax difference?


A) Business meal and entertainment expense
B) Domestic production activities deduction
C) Premiums paid on key-person life insurance policies
D) All of the above result in a permanent book/tax difference.

E) C) and D)
F) A) and B)

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BugLess Inc,a calendar year,accrual basis corporation,provides pest extermination services to its customers.In October 2017,BugLess contracted with Mr.Cass to provide monthly service calls for 24 months.Each service call costs $60,and Mr.Cass prepaid $1,440 when he signed the contract.BugLess made three service calls to Mr.Cass' home in 2017.As a result of the contract,BugLess should report:


A) $1,440 taxable income in 2017.
B) $180 taxable income in 2017,$720 taxable income in 2018,and $540 taxable income in 2019.
C) $180 taxable income in 2017,and $1,260 taxable income in 2018.
D) None of the above

E) None of the above
F) B) and D)

Correct Answer

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Laine Services,a calendar year taxpayer,billed a client for $8,450 of services on November 30,2017,and received a check in full payment from the client on January 12,2018.If Poole is an accrual basis taxpayer,it reports $8,450 taxable income in 2017.

A) True
B) False

Correct Answer

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Lawes Company,a cash basis business,mailed a $24,500 invoice to MWQ Partnership for professional services rendered.MWQ offered to pay the invoice by transferring 250 shares of ConAgri common stock to Lawes.The shares are selling on the NYSE at $98 per share.If Lawes accepts the shares in payment,it recognizes:


A) No taxable income.
B) No taxable income until it sells the ConAgri shares for cash.
C) $24,500 taxable income.
D) It is illegal for a cash basis taxpayer to accept a noncash payment.

E) All of the above
F) A) and C)

Correct Answer

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Taxpayers may adopt the cash receipts and disbursements method,the accrual method,or a hybrid method of accounting for tax purposes.

A) True
B) False

Correct Answer

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Which of the following statements about short-period returns is true?


A) If a taxpayer must file a short-period return because the IRS granted permission for a change in the taxpayer's year,the tax for the year must be based on annualized income.
B) The tax on a short-period return must be based on annualized income only if the taxpayer failed to obtain permission from the IRS to change its taxable year.
C) The tax on every short-period return must be based on annualized income.
D) None of the above is true.

E) B) and D)
F) B) and C)

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Which of the following statements regarding book/tax differences is false?


A) A permanent book/tax difference affects only the year in which it occurs.
B) A temporary book/tax difference affects two or more tax years.
C) Temporary book/tax differences arising in the current tax year will reverse in the future in one or more tax years.
D) The tax cost or benefit of a permanent book/tax difference is recouped over time.

E) B) and D)
F) A) and B)

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Elcox Company,a calendar year,cash basis taxpayer,paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term.Elcox can deduct $6,340 in the year of payment.

A) True
B) False

Correct Answer

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Which of the following statements about the NOL deduction is false?


A) The deduction prevents the tax distortion that could result from an inflexible one-year reporting period.
B) The deduction results in a tax refund if the NOL can be carried back against previous years' taxable income.
C) The deduction has value based on the NPV of its related tax savings.
D) None of the above statements is false.

E) A) and C)
F) A) and B)

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Taxable income is defined as gross income minus allowable deductions and credits.

A) True
B) False

Correct Answer

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According to your textbook,business managers prefer to:


A) Report as much income as possible for book and tax purposes.
B) Report as much income as possible for book purposes and as little income as possible for tax purposes.
C) Report as little income as possible for book and tax purposes.
D) Report the same amount of income for book and tax purposes.

E) B) and D)
F) A) and B)

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Federal and state political lobbying expenses are nondeductible.

A) True
B) False

Correct Answer

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Which of the following statements about tax expense per books and tax payable is false?


A) If a corporation has no temporary differences between book income and taxable income,tax expense per books equals tax payable.
B) If a corporation has no permanent differences between book income and taxable income,tax expense per books equals tax payable.
C) Tax expense per books and tax payable are calculated from the same rate schedule.
D) If a corporation has no permanent differences between book income and taxable income,tax expense per books equals tax payable and tax expense per books and tax payable are calculated from the same rate schedule.

E) C) and D)
F) All of the above

Correct Answer

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PPQ Inc.wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes.PPQ can't make this change without receiving permission from the IRS.

A) True
B) False

Correct Answer

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