TEST BANK Principles of Taxation for Business and Investment Planning, 2023 26th Edition by Jones, S by digitaldownload87

TEST BANK Principles of Taxation for Business and Investment Planning, 2023 26th Edition by Jones, Shelley, Sandra and Kubick

CHAPTER 1

1) Ms. Penser resides in the city of Lanock, Tennessee. She owns 100% of the stock of PSW Incorporated, which is incorporated under Tennessee law and conducts business in six different local jurisdictions in Tennessee. A.How many taxpayers are identified in the above statement of facts? B.Identify the governments with jurisdiction to tax each of these taxpayers.

2) Forrest Township levies a tax on the assessed value of real property located within the town limits. The tax equals 1.4% of the value up to $300,000 plus 2% of any value in excess of $300,000. Mildred Payne owns real estate with a $983,500 assessed value. Compute her property tax.

3) Richton Company operates its business solely in Jurisdiction H, which levies a 6% sales and use tax. This year, Richton paid $1,438,000 to purchase tangible property from a dealer located in Jurisdiction W. This purchase was subject to W's 3.5% sales tax. The property was shipped to Richton's office in Jurisdiction H for use in its business. Compute Richton's sales or use tax with respect to this transaction.

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4) Grant Wilson is an employee of Market Enterprises, a corporation operating in State A. Identify the different types of potential taxes to be paid by both Grant and Market Enterprises with respect to this employment relationship.

Which of the following is not characteristic of a tax? A) A tax is compulsory. B) A tax is intended to punish unacceptable behavior. C) A tax is levied by a government. D) All of these choices are characteristics of a tax.

6) The state of Virginia charges motorists 50 cents for every trip across a toll bridge over the James River. This charge is an example of a(n): A) User's fee B) Transaction-based tax C) Activity-based tax D) Excise tax

7) The city of Mayfield charges individuals convicted of DWI (driving while intoxicated) $500 for the first conviction and $2,000 for any subsequent conviction. These charges are an example of a(n): A) User's fee B) Transaction-based tax C) Activity-based tax D) Government penalty

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8) The property tax on a rental house owned by Mr. Janey increased by $1,200 this year. Mr. Janey increased the monthly rent charged to his tenant, Ms. Lacey, by $45. Who bears the incidence of the property tax increase? A) Mr. Janey B) Ms. Lacey C) Both Mr. Janey and Ms. Lacey D) Neither Mr. Janey nor Ms. Lacey

9) Acme Incorporated's federal income tax increased by $100,000 this year. As a result, Acme reduced the annual dividend paid on its common stock by $100,000. Who bears the incidence of the corporate tax increase? A) Acme Incorporated B) Acme's customers C) Acme's employees D) Acme's shareholders

10) Acme Incorporated's property taxes increased by $65,000 this year. As a result, Acme increased the sale prices of its products to generate $65,000 more revenue. Who bears the incidence of the corporate tax increase? A) Acme Incorporated B) Acme's customers. C) Acme's employees. D) Acme's shareholders.

11) Acme Incorporated's property taxes increased by $19,000 this year. As a result, Acme eliminated $19,000 from its budget for the employee Christmas party. Who bears the incidence of the corporate tax increase?

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A) Acme Incorporated B) Acme's customers. C) Acme's employees. D) Acme's shareholders.

12)

Mr. Bilboa is a citizen of Portugal. Which of the following statements is true? A) The U.S. government has no jurisdiction to tax Mr. Bilboa because he is not a U.S.

citizen. B) The U.S. government has jurisdiction to tax Mr. Bilboa if he is a permanent resident of the United States. C) The U.S. government has jurisdiction to tax Mr. Bilboa if he earns income from a business he operates in Florida. D) Both the U.S. government has jurisdiction to tax Mr. Bilboa if he is a permanent resident of the United States and the U.S. government has jurisdiction to tax Mr. Bilboa if he earns income from a business he operates in Florida are true.

13) Mrs. King is a U.S. citizen who permanently resides in South Africa. Which of the following statements is true? A) The U.S. government has jurisdiction to tax Mrs. King. B) The U.S. government has no jurisdiction to tax Mrs. King because she does not live in the United States. C) The U.S. government has no jurisdiction to tax Mrs. King because she does not earn any income from a source within the United States. D) Mrs. King can elect whether to pay tax to the United States or to South Africa.

14) Mrs. Renfru is a Brazilian citizen who permanently resides in Houston, Texas. Which of the following statements is true?

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A) The U.S. government has no jurisdiction to tax Mrs. Renfru because she is not a U.S. citizen. B) The U.S. government has jurisdiction to tax Mrs. Renfru only on income that she earns from a source within the United States. C) The U.S. government has jurisdiction to tax Mrs. Renfru. D) Mrs. Renfru can elect whether to pay tax to the United States or to Brazil.

15)

Which of the following statements regarding tax systems is false?

A) A single percentage that applies to the entire tax base is described as a flat rate. B) When designing a tax, governments try to identify tax bases that taxpayers can easily avoid or conceal. C) A tax base is an item, occurrence, transaction, or activity with respect to which a tax is levied. D) With regard to tax systems, the term revenue refers to the total tax collected by the government.

16)

Which of the following is an example of a transaction-based tax? A) A tax on net business income B) An excise tax C) An estate tax on the transfer of assets at death D) Both an excise tax and an estate tax on the transfer of assets at death.

17)

Which of the following is an example of an activity-based tax? A) A tax on business' net income B) An excise tax C) A gift tax on the transfer of assets by gift D) Both a tax on business' net income and a gift tax on the transfer of assets by gift

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18)

Which of the following is an earmarked tax?

A) A tax imposed on the purchase of specific items such as liquor or cigarettes B) A tax that generates revenues that the government can spend only to build more National Parks C) A tax imposed only on individuals who earn more than $1 million annually D) A tax that generates revenues that the government can spend for any purpose

19)

Which of the following characterizes a good tax base? A) The base can be easily expressed in monetary terms. B) Taxpayers cannot easily avoid or conceal the base. C) Taxpayers cannot easily move the base from one jurisdiction to another. D) All of these choices characterize a good tax base.

20) The city of Springvale imposes a net income tax on businesses operating within its jurisdiction. The tax equals 1% of income up to $100,000 and 1.5% of income in excess of $100,000. The Springvale Bar and Grill generated $782,000 net income this year. Compute its city income tax. A) $10,230 B) $11,230 C) $11,730 D) None of these choices are correct

21) Government Q imposes a net income tax on businesses operating within its jurisdiction. The tax equals 3% of income up to $500,000 and 5% of income in excess of $500,000. Company K generated $782,000 net income this year. Compute the income tax that Company K owes to Q.

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A) $29,100 B) $14,100 C) $39,100 D) None of these choices are correct

22) Which of the following taxes is not a significant source of revenue for local governments? A) Real property tax B) Personal property tax C) Employment tax D) All of these choices are correct

23) Which of the following taxes is generally the most significant source of revenue for local governments? A) Real property tax B) Employment tax C) Income tax D) None of these choices are correct

24)

Which of the following statements concerning property taxes is false? A) Property taxes are ad valorem taxes. B) Property taxes are the primary source of revenue for local governments. C) Property taxes can be levied on realty or personalty. D) None of these choices are false.

25)

A sales tax can best be described as a(n):

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A) Consumption tax B) Income tax C) Activity tax D) Ad valorem tax

26)

Which of the following statements concerning sales taxes is false? A) Sales taxes apply to the purchase of most types of consumer goods. B) Sales taxes apply to the purchase of most types of consumer services. C) Sales taxes are collected by the seller when the sale is made. D) Sales taxes imposed on the purchaser of retail items are consumption taxes.

27)

The incidence of a state sales tax levied on the purchase of retail goods is: A) Borne by the ultimate purchaser of the goods. B) Borne by the seller who must collect and remit the tax. C) Borne by the government that levies the tax. D) None of these choices are correct.

28) Mr. Dodd resides in a state with a 6% sales and use tax. He recently traveled to another state to buy furniture and paid that state's 4% sales tax. Which of the following statements is true? A) Mr. Dodd's use tax liability to his home state equals 2% of the purchase price of the furniture. B) Mr. Dodd does not owe a use tax to his home state. C) Mr. Dodd's use tax liability to his home state equals 6% of the purchase price of the furniture. D) None of these choices are true.

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29) Mr. Smith resides in a state with a 6% sales and use tax. He recently traveled to another state to buy furniture and paid that state's 7% sales tax. Which of the following statements is true? A) Mr. Smith is entitled to a refund of 1% of the purchase price of the furniture. B) Mr. Smith does not owe a use tax to his home state. C) Mr. Smith's use tax liability to his home state equals 6% of the purchase price of the furniture. D) None of these choices are true.

30)

Which of the following statements about sales and use taxes is true?

A) If an individual pays a sales tax on the purchase of an item, she will not have to pay a use tax on the purchase. B) If an individual pays a sales tax on the purchase of an item, she will also have to pay a use tax on the purchase. C) Many states that impose a sales tax do not impose a complementary use tax. D) None of these choices are true.

31)

Which of the following taxes is a significant source of revenue for state governments? A) General sales tax B) Individual income tax C) Corporate income tax D) All of these choices are correct

32)

Which of the following is not characteristic of an excise tax?

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A) An excise tax is levied on the retail sale of specific goods. B) Excise tax rates typically are higher than general sales tax rates. C) The purchaser is responsible for paying any excise tax directly to the government. D) All of these choices are characteristics of an excise tax.

33)

What is the major difference between a sales tax and an excise tax?

A) Sales taxes are levied by state governments, while excise taxes are levied only by the federal government. B) Sales taxes are imposed on the purchase of a wide variety of items, while excise taxes are imposed on the purchase of a few specific items. C) Sales taxes must be collected by the seller, while excise taxes must be paid directly by the purchaser. D) Sales taxes are imposed on the purchase of tangible goods, while excise taxes are imposed on the purchase of services.

34) Which of the following is not an advantage of state conformity to federal corporate income tax laws? A) States have complete control over their corporate income tax revenues. B) States do not have to enact comprehensive corporate income tax statutes. C) Conformity eases the compliance burden of corporate taxpayers. D) All of these choices are advantages of state conformity.

35)

Which tax raises the most revenue for the federal government? A) Corporate income tax B) Individual income tax C) Excise taxes D) Transfer taxes

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36)

Which of the following federal taxes is earmarked for a specific purpose? A) Corporate income tax B) Employment taxes C) Unemployment taxes D) Both employment taxes and unemployment taxes are earmarked taxes.

37)

Which of the following federal taxes is not earmarked for a specific purpose? A) Employment taxes B) Unemployment taxes C) Transfer taxes D) All of these choices are earmarked taxes.

38) What gives the federal government the right to impose a tax on individual and corporate income? A) Internal Revenue Code of 1986 B) Revenue Act of 1913 C) Sixteenth Amendment to the U.S. Constitution D) Bill of Rights

39)

When did the federal income tax become a permanent tax? A) Immediately after the Revolutionary War B) During the Civil War C) In 1913 when the Sixteenth Amendment to the U.S. Constitution was ratified D) In 1939 when Congress enacted the first Internal Revenue Code

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40)

Which of the following does not characterize federal transfer taxes?

A) The tax is imposed on the value of wealth transferred by an individual as a gift. B) The tax is imposed on the value of wealth transferred because of the death of an individual. C) The tax is imposed on the value of wealth transferred by an individual to charity. D) All of these choices characterize federal transfer taxes.

41)

Which of the following does not characterize federal transfer taxes? A) The tax is imposed on individuals but not on corporations. B) The tax is based on the value of property transferred by gift or at death. C) The tax is a transaction tax. D) All of these choices characterize federal transfer taxes.

42) Company D, which has its home office in Raleigh, North Carolina, conducts business in the United States, Canada, and Mexico. Which of the following statements is true? A) Because Company D must pay income tax to North Carolina, it is not required to pay tax to any other state. B) Because Company D must pay income tax to North Carolina, it is not required to pay federal income tax. C) Because Company D must pay income tax to the United States, it is not required to pay tax to Canada or Mexico. D) None of these choices are true.

43) SJF Incorporated, which has its corporate offices in Boise, Idaho, conducts business in Idaho, Oregon, California, and British Columbia, Canada. Which of the following statements is true?

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A) SJF must pay income tax only to Idaho and the United States. B) SJF may be required to pay income tax to Idaho, Oregon, California, British Columbia, the United States, and Canada. C) SJF must pay income tax only to Idaho, Oregon, California, and the United States. D) SJF may be required to pay income tax to either the United States or to Canada, but not to both.

44)

Which type of tax is not levied by the federal government? A) Corporate income tax B) Individual income tax C) Employment taxes D) General sales tax

45) Company N operates a mail order business out of its headquarters in Tulsa, Oklahoma. This year, it mailed $892,000 worth of product to customers residing in Oklahoma and $489,300 worth of product to customers residing in Missouri. Which of the following statements is true? A) Company N must collect Oklahoma sales tax from its Oklahoma customers. Missouri may require Company N to collect Missouri sales tax from its Missouri customers. B) Company N must collect Oklahoma sales tax from both its Oklahoma and Missouri customers. C) Company N is not required to collect Oklahoma sales tax from its Oklahoma customers. D) Company N is not required to collect sales tax on any mail order sales.

46)

Which of the following does not contribute to the dynamic nature of the tax law?

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A) The political pressure from professional lobbyists B) Changes in the economic and social climate C) Changes in revenue needs of the government D) All of these choices contribute to the dynamic nature of the tax law

47) Which of the following statements regarding the political process of creating tax law is false? A) The political process contributes to the dynamic nature of the tax law. B) Special interest groups have little effect on the tax legislative process. C) When taxpayers devise a new tactic for reducing their tax burdens, governments respond by enacting a new rule to render the tactic ineffective. D) Changes in political philosophy often reflect shifts in the public attitude about the proper role of taxes in society.

48)

Which of the following is/are not a primary source of authority for the tax law? A) A revenue ruling published by the Internal Revenue Service B) Section 162 of the Internal Revenue Code C) Treasury Reg. §1.351-2 D) All of these choices are primary sources of authority

49)

Which of the following statements about the Internal Revenue Code is false? A) The Internal Revenue Code has not been amended since 1986. B) The Internal Revenue Code is part of federal statutory law. C) The Internal Revenue Code consists of numerically organized sections. D) Only Congress has the authority to amend the Internal Revenue Code.

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50)

How often does Congress amend the Internal Revenue Code? A) Rarely (the Internal Revenue Code has not been amended since 1986) B) Occasionally (perhaps once every decade) C) Regularly (at least once every five years) D) Constantly (at least once a year)

51)

Which of the following statements about Treasury regulations is false?

A) Treasury regulations are written to interpret and explain the Internal Revenue Code. B) Treasury regulations are part of the statutory law. C) A federal court can invalidate a Treasury regulation if the court concludes that the regulation incorrectly interprets the Internal Revenue Code. D) None of these choices are false.

52)

Revenue rulings and revenue procedures are written by: A) The Internal Revenue Service B) The Department of the Treasury C) The United States Congress D) The Supreme Court

53)

Which of the following is not considered administrative authority? A) Treasury regulations B) Revenue rulings C) Tax Court decisions D) All of these choices are administrative authorities

54)

A revenue ruling is an example of:

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A) Judicial authority B) Administrative authority C) Legislative authority D) Editorial authority

55)

Which of the following statements concerning judicial authority is false? A) Appellate court decisions have more authority than trial court decisions. B) Supreme Court decisions have more authority than appellate court decisions. C) Supreme Court decisions are the equivalent of law. D) None of these statements are false.

56)

Which of the following sources of tax law carries the most authority? A) Revenue procedure B) Treasury regulation C) Supreme Court decision D) The three sources of tax law have equal authority

57)

Which of the following sources of tax law carries the least authority? A) Revenue ruling B) Treasury regulation C) Section 736 of the Internal Revenue Code D) The three sources of tax law have equal authority

58)

Payment of a tax entitles the payer to a specific good or service from the government. ⊚ true ⊚ false

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59)

A user fee entitles the payer to a specific good or service from the government. ⊚ true ⊚ false

60)

A tax is intended to deter or punish unacceptable behavior. ⊚ true ⊚ false

61)

A tax is a payment to support the cost of government. ⊚ true ⊚ false

62) Under U.S. tax law, corporations are entities separate and distinct from their shareholders. ⊚ true ⊚ false

63) The person who pays a tax directly to the government always bears the economic incidence of the tax. ⊚ true ⊚ false

64) In some cases, the payer of a tax can shift the economic incidence of the tax to a third party. ⊚ true ⊚ false

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65) The U.S. government has jurisdiction to tax individuals who are not U.S. citizens but who are permanent U.S. residents. ⊚ true ⊚ false

66) The U.S. government has jurisdiction to tax individuals who are not U.S. citizens or permanent U.S. residents but who earn income from a source within the United States. ⊚ ⊚

true false

67) The U.S. government does not have jurisdiction to tax U.S. citizens who are permanent residents of another country. ⊚ ⊚

68)

A tax with a graduated rate structure must have at least two brackets of tax base. ⊚ ⊚

69)

true false

A sales tax is an example of a transaction-based tax. ⊚ ⊚

70)

true false

A tax on net income is an example of a transaction-based tax.

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⊚ ⊚

71)

A sales tax is an example of an activity-based tax. ⊚ ⊚

72)

true false

Ad valorem property taxes are the major source of revenue for local governments. ⊚ true ⊚ false

73) Taxes on personal property are more difficult to administer and enforce than taxes on real property. ⊚ true ⊚ false

74)

A state government may levy either a sales tax or a use tax on consumers but not both. ⊚ true ⊚ false

75) Sellers of retail goods are responsible for collecting sales tax from their customers and remitting the tax to the state government. ⊚ true ⊚ false

76) Purchasers of consumer goods through the mail are responsible for paying use tax on goods for which sales tax was not collected by the seller.

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⊚ ⊚

true false

77) The majority of state governments raise revenue from both personal and corporate income taxes. ⊚ true ⊚ false

78) The federal government imposed the first income tax to raise money to fight the War of 1812. ⊚ true ⊚ false

79) The U.S. Constitution gives the federal government the power to impose a tax on income from whatever source derived. ⊚ ⊚

true false

80) The federal government collects more revenue from the corporate income tax than from the individual income tax. ⊚ true ⊚ false

81)

The federal government does not levy property taxes or a general sales tax. ⊚ true ⊚ false

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82) A business that operates in more than one state is required to pay state income tax only to the state in which it is incorporated. ⊚ true ⊚ false

83) The potential for conflict among taxing jurisdictions is greatest for businesses operating on a global scale. ⊚ true ⊚ false

84) Fewer than half of the state governments depend on some form of gambling as a source of revenue. ⊚ true ⊚ false

85) According to the U.S. Supreme Court, states may require businesses to collect sales tax based on the residency of the purchaser. ⊚ ⊚

true false

86)

The Internal Revenue Code is written by the Internal Revenue Service. ⊚ true ⊚ false

87)

The U.S. Constitution requires that federal tax legislation begins in the Senate. ⊚ ⊚

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true false

88) The U. S. House Ways and Means Committee is responsible for drafting new federal tax legislation. ⊚ ⊚

true false

89) Both the U.S. House of Representatives and the U.S. Senate must vote to approve a new federal tax bill before the bill is signed into law by the President. ⊚ ⊚

90)

true false

Treasury regulations are tax laws written by the Treasury Department. ⊚ true ⊚ false

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Answer Key Test name: Chap 01_2023 5) B 6) A 7) D 8) C 9) D 10) B 11) C 12) D 13) A 14) C 15) B 16) D 17) A 18) B 19) D 20) B 21) A 22) C 23) A 24) D 25) A 26) B 27) A 28) A 29) B 30) D Version 1

31) D 32) C 33) B 34) A 35) B 36) D 37) C 38) C 39) C 40) C 41) D 42) D 43) B 44) D 45) A 46) D 47) B 48) D 49) A 50) D 51) B 52) A 53) C 54) B 55) D 56) C 57) A 58) FALSE 59) TRUE 60) FALSE Version 1

61) TRUE 62) TRUE 63) FALSE 64) TRUE 65) TRUE 66) TRUE 67) FALSE 68) TRUE 69) TRUE 70) FALSE 71) FALSE 72) TRUE 73) TRUE 74) FALSE 75) TRUE 76) TRUE 77) TRUE 78) FALSE 79) TRUE 80) FALSE 81) TRUE 82) FALSE 83) TRUE 84) FALSE 85) TRUE 86) FALSE 87) FALSE 88) TRUE 89) TRUE 90) FALSE Version 1

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CHAPTER 2 1) Mr. and Mrs. Boln earn $63,000 annual income and pay 20% in state and federal income tax. If tax rates increase so that the couple's annual rate increases to 25%, how much additional income must they earn to maintain their after-tax standard of living?

2) Mr. Ohno owns and operates a part-time service business that generates $80,000 annual taxable income. Assume that the federal tax rate on this income is 17%. Because of recent legislation, this rate will increase to 25% next year. A.Based on a static forecast, how much additional revenue will the federal government collect from Mr. Ohno next year? B.How much additional revenue will the federal government collect if Mr. Ohno decides to work fewer hours and consequently earns only $50,000 next year?

3) The City of Willford levies a flat 7% tax on individual income in excess of $55,000. Individuals who earn $55,000 or less pay no income tax. A.Ms. Vello earned $127,200 income this year. Compute city income tax and determine average tax rate. B.Mr. Sui earned $68,900 income this year. Compute city income tax determine his average tax rate. C.Does Willford have a proportionate, progressive, or regressive tax rate structure?

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The country of Valhalla levies an income tax with the following rate structure. Rate 5% + 10% + 20%

Income bracket $-0- to $50,000 $50,001 to $150,000 $150,001 and above

A.Mrs. Greene's annual income is $125,000. Compute the tax on this income, the average tax rate, and the marginal tax rate. B.Mr. Chen's annual income is $220,000. Compute the tax on this income, the average tax rate, and the marginal tax rate. C.Does Valhalla have a proportionate, progressive, or regressive tax rate structure?

5) Government officials of Country Z estimate that next year's public programs will cost $19 million but that tax revenues will be only $15 million. The officials could avoid a deficit next year by adopting which of the following fiscal strategies? A) Reduce the cost of public programs by $4 million. B) Increase taxes by $4 million. C) Borrow $4 million by issuing new government bonds. D) All of these strategies will avoid a deficit.

6) Government officials of Country Z estimate that next year's public programs will cost $19 million but that tax revenues will be only $15 million. Which of the following statements is false?

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A) Country Z's tax system is sufficient. B) Country Z's government is engaging in deficit spending. C) If Country Z must borrow $4 million to pay for its public programs, its national debt will increase by $4 million. D) Country Z's government could balance its budget by eliminating a program that costs $4 million.

7) Government J decides that it must increase its tax revenue. Which of the strategies could result in more revenue? A) Increase the rate of an existing tax. B) Expand the base of an existing tax. C) Enact a tax on a new base. D) All of these strategies could result in more revenue for Government J.

8) The government of Nation C operated at a $32 billion deficit this year. The deficit suggests that Nation C's tax system is: A) Inefficient B) Insufficient C) Unfair D) Inconvenient

9) The city of Belleview operated at an $865,000 surplus this year. The surplus suggests that the municipal tax system is: A) Fair B) Efficient C) Sufficient D) Convenient

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10)

Which of the following statements concerning the federal Social Security tax is true? A) The tax burden increases annually because the rate generally increases annually. B) The tax burden increases annually because the base generally increases annually. C) Both the rate and the base generally increase annually. D) The Social Security tax burden has not increased since 1990.

11)

A static forecast of the incremental revenue from a tax rate increase presumes that: A) The tax base will not change because of the rate increase. B) The tax base will increase by the same proportion as the rate increase. C) The tax base will decrease by the same proportion as the rate increase. D) The tax rate and the tax base are correlated.

12)

A dynamic forecast of the incremental revenue from a tax rate increase presumes that: A) Taxpayers will not change their behavior because of the rate increase. B) The tax base will increase by the same proportion as the rate increase. C) The tax base will decrease by the same proportion as the rate increase. D) The tax rate and the tax base are correlated.

13) Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases). Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true? A) The rate increase will increase revenue by $160,000. B) Based on a dynamic forecast, the rate increase will increase revenue by $160,000. C) Based on a static forecast, the rate increase will increase revenue by $160,000. D) None of these choices are true.

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14) Last year, Government G levied a 35% tax on individual income, and Mr. Slate paid $35,000 tax on $100,000 income. This year, the government increased the tax rate to 40%. Which of the following statements is false? A) Based on a static forecast, government G should collect $5,000 additional tax from Mr. Slate this year. B) If Mr. Slate took a second job to maintain his after-tax disposable income, this behavior illustrates a substitution effect of the rate increase. C) If Mr. Slate took a second job to maintain his after-tax disposable income, government G should collect more than $5,000 additional tax this year. D) If Mr. Slate sold an income-generating investment and used the money for personal consumption, this behavior illustrates a substitution effect of the rate increase.

15) Which of the following statements about the substitution effect of an income tax rate increase is false? A) The substitution effect is theoretically stronger for high-income taxpayers than for low-income taxpayers. B) The substitution effect is theoretically stronger for a family's secondary wage earner than for the family's primary wage earner. C) The substitution effect is theoretically stronger for self-employed individuals who control their own time than for employees whose work schedules are controlled by their employers. D) None of these choices are false.

16) Which of the following statements about the income effect of an income tax rate increase is true?

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A) The income effect is theoretically stronger for low-income taxpayers than for highincome taxpayers. B) The income effect is theoretically stronger for a family's secondary wage earner than for the family's primary wage earner. C) The income effect motivates individuals to find ways to increase their before-tax income. D) Both the income effect is theoretically stronger for low-income taxpayers than for high-income taxpayers and the income effect motivates individuals to find ways to increase their before-tax income are true.

17) Which of the following statements about the income and substitution effects of an income tax rate increase is true? A) The income and substitution effects are contradictory behavioral reactions. B) From the government's perspective, the substitution effect is more desirable than the income effect. C) Faith in the income effect is the foundation for supply-side economic theory. D) Dynamic forecasts of incremental tax revenues must consider the potential income effect but not the potential substitution effect of a rate increase.

18)

Supply-side economic theory:

A) Predicts that a decrease in the highest income tax rates will cause an increase in government revenues. B) Is inconsistent with the substitution effect. C) Was a clear failure following the Reagan administration tax cuts of the 1980s. D) Predicts that taxpayers will save their tax windfall from a rate cut rather than spend or investment the windfall.

19)

Which of the following describes a tax that meets the standard of convenience?

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A) A tax that the government can administer without excessive cost. B) A tax that is easy for taxpayers to compute and pay. C) A tax that minimizes the opportunity for noncompliance. D) All of these describe a convenient tax.

20)

Which of the following taxes is most convenient for individuals (purchasers) to pay? A) Sales tax B) Use tax C) Federal income tax D) Real property tax

21)

Which of the following statements regarding a convenient tax is false?

A) From the government's viewpoint, a good tax should be convenient to administer. B) From the taxpayer's viewpoint, a good tax should be convenient to pay. C) A convenient tax should have a method of collection that offers maximum opportunity for noncompliance. D) A convenient tax should permit taxpayers to compute their tax with reasonable certainty without incurring undue costs.

22) Which of the following statements does not describe the classical standard of tax efficiency? A) An efficient tax is a neutral factor in a free market economy. B) An efficient tax does not change taxpayer behavior. C) An efficient tax encourages full employment. D) An efficient tax favors a laissez-faire economy policy.

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23)

The statement that "an old tax is a good tax" means that: A) Changes in the tax law create uncertainty in the business environment. B) Changes in the tax law disrupt traditional planning strategies. C) Changes in the tax law increase the compliance burden on businesses. D) All of these choices are correct.

24) The city of Hartwell spends about $3 million annually on snow removal. The city is considering amending its real property tax law to allow homeowners to offset the cost of private snow removal against their annual property tax liability. This amendment would affect the: A) Fairness of the tax B) Efficiency of the tax C) Sufficiency of the tax D) Convenience of the tax

25) Which of the following statements does not describe the Keynesian standard of tax efficiency? A) An efficient tax encourages economic growth. B) An efficient tax encourages full employment. C) An efficient tax encourages price-level stability. D) All of these describe the Keynesian standard of tax efficiency.

26) Government L levies a 4% excise tax on restaurant meals. It is considering reducing the rate to 2% on meals served in restaurants that ban cigarette and cigar smoking and to increase the rate to 5% in restaurants that allow smoking. Which of the following statements is true?

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A) The rate change would improve the neutrality of the excise tax. B) The rate change would improve the convenience of the tax. C) The rate change is intended to affect social behavior. D) Both the rate change would improve the convenience of the tax and the rate change is intended to affect social behavior are true.

27) Assume the state of California plans to amend its personal income tax laws to allow parents to reduce their tax by the cost of infant car seats. Which of the following statements is true? A) The amendment creates a tax preference for parents who purchase infant car seats. B) The amendment is intended to change social behavior. C) The amendment increases the neutrality of the tax law. D) Both the amendment creates a tax preference for parents who purchase infant car seats and is also intended to change social behavior are true.

28)

Which of the following statements concerning tax preferences is false? A) Tax preferences increase the complexity of the law. B) Tax preferences raise additional revenue for the government. C) Tax preferences are government subsidies for targeted taxpayer activities. D) Tax preferences do not improve the accurate measurement of the tax base.

29)

Which of the following statements concerning tax preferences is true?

A) The annual revenue loss from federal tax preferences is quantified in the Tax Expenditures Budget. B) Tax preferences increase the fairness of the tax law. C) Tax preferences simplify the tax law. D) Tax preferences make the tax law more neutral across taxpayers.

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30)

Which of the following statements about horizontal equity is false?

A) Horizontal equity focuses on a rational and impartial measurement of the tax base. B) Horizontal equity focuses on the measurement of taxpayers' ability to pay. C) If persons with equal ability to pay a tax owe an equal amount of tax, the tax is horizontally equitable. D) None of these choices are false.

31) The federal income tax law allows individuals whose property is destroyed by a natural disaster such as a fire or hurricane to reduce their taxable income by the amount of their financial loss. This rule is intended to improve the: A) Convenience of the tax B) Efficiency of the tax C) Horizontal equity of the tax D) Vertical equity of the tax

32) The sales tax laws of many states exempt the purchase of groceries and prescription drugs from tax. Such exemptions are intended to improve the: A) Convenience of the tax B) Equity of the tax C) Sufficiency of the tax D) Neutrality of the tax

33)

Which of the following statements about vertical equity is false?

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A) Vertical equity focuses on a fair rate structure instead of a fair measurement of the tax base. B) If persons with greater ability to pay owe more tax than persons with lesser ability to pay, the tax is vertically equitable. C) A tax with a single percentage rate is not vertically equitable. D) None of these choices are false.

34)

Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%

Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above

Which of the following statements is true? A) The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable. B) Jurisdiction M's tax is vertically equitable. C) Jurisdiction M's tax is vertically equitable only for individuals with $50,000 or less taxable income. D) Both "The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable" and "Jurisdiction M's tax is vertically equitable" are true.

35)

Which of the following statements about a regressive tax rate structure is false?

A) A regressive rate structure cannot result in vertical equity. B) Regressive rates decrease as the tax base increases. C) A regressive rate structure places a proportionally heavier tax burden on taxpayers with smaller tax bases than persons with greater tax bases. D) None of these choices are false.

36)

Vervet County levies a real property tax based on the following schedule.

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Rate

Assessed value 3%

$-0- to $250,000

+ 1%

$250,001 and above

Which type of rate structure does this tax use? A) Proportionate B) Regressive C) Progressive D) Dual-bracket

37)

Vervet County levies a real property tax based on the following schedule. Rate

Assessed value 3%

$-0- to $250,000

+ 1%

$250,001 and above

Bilex Incorporated owns real property valued at $629,800. Compute Bilex's tax on this property. A) $13,798 B) $7,500 C) $6,298 D) None of the choices are correct.

38)

Vervet County levies a real property tax based on the following schedule. Rate 3% + 1%

Assessed value $-0- to $250,000 $250,001 and above

Which of the following statements is false? A) If Mr. Clem owns real property valued at $112,500, the average tax rate is 3%. B) If Ms. Barker owns real property valued at $455,650, the average tax rate is 2.1%. C) If Ms. Lumley owns real property valued at $750,000, the marginal tax rate is 1%. D) None of the choices are false.

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39)

Which of the following statements about tax rate structures is true? A) Regressive rate structures are illegal in the United States. B) A tax with a graduated rate structure must be either regressive or progressive. C) A proportionate rate structure is the only structure resulting in vertical equity. D) None of the choices are true.

40)

Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%

Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above

Which type of rate structure does this tax use? A) Proportionate B) Regressive C) Progressive D) Multi-bracket

41)

Which of the following statements about a progressive tax rate structure is false? A) Progressive rates increase as the tax base increases. B) Progressive rates reflect the theory of the declining marginal utility of income. C) The federal income tax has always used a progressive rate structure. D) Progressive rates result in greater vertical equity than a proportionate rate.

42) Which of the following statements about a proportionate income tax rate structure is false?

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A) A theoretic justification for a proportionate rate is its superior potential for wealth redistribution. B) Under a proportionate rate structure, the marginal rate equals the average rate. C) Under a proportionate rate structure, the taxpayer with the least income pays the same percentage of income to the government as the taxpayer with the most income. D) None of the choices are false.

43)

Which of the following statements concerning income tax rate structures is false?

A) Under a progressive rate structure, the marginal rate and the average rate are equal. B) Under a regressive rate structure, the average rate for low-income individuals is more than the average rate for high-income individuals. C) Under either a regressive, proportionate, or progressive rate structure, high-income taxpayers pay more dollars of tax than low-income individuals. D) In theory, a progressive rate structure results in equal economic sacrifice across taxpayers.

44)

Which of the following statements concerning a regressive tax rate structure is true?

A) A regressive tax rate structure is justified by the tax policy of distributive justice. B) A regressive rate structure is justified by the theory of the declining marginal utility of income. C) Under a regressive rate structure, the average tax rate for high-income taxpayers is less than the marginal tax rate. D) None of the statements are true.

45)

Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%

Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above

Mr. Coen has $78,000 taxable income. Compute the tax on this income. Version 1

A) $4,740 B) $6,240 C) $8,740 D) None of the choices are correct.

46)

Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%

Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above

Ms. Owen has $314,000 taxable income. Compute the tax on this income. A) $29,680 B) $28,180 C) $37,680 D) None of the choices are correct.

47)

Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%

Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above

Which of the following statements is true? A) If Mrs. Hall's taxable income is $227,000, the average tax rate is 12%. B) If Mr. Poe's taxable income is $41,200, the marginal tax rate is 8%. C) If Ms. Kaye's taxable income is $63,800, the marginal tax rate is 8%. D) None of the choices are correct.

48)

Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5%

Version 1

Income bracket $-0- to $50,000 15

+ 8% + 12%

$50,001 to $200,000 $200,001 and above

Which of the following statements is false? A) If Ms. Lui's taxable income is $33,400, the average tax rate is 5%. B) If Mr. Bell's taxable income is $519,900, the marginal tax rate is 12%. C) If Ms. Vern's taxable income is $188,000, the average tax rate is 7.2%. D) None of the choices are false.

49)

Congress originally enacted the federal estate and gift taxes to improve: A) Distributional justice B) Economic efficiency C) Vertical equity D) Horizontal equity

50) Which of the following tax policies would increase the redistribution of wealth across society? A) Repealing the federal estate and gift taxes B) Increasing the highest marginal income tax rate by 10% C) Replacing the progressive income tax rate structure with a flat rate D) Replacing the income tax with a national sales tax

51)

Which of the following statements concerning the standard of fairness is false?

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A) People who believe that a tax is unfair are more likely to evade the tax. B) People believe that the federal income tax is unfair because it contains preferences available only to wealthy individuals. C) The public perception that the federal income tax is unfair has decreased in recent decades. D) None of the choices are false.

52) Assume that Congress plans to amend the federal income tax to provide a deduction for the first $2,400 of residential rent paid by families with incomes below the federal poverty level. Which of the following statements is true? A) The amendment is intended to improve the efficiency of the tax. B) The amendment is intended to improve the equity of the tax. C) The amendment is intended to improve the simplicity of the tax. D) The amendment is intended to improve the convenience of the tax.

53) Assume that Congress plans to amend the federal individual income tax to eliminate the deductions for medical care, charitable contributions, and home mortgage interest. Which of the following statements is true? A) The amendment will reduce the complexity of the tax. B) The amendment will increase the horizontal equity of the tax. C) The amendment will increase the neutrality of the tax. D) Both the amendment will reduce the complexity of the tax and will increase the neutrality of the tax.

54) Assume that Congress plans to amend the federal income tax to provide a deduction for the cost of energy-efficient fluorescent light bulbs. Which of the following statements is true?

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A) The amendment is intended to improve the efficiency of the tax. B) The amendment is intended to improve the equity of the tax. C) The amendment is intended to improve the simplicity of the tax. D) The amendment is intended to improve the convenience of the tax.

55) Congress recently amended the tax law to make it easier for individuals to file their income tax returns electronically (online). Which of the following statements is true? A) The amendment is intended to improve the efficiency of the tax. B) The amendment is intended to improve the equity of the tax. C) The amendment is intended to improve the simplicity of the tax. D) The amendment is intended to improve the convenience of the tax.

56)

A tax meets the standard of sufficiency if it is easy for people to pay the tax. ⊚ true ⊚ false

57)

The federal government is not required to pay interest on the national debt. ⊚ true ⊚ false

58) A static forecast of the revenue effect of a tax rate change assumes that the tax base does not change. ⊚ true ⊚ false

59) A dynamic forecast of the revenue effect of a tax rate change assumes that the tax base does not change. Version 1

⊚ ⊚

true false

60) The federal Social Security tax burden on employees has not increased since 1990 because the tax rate has not increased since that year. ⊚ true ⊚ false

61) 1%.

If State H increases its sales tax rate by 1%, its sales tax revenue must also increase by ⊚ ⊚

true false

62) The city of Berne recently enacted a 10% tax on the price of a subway ticket. Consequently, Mrs. Lane now walks to work instead of taking the subway. This behavior illustrates the substitution effect of a tax increase. ⊚ true ⊚ false

63) Jurisdiction P recently increased its income tax rate. A taxpayer who reacts to the increase by working harder to earn more income is demonstrating the income effect of the rate increase. ⊚ true ⊚ false

64) According to supply-side economic theory, a decrease in tax rates for high-income individuals could actually cause an increase in tax revenue. ⊚ true ⊚ false

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65) Supply-side economic theory holds that people who benefit from a tax rate reduction will spend their tax windfall on consumption goods. ⊚ true ⊚ false

66)

State use taxes are more convenient for individual consumers than state sales taxes. ⊚ true ⊚ false

67)

The Internal Revenue Service's cost of collecting $100 of tax revenue is about $3. ⊚ true ⊚ false

68) A convenient tax has low compliance costs for taxpayers and low collection and enforcement costs for the government. ⊚ true ⊚ false

69) According to the classical concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources. ⊚ true ⊚ false

70) According to the Keynesian concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources. ⊚ true ⊚ false

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71) A tax meets the standard of efficiency if it generates enough revenue to pay for the public goods and services provided by the government. ⊚ true ⊚ false

72) A provision in the tax law designed to encourage a specific economic behavior is a tax preference. ⊚ true ⊚ false

73)

A tax should result in either horizontal or vertical equity across taxpayers. ⊚ true ⊚ false

74) Changes in the tax law intended to make the measurement of taxable income more precise usually make the tax law less complex. ⊚ true ⊚ false

75) Vertical equity focuses on measurement of the tax base, and horizontal equity focuses on the tax rate structure. ⊚ true ⊚ false

76) Tax systems with regressive rate structures result in a proportionally heavier tax burden on persons with smaller tax bases.

Version 1

⊚ ⊚

true false

77) A progressive rate structure and a proportionate rate structure both result in vertical equity across taxpayers. ⊚ true ⊚ false

78)

The U.S. individual income tax has always used a progressive rate structure. ⊚ true ⊚ false

79)

The declining marginal utility of income across individuals can be measured empirically. ⊚ true ⊚ false

80)

Tax liability divided by taxable income equals marginal tax rate. ⊚ true ⊚ false

81) If a tax has a proportionate rate structure, a taxpayer's marginal rate and average rate are equal. ⊚ true ⊚ false

82) If a tax has a progressive rate structure, a taxpayer's average rate is greater than her marginal rate.

Version 1

⊚ ⊚

83)

true false

The theory of distributional justice is a rationale for a progressive income tax system. ⊚ true ⊚ false

84) Individuals who believe that a tax system is fair are less likely to cheat on their taxes than individuals who believe that the system is unfair. ⊚ true ⊚ false

85)

Many taxpayers believe the income tax system is unfair because it is so complicated. ⊚ true ⊚ false

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Answer Key Test name: Chap 02_2023 5) D 6) A 7) D 8) B 9) C 10) B 11) A 12) D 13) C 14) B 15) D 16) D 17) A 18) A 19) D 20) A 21) C 22) C 23) D 24) B 25) D 26) C 27) D 28) B 29) A 30) D Version 1

31) C 32) B 33) C 34) D 35) A 36) B 37) D 38) D 39) B 40) C 41) D 42) A 43) A 44) D 45) A 46) B 47) C 48) D 49) A 50) B 51) C 52) B 53) D 54) A 55) D 56) FALSE 57) FALSE 58) TRUE 59) FALSE 60) FALSE Version 1

61) FALSE 62) TRUE 63) TRUE 64) TRUE 65) FALSE 66) FALSE 67) FALSE 68) TRUE 69) TRUE 70) FALSE 71) FALSE 72) TRUE 73) FALSE 74) FALSE 75) FALSE 76) TRUE 77) TRUE 78) TRUE 79) FALSE 80) FALSE 81) TRUE 82) FALSE 83) TRUE 84) TRUE 85) TRUE

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CHAPTER 3 1) Citran Company will earn $150,000 revenue as payment for a three-year consulting engagement. Compute the NPV of the revenue using Appendix A if Citran will received $35,000 cash immediately (year 0), $35,000 cash next year (year 1) and $80,000 cash the following year (year 2). Citran will report the revenue as taxable income in the year received. Its marginal tax rate is 30%, and it uses an 8% discount rate.

2) Pepper Company, which has a 25% marginal tax rate, must choose between two alternative transactions. Transaction 1 requires a $20,400 cash outlay that is a deductible current expense. Transaction 2 requires a $15,000 cash outlay that is a nondeductible current expense. Which transaction has the lesser after-tax cost to Pepper?

3) Yawl Incorporated must choose between two business opportunities: Opportunity 1 will generate $40,000 before-tax cash flow in years 0, 1, and 2, with a $7,000 annual tax cost. Opportunity 2 will also generate $40,000 before-tax cash flow in years 0, 1, and 2. However, the tax cost will be $15,000 in year 0, $2,500 in year 2, and $2,500 in year 3. Which opportunity should Yawl choose if it uses a 6% discount rate to compute NPV (round the calculations to the nearest whole dollar)?

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4) Borden Company has the choice between two investments. Investment 1 will generate a $27,000 deductible loss this year (year 0), $15,000 taxable income in year 1, and $60,000 taxable income in year 2. Investment 2 will generate $16,000 taxable income in years 0, 1, and 2. Assume that income and loss reflect before-tax cash flow for Borden. Using the appropriate present value tables, determine which opportunity Borden should choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV (round the calculations to the nearest whole dollar)?

5) Wilson Company has $100,000 in an investment paying 6% per annum. Each year Wilson incurs $1,200 of expenses related to this investment. Compute Wilson's annual net cash flow from this investment assuming the following. A.Wilson's marginal tax rate is 10% and the annual expense is not deductible. B.Wilson's marginal tax rate is 35% and the annual expense is deductible. C.Wilson's marginal tax rate is 25% and one-half of the annual expense is deductible.

6) Use the present value tables in Appendix A to compute the NPV of $12,500 received in year 5 at a 6% discount rate. A) $8,745.50 B) $9,337.50 C) $9,900.00 D) None of these choices are correct.

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7) Use the present value tables in Appendix A to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate. A) $14,018.00 B) $14,623.35 C) $15,647.25 D) None of these choices are correct.

8) Use the present value tables in Appendix A to compute the NPV of four $25,000 payments received in years 0, 1, 2, and 3 at a 5% discount rate. A) $93,075.00 B) $88,650.00 C) $81,445.50 D) None of these choices are correct.

Which of the following statements about discount rates is true?

A) The higher the marginal tax rate, the higher the discount rate for future cash flows should be. B) The higher the degree of risk involved in a transaction, the higher the discount rate for future cash flows should be. C) The longer the time period over which a transaction will generate cash flows, the higher the discount rate should be. D) The greater the amount of cash generated by a transaction, the higher the discount rate should be.

10)

Which of the following statements about discount rates is false?

Version 1

A) A discount rate for computing NPV cannot change from one period to the next. B) The discount rate for a risky investment should be higher than the discount rate for a risk-free investment. C) Discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction. D) Both a discount rate for computing NPV cannot change from one period to the next and discount rates can be applied either to the cash flow from a transaction or the taxable income from a transaction.

11) BMX Company engaged in a current-year transaction that generated a $20,000 cash inflow. Which of the following statements is false? A) If the cash inflow is not taxable income, the current-year tax cost of the transaction is zero. B) If the cash inflow is taxable income and BMX's marginal tax rate is 25%, the tax cost of the transaction is $5,000. C) If the cash inflow is taxable income and BMX's marginal tax rate is 35%, the tax cost of the transaction is $7,000. D) None of these choices are false.

12) KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true? A) If the cash outflow is deductible and KRU's marginal tax rate is 20%, the tax savings from the transaction is $4,000. B) If the cash outflow is deductible and KRU's marginal tax rate is 30%, the tax savings from the transaction is $6,000. C) If the cash outflow is not deductible, the current-year tax savings of the transaction is zero. D) All of these are true.

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13) Mr. Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income. If Mr. Trail's marginal tax rate is 40%, compute his after-tax cash flow from the transaction. A) $20,000 B) $24,000 C) $34,000 D) $40,000

14) Ms. Lenz has $100,000 in an investment paying 9% annual interest. Her marginal tax rate is 25%. Which of the following statements is false? A) Ms. Lenz's annual before-tax cash flow from this investment is $9,000. B) If the interest is tax-exempt, Ms. Lenz's annual after-tax cash flow is $9,000. C) If the interest is taxable, Ms. Lenz's annual after-tax cash flow is $6,750. D) None of these choices are false.

15)

Which of the following statements about marginal tax rates is true?

A) A taxpayer's marginal rate can change with every transaction. B) As the marginal rate increases, the tax cost of an income-generating transaction decreases. C) As the marginal rate increases, the tax savings from a deduction increases. D) Both a taxpayer's marginal rate can change with every transaction and, as the marginal rate increases, the tax savings from a deduction increases.

16)

Which of the following statements about marginal tax rates is false?

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A) A taxpayer's marginal rate does not change over time. B) As the marginal rate decreases, the after-tax cost of a deductible expense increases. C) As the marginal rate decreases, the after-tax value of an income-generating transaction increases. D) Both a taxpayer's marginal rate does not change over time and, as the marginal rate decreases, the after-tax cost of a deductible expense increases.

17) Omar Incorporated paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense. A) $24,000 B) $18,000 C) $16,800 D) $10,800

18) Omar Incorporated paid a $24,000 expense, of which only $10,000 was deductible. Which of the following statements is false? A) If Omar's marginal tax rate is 10%, the after-tax cost of the expense is $9,000. B) Regardless of Omar's marginal tax rate, the before-tax cost of the expense is $24,000. C) If Omar's marginal tax rate is 30%, the after-tax cost of the expense is $21,000. D) The after-tax cost of the expense depends on Omar's marginal tax rate.

19) Ms. Teague incurred a $35,000 expense. If her marginal tax rate is 20%, which of the following statements is true? A) If the expense is nondeductible, Ms. Teague's after-tax cost is zero. B) If the expense is deductible, Ms. Teague's after-tax cost is $28,000. C) If only $17,500 of the expense is deductible, Ms. Teague's after-tax cost is $14,000. D) If the expense is nondeductible, Ms. Teague's after-tax cost is zero and, if the expense is deductible, Ms. Teague's after-tax cost is $28,000.

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20) Mrs. Sanchez received a $12,000 cash payment. If Mrs. Sanchez’s marginal tax rate is 40%, which of the following statements is true? A) If only $9,200 of the payment is taxable income, and after-tax cash flow is $9,200. B) If the payment is not taxable income, and after-tax cash flow is $12,000. C) If the payment is taxable income, and after-tax cash flow is $4,800. D) None of these choices are true.

21) Reid Incorporated received a $90,000 cash payment, of which only $50,000 was taxable income. If Reid's marginal tax rate is 40%, compute Reid's after-tax cash flow. A) $54,000 B) $50,000 C) $30,000 D) None of these choices are correct.

22) Ms. Khalid has $200,000 in an investment paying 8% annual interest. Her marginal tax rate is 40%. Which of the following statements is false? A) Ms. Khalid's annual before-tax cash flow from this investment is $16,000. B) If the interest is tax-exempt, Ms. Khalid's annual after-tax cash flow is $16,000. C) If the interest is taxable, Ms. Khalid's annual after-tax cash flow is $6,400. D) None of these choices are false.

23) Leto Incorporated has $500,000 in an investment paying 8% annual taxable interest. Each year, the corporation incurs a $3,000 nondeductible cash expense relating to the investment. If Leto's marginal tax rate is 35%, compute the annual after-tax cash flow.

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A) $23,000 B) $24,050 C) $37,000 D) None of these choices are correct.

24) Ms. Leik has $50,000 in an investment paying 10% annual interest. Each year, Ms. Leik incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true? A) Ms. Leik's annual after-tax cash flow from this investment is $3,520. B) If the interest is taxable but the expense is not deductible, Ms. Leik's annual after-tax cash flow from the investment is $3,400. C) If the interest is tax-exempt and the expense is not deductible, Ms. Leik's annual aftertax cash flow is $5,000. D) None of these choices are true.

25) Holter Incorporated owns an investment that generated $120,000 cash revenue and required $26,500 cash expenses this year. Holter's marginal tax rate is 30%. Which of the following statements is false? A) Holter's before-tax cash flow is $93,500. B) If the revenue is taxable, but only $19,000 of the expenses are deductible, Holter's after-tax cash flow is $63,200. C) If only $105,000 of the revenue is taxable, but all the expenses are deductible, Holter's after-tax cash flow is $69,950. D) None of these choices are false.

26) Mr. and Mrs. Dean own an investment that generated $60,000 cash revenue and required $12,000 cash expenses this year. The Deans' marginal tax rate is 25%. Which of the following statements is true?

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A) If only $52,000 of the revenue is taxable, but all the expenses are deductible, the Deans' after-tax cash flow is $40,000. B) If the revenue is taxable, but only $8,500 of the expenses are deductible, the Deans' after-tax cash flow is $38,625. C) The Deans' before-tax cash flow is $48,000. D) Both if the revenue is taxable, but only $8,500 of the expenses are deductible, the Deans' after-tax cash flow is $38,625 and the Deans' before-tax cash flow is $48,000.

27) Ramos Company must choose between two alternate transactions. Transaction 1 requires a $20,000 nondeductible cash outlay, while transaction 2 requires a $25,000 deductible cash outlay. Determine the marginal tax rate at which the after-tax costs of the two transactions are equal. A) 15% B) 20% C) 25% D) 30%

28) Unlow Incorporated must choose between two alternate transactions. Transaction 1 would generate $160,000 cash, all of which would be taxable, while transaction 2 would generate $120,000 cash, none of which would be taxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal. A) 15% B) 20% C) 25% D) 30%

29) XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

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A) If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow. B) If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow. C) If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow. D) None of these choices are false.

30) Mr. Qintana plans to engage in a transaction that will generate $10,000 cash flow in year 0, year 1, and year 2 ($30,000 total cash flow). Which of the following statements is true? A) If the cash flow is not taxable income, the before-tax and after-tax cash flows from the transaction are equal. B) If the cash flow is not taxable income, the NPV of the transaction is $30,000. C) Mr. Qintana's discount rate for computing the NPV of the transaction depends on the marginal tax rate. D) None of these choices are true.

31) Mr. Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate using Appendix A. A) $259,185 B) $277,348 C) $290,310 D) None of these choices are correct.

32) Mr. and Mrs. Rajan invested in a business that will generate the following cash flows over a three-year period. Year 0 Taxable revenue

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30,000

Year 1 40,000

Year 2 60,000

Deductible expenses

(15,000)

(20,000)

If the Rajan's marginal tax rate over the three-year period is 20% and they use a 6% discount rate, compute the NPV of the transaction using the appropriate present value tables in Appendix A. A) $59,340 B) $55,996 C) $50,413 D) None of these choices are correct.

33) Ms. Card bought an investment that will generate the following cash flows over a threeyear period. Taxable revenue Nontaxable revenue Deductible expenses

Year 0

Year 1

Year 2

42,000 6,000 (20,000)

56,000 8,500 (20,000)

80,000 9,000 (25,000)

If Ms. Card's marginal tax rate over the three-year period is 40% and a 6% discount rate is used, compute the NPV of the transaction using the appropriate present value tables in Appendix A (round the final answer to the nearest whole dollar). A) $94,129 B) $84,964 C) $62,373 D) None of these choices are correct.

34) Mr. Basel made an investment that will generate the following cash flows over a threeyear period. Year 0 Taxable revenue Deductible expenses Nondeductible expenses

16,000 (5,000) (1,200)

Year 1 23,000 (6,000) (2,000)

Year 2 33,000 (7,500) (4,300)

If Mr. Basel's marginal tax rate over the three-year period is 20% and a 6% discount rate is used, compute the NPV of the transaction using the appropriate present value tables in Appendix A (round the final answer to the nearest whole dollar). Version 1

A) $30,028 B) $33,557 C) $39,781 D) None of these choices are correct.

35) Mrs. Biggs invested in a business that will generate the following cash flows over a threeyear period. Taxable revenue Deductible expenses Nondeductible expenses

Year 0

Year 1

Year 2

30,000 (15,000) (1,000)

45,000 (15,000) (4,000)

70,000 (20,000) (10,000)

If Mrs. Biggs' marginal tax rate over the three-year period is 30% and a 6% discount rate is used, compute the NPV of the transaction using the appropriate present value tables in Appendix A. A) $61,453 B) $52,771 C) $47,781 D) None of these choices are correct.

36)

Which of the following statements about different tax rates over time is false?

A) A 5% increase in the tax rate for year 10 has less effect on NPV than a 5% increase in the tax rate for year 4. B) Future tax rates used in NPV calculations are estimates because Congress can change the statutory rates every year. C) A NPV calculation must assume a constant tax rate for all future periods. D) A firm's future tax rate may change because of increases or decreases in future taxable income.

37) If Congress enacts legislation late in the year that is retroactive to the beginning of the year, the legislation increases: Version 1

A) Audit risk B) Tax law uncertainty C) Financial risk D) Marginal tax rate uncertainty

38) If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases: A) Market risk B) Financial risk C) Audit risk D) Tax law uncertainty

39) If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases: A) Financial risk B) Audit risk C) Tax law uncertainty D) Marginal tax rate uncertainty

40) Hower Incorporated's tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances. If Hower decides not to take the deduction, it is reducing: A) Audit risk B) Tax law uncertainty C) Business risk D) None of these choices are correct.

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41) Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of: A) Marginal tax rate uncertainty B) Financial risk C) Audit risk D) Tax law uncertainty

42) Zazu Company is considering modifying a transaction to reduce the current year tax cost by $50,000. Which of the following statements is false? A) The modification will increase the NPV of the transaction by $50,000. B) The modification may affect the transaction's before-tax cash flows. C) The modification may reduce the tax cost but increase one or more nontax costs. D) The modification may not be desirable even though it reduces the tax cost.

43)

Which of the following statements about tax minimization is true? A) Tax minimization always maximizes the NPV of a transaction. B) Tax minimization should be the goal of business and financial planning. C) Tax minimization with respect to a transaction may not be the optimal strategy. D) Tax minimization has no effect on nontax cash flows.

44) Angela Jones is considering two investments. The first produces $5,000 of tax-exempt income. The second produces income that will be subject to tax at a rate of 15%. Which of the following statements is true regarding Angela's choice?

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A) Angela should always choose the first investment because it minimizes her tax costs. B) If the second investment generates $5,500 of before-tax income, Angela should choose the first investment. C) If the second investment generates $6,500 of before-tax income, Angela should choose the second investment. D) Both if the second investment generates $5,500 of before-tax income, Angela should choose the first investment and if the second investment generates $6,500 of before-tax income, Angela should choose the second investment are true.

45) Mr. Vail made an offer to purchase a business for sale by Mr. Cao. Mr. Vail and Mr. Cao had never met prior to their negotiation of the terms of the sale. The sale is an example of a/an: A) Arm's length transaction B) Private market transaction C) Public market transaction D) Both an arm's length transaction and a private market transaction are true.

46) TallBoy Incorporated is a local furniture manufacturer and Leley Company is a retail furniture store. The two companies have no owners in common. Leley recently negotiated to purchase $845,000 of furniture from TallBoy. This purchase is an example of a/an: A) Related party transaction B) Public market transaction C) Arm's length transaction D) None of these choices are correct.

47) Ms. Owen purchased 2,000 shares of General Electric common stock through a broker. This purchase is an example of a:

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A) Public market transaction B) Fictitious market transaction C) Private market transaction D) Related party transaction

48) a:

The transacting parties can engage in bilateral tax planning when a transaction occurs in

A) Public market B) Private market C) Secondary market D) None of these choices are correct.

49)

Arm's length business transactions can occur in: A) Private markets B) Public markets C) Fictitious markets D) Both private and public markets

50)

The arm's length transaction presumption: A) Assumes that each party is dealing in its own economic self-interest. B) Cannot be satisfied in a private market transaction. C) Requires direct negotiation between parties to ensure an arm's length price. D) Applies to both related party and unrelated party transactions.

51)

Which of the following statement about private market transactions is false?

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A) Both parties have flexibility in determining the legal and financial characteristics of the transaction. B) The parties negotiate directly with each other. C) The parties are dealing at arm's length. D) The parties must engage in unilateral instead of bilateral tax planning.

52)

Which of the following statements about public market transactions is true?

A) The parties negotiate directly with each other. B) The parties must engage in unilateral instead of bilateral tax planning. C) The parties are not transacting at arm's length. D) Both parties have flexibility in determining the legal and financial characteristics of the transaction.

53) Mrs. Scott loaned $100,000 to her favorite niece, who agreed to pay 3% annual interest on the debt. This loan is an example of a/an: A) Prohibited transaction B) Public market transaction C) Related party transaction D) Arm's length transaction

54)

Which of the following statements about related party transactions is false?

A) The transaction may lack the economic tension characteristic of a transaction between unrelated parties. B) The transaction may reflect a fictitious market. C) The parties to the transaction may have compatible financial objectives. D) None of these choices are false.

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55) a/an:

When the IRS audits a tax return, it is most likely to scrutinize the tax consequences of

A) Related party transaction B) Private market transaction C) Public market transaction D) Arm's length transaction

56)

Which of the following statements concerning related party transactions is false?

A) The federal tax law prohibits related party transactions. B) Related parties enjoy significant flexibility in controlling the tax consequences of their transactions. C) A related party transactions is more likely to be scrutinized relative to a public transaction to ensure it meets an arm's length standard. D) The IRS always disallows any favorable tax consequences of related party transactions.

57)

Which of the following is not a related party transaction?

A) Acme Corporation leases office space to Norton Company. Mr. and Mrs. Norton own Norton Company and 65% of Acme Corporation's stock. B) BBD Incorporated licenses a patent from Nugo Incorporated, which owns 82% of BBD's outstanding stock. C) Beth Teal pays $15,000 a year to her gardener, Ben. Beth is Ben's grandmother. D) All the transactions are between related parties.

58) Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction.

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⊚ ⊚

true false

59) The present value of a dollar available in a future period increases as the discount rate increases. ⊚ true ⊚ false

60) A dollar available today is always worth more than a dollar not available until a future period. ⊚ true ⊚ false

61) A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity. ⊚ true ⊚ false

62) An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation. ⊚ true ⊚ false

63)

The tax cost of a transaction represents a cash inflow. ⊚ true ⊚ false

64)

The tax savings from a transaction represents a cash inflow.

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⊚ ⊚

true false

65)

Every business transaction results in a current tax cost or tax savings. ⊚ true ⊚ false

66)

The tax cost of a transaction depends on the taxpayer's average tax rate for the year. ⊚ true ⊚ false

67) The tax cost of an income-generating transaction increases as the taxpayer's marginal tax rate increases. ⊚ true ⊚ false

68)

The tax savings from a deduction decreases as the taxpayer's marginal tax rate increases. ⊚ true ⊚ false

69) A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate. ⊚ true ⊚ false

70)

The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal. ⊚ true ⊚ false

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71) A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation. ⊚ true ⊚ false

72) When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings. ⊚ ⊚

true false

73) Tax law uncertainty is the risk that the Internal Revenue Service will challenge a taxpayer's tax treatment on audit. ⊚ true ⊚ false

74) Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income. ⊚ true ⊚ false

75) A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction. ⊚ true ⊚ false

76) Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stockbroker. This transaction occurred in a private market. Version 1

⊚ ⊚

true false

77) Mr. and Mrs. Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market. ⊚ true ⊚ false

78)

Private market transactions create an opportunity for bilateral tax planning. ⊚ true ⊚ false

79)

Related party transactions occur in a public market. ⊚ true ⊚ false

80) The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market. ⊚ true ⊚ false

81)

The tax law prohibits related party transactions. ⊚ true ⊚ false

82) The arm's length transaction presumption is unreliable for transactions between related parties.

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⊚ ⊚

Version 1

true false

Answer Key Test name: Chap 03_2023 6) B 7) C 8) A 9) B 10) D 11) D 12) D 13) C 14) D 15) D 16) A 17) C 18) A 19) B 20) B 21) D 22) C 23) A 24) B 25) D 26) C 27) B 28) C 29) B 30) A 31) D Version 1

32) A 33) B 34) D 35) C 36) C 37) B 38) D 39) B 40) A 41) D 42) A 43) C 44) D 45) D 46) C 47) A 48) B 49) D 50) A 51) D 52) B 53) C 54) D 55) A 56) A 57) D 58) TRUE 59) FALSE 60) TRUE 61) TRUE Version 1

62) TRUE 63) FALSE 64) TRUE 65) FALSE 66) FALSE 67) TRUE 68) FALSE 69) TRUE 70) TRUE 71) TRUE 72) FALSE 73) FALSE 74) TRUE 75) FALSE 76) FALSE 77) TRUE 78) TRUE 79) FALSE 80) TRUE 81) FALSE 82) TRUE

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CHAPTER 4 1) Tatun Incorporated pays state income tax at a 5% rate and federal income tax at a 21% rate. Tatun recently engaged in a transaction in Mexico, which levied a $25,200 income tax on the transaction. Tatun's pretax net income for the current year is $1,913,900. Compute Tatun's total income tax burden assuming that: A.The Mexican tax is nondeductible for state and federal tax purposes. B.The Mexican tax is deductible for state and federal tax purposes.

2) Assume that Congress recently amended the tax law to provide for a maximum 12% rate on interest income from U.S. savings bonds. Compute the tax savings from this preferential rate for: A.Mrs. Edwin, who has a 15% marginal rate on ordinary income and earned $290 interest on her investment in U.S. savings bonds. B.Mr. Kalter, who has a 35% marginal rate on ordinary income and earned $290 interest on his investment in U.S. savings bonds.

3) Mr. Understal has $750,000 to invest and two competing investment opportunities. Investment 1 would pay 9% per year ($67,500 annual before-tax cash flow). Investment 2 would pay 7% per year ($52,500 annual before-tax cash flow). The return on Investment 1 is taxable at Mr. Understal's 35% rate on ordinary income, while the return on Investment 2 is taxable at a 20% preferential rate. A.Compute the explicit and implicit tax that Mr. Understal would pay with respect to each investment. B.Which investment results in the greater after-tax cash flow?

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4) Gregly Company, which has a 21% marginal tax rate, plans to make an investment that should generate $300,000 annual cash flow/ordinary income. Instead of making the investment directly, Gregly could form a new taxable entity (L'il Greg) to make the investment. L'il Greg's marginal tax rate on the investment income would be only 13%. However, L'il Greg would have to incur a $26,500 annual nondeductible expense associated with the investment that Gregly would not incur. A.Should Gregly make the investment directly or make it through L'il Greg to maximize aftertax cash flow? B.Would your answer change if L'il Greg could deduct its $26,500 additional expense?

5) Elton Company plans to build a new facility to manufacture backpacks. Elton sells its backpacks across the country for $300 per pack. It could locate the plan in state A, which levies a 5 percent tax on business income. The estimated manufacturing cost per pack in state A would be $120. Alternatively, Elton could locate the plan in state B, which levies a 3 percent tax on business income. The estimated manufacturing cost in state B is $126 per pack. In which state should Elton locate its plant? Provide calculations to support your conclusion.

Which of the following statements about tax planning is false?

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A) The goal of tax planning is tax minimization. B) Tax planning involves structuring transactions to reduce tax costs or increase tax savings. C) Sound tax planning ideas should be entirely legal. D) None of these choices are false.

Which of the following statements about tax avoidance and tax evasion is false? A) Tax avoidance is legal, while tax evasion is illegal. B) The difference between avoidance and evasion is clearly defined in the tax law. C) Tax evasion is a federal felony offence. D) Taxpayers should not regard tax avoidance as unethical.

8) Mrs. Day structures a transaction to shift income from her sole proprietorship to her grandson's business. This tax planning strategy may be taking advantage of the: A) Entity variable B) Time period variable C) Jurisdiction variable D) Character variable

9) Mrs. Day structures a transaction to shift income from her New York business to her New Hampshire business. This tax planning strategy may be taking advantage of the: A) Entity variable B) Time period variable C) Jurisdiction variable D) Character variable

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10) Mrs. Day structures a transaction to convert income from ordinary income to capital gain. This tax planning strategy may be taking advantage of the: A) Entity variable B) Time period variable C) Jurisdiction variable D) Character variable

11) Mrs. Day structures a transaction to shift income from her 20Y1 tax year to her 20Y2 tax year. This tax planning strategy may be taking advantage of the: A) Entity variable B) Time period variable C) Jurisdiction variable D) Character variable

12) Hilex Incorporated structures a transaction to shift income from one controlled subsidiary to another controlled subsidiary. This tax planning strategy may be taking advantage of the: A) Jurisdiction variable B) Time period variable C) Entity variable D) Character variable

13) Hilex Incorporated structures a transaction to shift income from its California office to its Oregon office. This tax planning strategy may be taking advantage of the: A) Character variable B) Time period variable C) Entity variable D) Jurisdiction variable

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14) Hilex Incorporated liquidates its investment in General Electric corporate bonds and reinvests the proceeds in City of Miami municipal bonds. This tax planning strategy may be taking advantage of the: A) Character variable B) Entity variable C) Time period variable D) Jurisdiction variable

15) Hilex Incorporated structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the: A) Character variable B) Entity variable C) Time period variable D) Jurisdiction variable

16) A taxpayer who invests in a growth stock rather than a stock that pays an annual dividend is engaging in tax planning based on the: A) Entity variable B) Time period variable C) Jurisdiction variable D) Character variable

17) The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the:

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A) Entity variable B) Time period variable C) Jurisdiction variable D) Character variable

18) Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is taking advantage of the: A) Entity variable B) Time period variable C) Jurisdiction variable D) Character variable

19)

Which of the following entities is not a taxable entity for federal income tax purposes? A) Mr. Bob Clark, a U.S. citizen and resident of West Virginia B) PTS Limited, an Arizona partnership C) Confad Incorporated, an Oklahoma corporation listed on Nasdaq D) All of these choices are taxable entities.

20)

Which of the following statements is true?

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A) Mary Gilly owns 100% of the stock of Gilly Incorporated Both Mary and Gilly Incorporated are taxpayers under federal law. B) The same rate schedule applies to both individual and corporate taxpayers. C) The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income. D) Mary Gilly owns 100% of the stock to Gilly Incorporated Both Mary and Gilly Incorporated are taxpayers under federal law and the tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income.

21) The income tax consequences of a business transaction depend on which entity engages in the transaction because: A) The amount of income from the transaction depends on which type of entity engaged in the transaction. B) The transaction may be taxable or nontaxable depending on which type of entity engaged in the transaction. C) The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction. D) The character of the income from the transaction depends on which type of entity engaged in the transaction.

22) JNC Company structured an income-generating transaction so that the income and cash flow shifted to Juno Incorporated presuming that JNC makes rational decisions, which of the following statements is false? A) JNC and Juno must be related parties that share a mutual economic interest. B) JNC's marginal tax rate is higher than Juno's marginal tax rate. C) The income shift should increase the NPV of the transaction. D) None of these choices are false.

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23) Pratt Company structured an income-generating transaction so that the $750,000 income and cash flow shifted to Pratt's wholly owned subsidiary, PTB Company. If Pratt's marginal tax rate is 21%, and PTB's tax rate is 10%, compute the tax savings from the income shift. A) $157,500 B) $75,000 C) $82,500 D) $78,750

24) Mr. Blau structured an income-generating transaction so that the $90,000 income and cash flow shifted to Mr. Blau's sister, Kim. If Mr. Blau's marginal tax rate is 35%, and Kim's tax rate is 12%, compute the tax savings from the income shift. A) $0 B) $10,800 C) $31,500 D) None of these choices are correct

25)

Which of the following statements about the entity variable is false?

A) If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the entity variable would no longer be a factor in tax planning. B) The entity variable becomes more important when Congress increases the progressivity of the income tax. C) Tax planning strategies based on the entity variable must involve at least two different taxpayers. D) Tax planning strategies based on the entity variable must involve some type of income taxed at a preferential rate.

26) Varson Incorporated and Vonsell Incorporated are owned by the same family. The family decides to purchase $150,000 of deductible advertising that will benefit the businesses operated by both corporations. Which of the following statements is true?

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A) If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Vonsell should purchase the advertising to minimize after-tax cost. B) If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, the tax law requires Vonsell to purchase the advertising. C) If Varson's marginal tax rate is higher than Vonsell's marginal tax rate, Varson can claim a $150,000 deduction on its tax return regardless of which corporation purchases the advertising. D) None of these choices are true.

27) Mrs. Bern's marginal tax rate is 35%, and her grandson Jeff's marginal tax rate is 12%. Which of the following statement is false? A) The family could save 23 cents of tax for every dollar of deduction shifted from Jeff to Mrs. Bern. B) The family could save 23 cents of tax for every dollar of income shifted from Mrs. Bern to Jeff. C) Any income shift from Mrs. Bern to Jeff is constrained by the assignment of income doctrine. D) None of these choices are false.

28) Carter Incorporated and CCC Incorporated are owned by the same family. Carter's marginal tax rate is 21%, and CCC's marginal tax rate is 10%. Carter has the opportunity to engage in a transaction that will generate $500,000 taxable cash flow. Alternatively, CCC could engage in the transaction. However, CCC would incur an extra $42,500 deductible cash expense with respect to the transaction. Which of the following statements is true? A) CCC should engage in the transaction to generate $16,750 more after-tax cash flow. B) Carter should engage in the transaction to avoid the extra expense. C) CCC should engage in the transaction because it has the lower marginal tax rate. D) Because Carter and CCC are owned by the same family, the family is indifferent as to which corporation engages in the transaction.

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29) OWB Incorporated and Owin Incorporated are owned by the same family. OWB's marginal tax rate is 30%, and Owin's marginal tax rate is 21%. OWB has the opportunity to engage in a transaction that will generate $250,000 taxable cash flow. Alternatively, Owin could engage in the transaction. However, Owin would incur an extra $60,000 deductible cash expense with respect to the transaction. Which of the following statements is true? A) Because OWB and Owin are owned by the same family, the family is indifferent as to which corporation engages in the transaction. B) OWB should engage in the transaction to generate $24,900 more after-tax cash flow. C) OWB should engage in the transaction to avoid the extra expense. D) Owin should engage in the transaction because it has the lower marginal tax rate.

30) Mrs. Reid made a gift to her 19-year old daughter Susan. Mrs. Reid's marginal tax rate is 35%, and Susan's marginal tax rate is 10%. Which of the following statements is true? A) The gift consisted of a corporate bond that paid $10,000 interest to Susan this year. Even though Susan is the owner of the bond, Mrs. Reid must include the $10,000 in her taxable income. B) The gift consisted of a $2,600 rent check written by tenants who lease a duplex owned by Mrs. Reid. Even though Susan cashed the check, Mrs. Reid must include the $2,600 in her taxable income. C) The gift consisted of a lottery ticket. Six weeks after the gift, the ticket was drawn as a winner. Even though Susan received the $50,000 taxable prize because she was the rightful owner of the ticket, Mrs. Reid must include $50,000 in her taxable income. D) None of these choices are true.

31)

The assignment of income doctrine indicates that:

A) Income from a transaction must be taxed to the person who receives the cash from the transaction. B) Income from a transaction must be taxed to the person who reports the transaction on his or her tax return. C) Income from a transaction must be taxed to the person that earns the income. D) None of these choices are correct.

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32) Mr. Crum, an architect, billed a client $12,500 for professional services rendered. When Mr. Crum received a check in full payment from the client, he endorsed the check and mailed it to his college-age son, Paul, who cashed it and deposited the $12,500 in his own bank account. Which of the following statements is a correct application of the assignment of income doctrine? A) Mr. Crum must report $12,500 income on his tax return because he earned it. B) Paul must report $12,500 income on his tax return because he received the cash. C) It is illegal for Mr. Crum to transfer the check to Paul. D) Mr. Crum and Paul may decide which one of them reports $12,500 income on his tax return.

33)

Which of the following statements about the time period variable is false?

A) If Congress replaced the current progressive income tax rates with a proportionate rate applying to all taxpayers, the time period variable would no longer be a factor in tax planning. B) The time period variable becomes more important as the taxpayer's discount rate for computing NPV increases. C) Tax planning strategies based on the time period variable must involve at least two different taxable years. D) Tax planning strategies based on the time period variable reflect the time value of money.

34)

The time period variable reflects the fact that: A) Federal income tax rules are not stable over time. B) A tax dollar paid this year costs more than a tax dollar paid in a future year. C) A taxpayer's marginal rate next year may be more or less than the current marginal

rate. D) None of these choices are correct.

35)

Which of the following statements about tax deferral is true?

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A) The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases. B) Tax deferral is not an effective planning strategy if the taxpayer's marginal tax rate is stable over time. C) The greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms. D) The value of tax deferral increases as the taxpayer's discount rate for computing NPV decreases and the greater the length of time that the payment of a tax is deferred, the less the tax costs in NPV terms.

36) Jelk Company is structuring a transaction that will generate $140,000 taxable revenue and cash inflow. Which of the following structures is the most effective in terms of the time period variable? A) Jelk will receive the cash and report the income in 20Y1. B) Jelk will receive the cash in 20Y2 and report the income in 20Y1. C) Jelk will receive the cash and report the income in 20Y2. D) Jelk will receive the cash in 20Y1 and report the income in 20Y2.

37) NWR Incorporated is structuring a transaction that will require a $200,000 deductible cash expenditure. Which of the following structures is the most effective in terms of the time period variable? A) NWR will pay the cash and report the deduction in 20Y1. B) NWR will pay the cash and report the deduction in 20Y2. C) NWR will pay the cash in 20Y2 and report the deduction in 20Y1. D) NWR will pay the cash in 20Y1 and report the deduction in 20Y2.

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38) Sancel Incorporated is planning a transaction that will generate $70,000 taxable income and cash inflow. The transaction is structured so that Sancel will receive the cash and report the income this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Sancel will receive the cash this year, but report the income two years later (year 2). Sancel's marginal tax rate is 21%, and it uses a 10% discount rate to compute NPV. A) $2,558 B) $1,338 C) $9,622 D) None of these choices are correct.

39) Hubern Incorporated is planning a transaction that will generate $275,000 taxable income and cash inflow. The transaction is structured so that Hubern will receive the cash and report the income this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Hubern will receive the cash this year, but report the income one year later (year 1). Hubern's marginal tax rate is 21%, and it uses a 9% discount rate to compute NPV. A) $6,276 B) $17,938 C) $4,793 D) None of these choices are correct.

40) Bailey Incorporated is planning a transaction that requires a $60,000 deductible cash expenditure. The transaction is structured so that Bailey will pay the cash and report the deduction this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Bailey will report the deduction this year, but pay the cash two years later (year 2). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV.

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A) $8,677 B) $9,014 C) $9,480 D) None of these choices are correct.

41) Acme Incorporated is planning a transaction that requires a $100,000 deductible cash expenditure. The transaction is structured so that Acme will pay the cash and report the deduction this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Acme will report the deduction this year, but pay the cash three years later (year 3). Acme's marginal tax rate is 21%, and it uses a 7% discount rate to compute NPV. A) $15,928 B) $18,400 C) $21,516 D) None of these choices are correct.

42) Mr. Cox has the choice between two transactions. Transaction A will generate $500,000 taxable cash flow in the current year (year 0). Transaction B will generate $460,000 cash flow in the current year, but Mr. Cox will not be required to report $460,000 income until next year (year 1). Mr. Cox has a 40% marginal tax rate and uses a 10% discount rate to compute NPV. Use Appendix A of your textbook provided to determine which of the following statements is true? A) Mr. Cox should choose transaction A because it generates more before-tax cash flow. B) Mr. Cox should choose transaction A because its NPV exceeds transaction B's NPV. C) Mr. Cox should choose transaction B because the tax cost is deferred one year. D) Mr. Cox should choose transaction B because its NPV exceeds transaction A's NPV.

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43) Mrs. Lester has the choice between two transactions. Transaction A will generate $175,000 taxable cash flow in the current year (year 0). Transaction B will generate $160,000 cash flow in the current year, but Mrs. Lester will not be required to report $160,000 income for two years (year 2). Mrs. Lester has a 40% marginal tax rate and uses a 9% discount rate to compute NPV. Use Appendix A of your textbook provided to determine which of the following statements is true? A) Mrs. Lester should choose transaction A because it generates more before-tax cash flow than transaction B. B) Mrs. Lester should choose transaction A because its NPV exceeds transaction B's NPV. C) Mrs. Lester should choose transaction B because the tax cost is deferred one year. D) Mrs. Lester should choose transaction B because its NPV exceeds transaction A's NPV.

44)

Which of the following statements about the jurisdiction variable is true?

A) Most businesses are subject to the taxing jurisdiction of more than one government. B) For federal purposes, state income taxes are deductible in the computation of taxable income. C) Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates. D) All of these statements are true.

45)

Which of the following statements about the character variable is true?

A) The tax character of income is determined strictly by tax law. B) The tax character of income cannot change from year to year. C) Tax planning strategies based on the character variable must involve at least two different taxpayers. D) The tax character of income cannot change from year to year and tax planning strategies based on the character variable must involve at least two different taxpayers.

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46)

Which of the following statements about ordinary income and capital gain is false?

A) Every item of income is ultimately characterized as either ordinary income or capital gain for federal tax purposes. B) Most ordinary income items are taxed at the regular individual or corporate tax rates. C) Individuals and corporations pay tax on their capital gains at a preferential rate. D) None of these choices are false.

47)

Which of the following statements about ordinary income and capital gain is true?

A) Income characterized as capital gain can have no additional tax characteristics. B) Individuals pay tax on their capital gains at a preferential the same rate as ordinary income. C) Corporations pay tax on both ordinary income at their regular rate and capital gain at their regular preferential rate. D) Individuals pay tax on their capital gains at a preferential rate and corporations pay tax on both ordinary income and capital gain at their regular rate.

48) Mrs. Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false? A) If Mrs. Stout's regular marginal tax rate is 22%, she can elect to recharacterize the capital gain as ordinary income. B) If Mrs. Stout's regular marginal tax rate is 24%, the preferential tax rate has no value to her. C) If Mrs. Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax. D) None of these choices are false.

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49) Mrs. James plans to invest in one of two investment alternatives having the same risk. Investment 1 has a before-tax return of 10% and the income from investment 1 would be taxed at Mrs. James' 35% regular tax rate. Investment 2 has a before-tax return of 8% and the income from investment 2 would be taxed at a 15% preferential rate. Which of the following statements regarding these investment choices is false? A) The after-tax rate of return on investment 1 is 6.5%. B) The after-tax rate of return on investment 2 is 6.8%. C) Investment 2 bears implicit tax relative to investment 1. D) Mrs. James should choose investment 1.

50) Mr. Hayes plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Hayes' 24% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 9.0% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mr. Hayes select? A) Investment 1 B) Investment 2 C) Investment 3 D) Mr. Hayes is neutral between investment 2 and investment 3.

51) Mr. Erske plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Erske's 32% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.5% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mr. Erske select?

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A) Investment 1 B) Investment 2 C) Investment 3 D) Mr. Erske is neutral between investment 2 and investment 3.

52) Mrs. Jax plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mrs. Jax's 37% regular tax rate, the income from investment 2 would be taxed at a 20% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields. Investment 1: 8.25% Investment 2: 7.5% Investment 3: 6.0% Which investment should Mrs. Jax select? A) Investment 1 B) Investment 2 C) Investment 3 D) Mrs. Jax is neutral between investment 2 and investment 3.

53) Mr. Fox has $100,000 to invest. He could buy corporate bonds with a 10% before-tax yield or tax-exempt bonds with an 8% before-tax yield. Which of the following statements is false? A) If Mr. Fox invests in the tax-exempt bonds, he will pay $2,000 implicit tax every year. B) If Mr. Fox's marginal tax rate is 15%, he should invest in the corporate bonds. C) If Mr. Fox's marginal tax rate is 37%, he should invest in the tax-exempt bonds. D) None of these choices are false.

54) A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a/an:

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A) Excise tax B) Explicit tax C) Implicit tax D) Transaction tax

55)

Which of the following statements about implicit and explicit taxes is false?

A) The amount of implicit tax on an investment depends on the owner's marginal tax rate. B) The taxpayer pays an explicit tax to the taxing jurisdiction. C) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. D) None of these choices are false.

56)

Which of the following statements about implicit and explicit taxes is false?

A) The taxpayer pays an explicit tax to the taxing jurisdiction. B) An investment yielding ordinary income taxed at the regular tax rates should not have an implicit tax. C) Any implicit tax on investment income is always more than the explicit tax on the income. D) An implicit tax reduces the before-tax yield on an investment.

57)

Which of the following statements about tax strategies is false? A) Tax planners should prefer a simple strategy over a complex strategy. B) Tax planners should prefer a flexible strategy over an inflexible strategy. C) Tax planners should consider the tax consequences of a strategy to all parties. D) None of these choices are false.

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58)

Which of the following statements about tax legal doctrines is false?

A) The scope of the economic substance, business purpose, substance over form, and step transaction doctrines often overlap. B) Taxpayers can invoke the substance over form doctrine to undo the tax consequences of a failed planning strategy. C) The IRS's application of the doctrines is subjective. D) The economic substance, business purpose, substance over form, and step transaction doctrines increase the uncertainty of the tax law.

59) Mr. Coomb structured a transfer of real estate to his daughter as a sale. Upon audit, the IRS agent analyzed the economic consequences of the transfer and treated it as a gift by applying the: A) Business purpose doctrine B) Substance over form doctrine C) Assignment of income doctrine D) Step transaction doctrine

60) Mr. Bearne paid $50,000 to a local spiritual healer and deducted the payment as a business expense of his sole proprietorship. The healer provided personal counseling to Mr. and Mrs. Bearne. Upon audit of the sole proprietorship's accounting records, the IRS agent disallowed the deduction by applying the: A) Business purpose doctrine B) Assignment of income doctrine C) Economic substance doctrine D) Constructive receipt doctrine

61) Nilo Incorporated sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Incorporated, which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the: Version 1

A) Economic substance doctrine B) Assignment of income doctrine C) Step transaction doctrine D) Constructive receipt doctrine

62) In 20Y1, Ms. Graves transferred appreciated property to KL Partnership in exchange for an ownership interest in the partnership. She deliberately waited until 20Y3 before taking cash out of the partnership. Ms. Graves may have been trying to prevent the IRS from applying the: A) Business purpose doctrine B) Economic substance doctrine C) Substance over form doctrine D) Step transaction doctrine

63) The goal of tax planning is to reduce tax costs or increase tax savings as much as possible. ⊚ true ⊚ false

64)

Tax avoidance is the reduction of a person's tax liability through illegal means. ⊚ true ⊚ false

65)

Tax evasion is a federal crime punishable by imprisonment. ⊚ true ⊚ false

66)

The tax law applies uniformly to every commercial transaction by every business entity.

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⊚ ⊚

true false

67) Planning opportunities are created when the tax law applies differentially to alternative business transactions. ⊚ true ⊚ false

68)

Corporations, LLCs, and partnerships are all taxable entities. ⊚ true ⊚ false

69) In the United States, individuals and corporations are the two entities that pay tax on business income. ⊚ true ⊚ false

70) The entity variable is important because the amount of taxable income generated by a business depends on the type of entity conducting the business. ⊚ true ⊚ false

71)

Both the individual and the corporate federal income tax rates are progressive. ⊚ true ⊚ false

72) The after-tax value of a dollar of income to a high-tax entity is more than the after-tax value to a low-tax entity.

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⊚ ⊚

true false

73) The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity. ⊚ true ⊚ false

74) Income-shifting transactions occur more frequently between related parties than between unrelated parties. ⊚ true ⊚ false

75)

Deduction-shifting transactions usually occur between unrelated taxpayers. ⊚ ⊚

true false

76) According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction. ⊚ true ⊚ false

77)

The assignment of income doctrine constrains tax deferral strategies. ⊚ ⊚

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true false

78) Andrea Mitchell can shift income to her daughter, Lynn, by endorsing a check for $10,000 received for a client over to Lynn. ⊚ true ⊚ false

79)

The time period variable is based on the time value of money. ⊚ true ⊚ false

80) A strategy to shift income from one taxpayer to a different taxpayer reflects the entity variable, while a strategy to shift income from one year to a different year reflects the time period variable. ⊚ true ⊚ false

81) A planning strategy that defers a tax cost without deferring the receipt of before-tax cash flows decreases the NPV of the transaction. ⊚ true ⊚ false

82) Opportunity cost refers to the decrease in NPV from a deferral of the receipt of before-tax cash flows. ⊚ true ⊚ false

83) The tax character of an item of income depends on how the income is reported on the firm's financial statements. ⊚ true ⊚ false

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84)

The tax character of an item of income can change when Congress amends the tax law. ⊚ true ⊚ false

85)

The rate at which an item of income is taxed depends on the tax character of the income. ⊚ true ⊚ false

86) The 15% preferential tax rate on capital gains has the same value to every individual taxpayer. ⊚ true ⊚ false

87)

A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax. ⊚ true ⊚ false

88)

A reduced market rate of return on a tax-favored investment is called an implicit tax. ⊚ true ⊚ false

89) Municipal bond investments bear less implicit tax than investments in taxable corporate bonds. ⊚ true ⊚ false

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90)

Tax planning strategies to enhance NPV must reflect all four tax planning maxims. ⊚ true ⊚ false

91) The business purpose doctrine allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety. ⊚ true ⊚ false

92) The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature. ⊚ true ⊚ false

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Answer Key Test name: Chap 04_2023 6) A 7) B 8) A 9) C 10) D 11) B 12) C 13) D 14) A 15) C 16) B 17) D 18) B 19) B 20) A 21) C 22) D 23) C 24) D 25) D 26) D 27) D 28) A 29) B 30) B 31) C Version 1

32) A 33) A 34) B 35) C 36) D 37) C 38) A 39) C 40) C 41) B 42) B 43) D 44) D 45) A 46) C 47) D 48) A 49) D 50) A 51) B 52) D 53) D 54) C 55) A 56) C 57) D 58) B 59) B 60) A 61) C Version 1

62) D 63) FALSE 64) FALSE 65) TRUE 66) FALSE 67) TRUE 68) FALSE 69) TRUE 70) FALSE 71) FALSE 72) FALSE 73) TRUE 74) TRUE 75) FALSE 76) FALSE 77) FALSE 78) FALSE 79) TRUE 80) TRUE 81) FALSE 82) TRUE 83) FALSE 84) TRUE 85) TRUE 86) FALSE 87) FALSE 88) TRUE 89) FALSE 90) FALSE 91) FALSE Version 1

92) TRUE

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CHAPTER 5 1) Alex inherited an antique diamond bracelet from her grandmother. She is thinking of selling the bracelet to raise cash for her college tuition and wonders about the tax consequences of such a sale. If you were to research this question using a keyword search in an electronic library, what keywords would you use? Propose three distinct keyword searches.

2) Using an electronic research database such as Checkpoint or CCH AnswerConnect, perform a keyword search that includes the phrase business expense and the keyword charity. Include both primary sources and editorial materials in your search. a.How many documents did your search retrieve? b.How many documents are primary authorities and how many are secondary authorities? c.Provide citations to two primary authorities and two secondary authorities.

3) Locate the revenue procedure that includes the inflation-adjusted individual tax rate schedules for 2022. This revenue procedure usually is released in the fourth quarter of the previous year. Provide a complete citation for your source.

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4) Find a tax glossary on any freely accessible Web site and provide the URL. Also find and provide a citation for the IRC section that defines the term gross income. a. What is the tax glossary's definition of gross income? b. How does the IRC define gross income? c. Of the two definitions, which would a taxpayer without extensive tax knowledge find easier to understand? Why? d. Which of the two definitions is relevant for a tax researcher? Why?

Which of the following is not one of the six steps in the tax research process? A) Understand the client's transaction and ascertain the facts. B) Locate relevant tax law authority. C) Analyze relevant authority and answer the research questions. D) All of these choices are steps in the tax research process.

Which of the following statements regarding the tax research process istrue?

A) Before a researcher can analyze the tax consequences of a transaction, he or she must thoroughly understand the transaction. B) Tax research is often conducted as part of both tax compliance and tax planning activities. C) Tax research is a critical skill for the tax practitioner. D) All of these statements are true.

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What is the first step in the tax research process? A) Discover all the facts relevant to the taxpayer's transaction. B) Decide which tax library to use. C) Decide whether to read primary or secondary authority. D) Formulate a precise research question.

Which of the following is not one of the six steps in the tax research process?

A) Identify the tax issues, problems, or opportunities suggested by the facts and formulate specific research questions. B) Consult a commercial tax service to identify potential legal authorities. C) Analyze relevant authority and answer the research questions. D) Document your research and communicate your conclusions.

When performing step one of the tax research process:

A) The researcher generally can assume that the client's initial summary of the transaction is factually accurate and complete. B) The researcher must take into account the level of the client's tax knowledge. C) The client's motivation in undertaking the transaction is generally irrelevant. D) The researcher should presume that the client has some knowledge of the tax law.

10)

When performing step two of the tax research process: A) The identification of tax issues precedes the formulation of research questions. B) Research questions should be as broadly stated as possible. C) Each tax issue is always associated with a single research question. D) The order in which research questions are addressed is irrelevant.

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11)

When performing step three of the tax research process:

A) A commercial tax service may provide an excellent starting point. B) The researcher must discover all the facts concerning the client's transaction. C) The researcher must communicate his or her conclusions to the client. D) The researcher should always consult primary authorities first before turning to secondary authorities for guidance.

12)

Step five of the tax research process:

A) Is typically performed only by novice researchers. B) Is required only if the researcher has made a careless mistake in a previous step. C) Should only be taken once. D) Is necessary when the researcher determines that additional facts are needed to complete the analysis of the transaction.

13)

Which of the following statements does not accurately describe the tax research process?

A) A researcher may begin with any of the six steps in the process. B) The process is not linear because the researcher may have to repeat one or more of the steps before concluding the research. C) If a set of facts suggests multiple research questions, the researcher must decide on the order in which the questions should be answered. D) The last step in the process requires preparation of a written summary that communicates the researcher's conclusions.

14) When analyzing tax authorities, the researcher must decide if the authority requires a factual judgment or an evaluative judgment. The difference between the two can be described as follows:

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A) In making an evaluative judgment, the researcher can provide a definitive answer to the research question. B) In making a factual judgment, the authority may be subject to interpretation. C) In making an evaluative judgment, the researcher must draw a subjective conclusion that results in a qualified answer. D) There is little difference between a factual judgment and an evaluative judgment.

15)

When analyzing relevant legal authority:

A) The researcher is finished only when an unambiguous answer to the research question has been located. B) Different sources of authority may provide conflicting answers. C) Interpretation and judgment on the part of the researcher is rarely required. D) The researcher should never give an unqualified answer to any research question.

16)

Which of the following is not generally included in a tax research memorandum? A) A statement of the pertinent facts B) An analysis of the relevant sources of authority C) The details of any advice given to the client as part of the research engagement D) A bill for fees charged to the client for the research engagement

17) Which of the following statements regarding documentation of research conclusions is false? A) A research memorandum is a permanent record of the research process. B) A researcher communicates his or her conclusions to the client in a letter containing information similar to that in the research memorandum. C) Technical references are generally inappropriate in a client letter. D) A research memorandum contains only research conclusions and not a detailed analysis of legal authorities supporting those conclusions.

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18) Which of the following is not one of the three sources of authority that comprise the federal tax law? A) Statutory authority B) Secondary authority C) Administrative authority D) Judicial authority

19)

Which of the following is not a primary authority on which to base research conclusions? A) Journal of Taxation article written by a professor. B) Revenue ruling. C) U.S. Tax Court decision. D) U.S. Supreme Court decision.

20)

Which of the following is not a primary authority? A) Section 465 of the Internal Revenue Code B) Munro v. Comm., 267 F.3d 1918 (CA-8, 2004) C) CCH Master Tax Guide D) All of these choices are primary authorities

21) Which of the following is not a primary authority on which to base tax research conclusions? A) U.S. District Court decision B) Editorial in the Wall Street Journal C) U.S. Court of Federal Claims decision D) Revenue procedure

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22)

Which of the following is a primary authority on which to base research conclusions? A) Textbook used in this class B) An editorial explanation in a commercial tax service C) A Treasury regulation D) A treatise written by a tax attorney and published in a legal journal

23)

Which of the following is not a proper citation to a Treasury regulation? A) Reg. Sec. 1.61-1(a) B) Reg. 1.61-1(a) C) Reg. §1.61-1(a) D) Treasury Regulation 61-1(a)

24)

Which of the following is not a proper citation to an Internal Revenue Code section? A) IRC 1001 B) Sec. 1001 C) Section 1001 D) §1001

25)

Which of the following is a proper citation to a revenue ruling? A) Revenue Ruling 2004-33 B) RR 2004-33 C) Rev. Rul. 2006-33, 2004-1 C.B. 628 D) All of these choices are proper forms for citing a Revenue Ruling

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26)

Which of the following is not a citation to a primary authority? A) Sec. 1245 B) Lengsfield v. Comm., 50 AFTR 1683 (CA-5, 1957) C) M-5800 Activities Not Engaged in for Profit - Hobby Losses D) Rev. Proc. 2002-32, 2002-1 C.B. 959

27)

Based on the citation Rev. Rul. 89-157, 1989-1 C.B. 221: A) This revenue ruling was issued in 1989. B) This revenue ruling is no longer valid. C) The abbreviation C.B. stands for Comprehensive Bulletin. D) This revenue ruling appears on page 157.

28)

Which of the following is not administrative authority? A) The Internal Revenue Code B) Treasury regulations C) Revenue rulings D) Revenue procedures

29)

The U.S. Supreme Court:

A) Typically hears hundreds of tax cases each year. B) May deny certiorari for a tax case because the court believes that the case involves a significant principle of law. C) May grant certiorari for a tax case because two or more appellate courts have rendered conflicting opinions on the proper resolution of a tax issue. D) Does not hear cases on tax issues.

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30) Which of the following primary authorities is least likely to provide a detailed description of facts to which a researcher can compare his or her client's fact pattern? A) Internal Revenue Code section B) Treasury regulation C) Revenue ruling D) Tax Court decision

31)

The advantages of electronic tax research libraries do not include: A) The ease with which such libraries can be updated for new developments. B) Portability. C) Speed of access and search. D) All of these choices are advantages of electronic tax research libraries.

32)

Which of the following is not a commercial tax service? A) RIA Federal Tax Coordinator 2d B) CCH Federal Tax Services C) BNA Tax Management Portfolios D) Cumulative Bulletin

33)

Which of the following statements regarding commercial tax services is false?

A) Commercial tax services explain and interpret the tax law. B) Commercial tax services organize information about primary authorities in a manner that facilitates tax research. C) Commercial tax services contain both primary authority and secondary authority. D) Consulting a commercial tax service is typically the final step rather than a preliminary step in the tax research process.

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34)

A keyword search in an electronic tax service: A) Allows the researcher to combine words and phrases to define the search. B) Is identical to using the topical index in a paper service. C) Is not an efficient way to conduct tax research. D) Cannot be restricted to only a part or portion of the data base.

35)

A citator:

A) Is not an important tax research resource. B) May be used to determine the status of tax judicial decisions, revenue rulings, and revenue procedures. C) Is published by the federal government. D) Provides an editorial explanation of tax judicial decisions.

36)

Which of the following statements regarding secondary authorities is true?

A) Most secondary authorities are published by the federal government. B) Secondary authorities should never be cited as the authority for final research conclusions. C) Secondary authorities should always cite primary authority to support conclusions about the application of the tax law. D) None of these statements are true.

37)

In locating relevant authorities:

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A) Only a novice researcher will use secondary authorities as a guide. B) Experienced researchers always conduct their search in exactly the same way for every research project. C) Tax researchers may consult more than one tax service. D) Skilled researchers usually consult a broader range of library materials than novice researchers.

38)

Which of the following statements regarding secondary authorities is false?

A) In paper format, commercial tax services are organized either topically or by Code section. B) Commercial tax services provide legislative history of each Internal Revenue Code section. C) Online commercial tax services provide access only to primary authorities, not secondary authorities. D) The organization and content of the major topically-oriented services differs considerably.

39) A keyword search using an electronic database is part of which step in the research process? A) Understand the client's transaction and ascertain the facts B) Identify the tax issues, problems, or opportunities suggested by the facts and formulate specific research questions C) Locate relevant tax law authority D) Analyze relevant authority and answer the research questions

40) The use of secondary authorities might be appropriate as part of which step in the research process?

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A) Understand the client's transaction and ascertain the facts B) Identify the tax issues, problems, or opportunities suggested by the facts and formulate specific research questions C) Locate relevant tax law authority D) Document your research and communicate your conclusions

41)

Which of the following is not a secondary authority? A) Tax textbook B) Commercial tax service C) Tax professional journal D) Revenue procedure

42)

Which of the following is not a primary authority? A) Internal Revenue Code B) Treasury regulations C) Revenue Procedure D) Tax textbook

43)

Which of the following statements regarding administrative authorities is false?

A) Private letter rulings are considered authoritative only for the taxpayer to whom they were issued. B) A technical advice memorandum is requested by a revenue agent or appeals officer during the examination or appeal of a taxpayer's return. C) Revenue procedures are considered secondary authority. D) Private letter rulings can only be obtained for a fee from the IRS.

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44)

Which of the following is not a secondary authority? A) Tax Court Memorandum decision B) BNA Tax Management Portfolio C) United States Tax Reporter D) All of these choices are secondary authorities

45) Which of the following statements regarding strategies to locate relevant authority is true? A) Novice researchers tend to examine fewer materials during the research process than experienced researchers. B) In an electronic tax service, keyword searching allows the researcher to combine words and phrases to target the search. C) Keyword searches should be defined as narrowly as possible to maximize efficiencies in the search process. D) All of these choices are true statements.

46) Experienced tax professionals generally can answer most tax questions without the need for tax research. ⊚ true ⊚ false

47)

A single tax issue may result in multiple research questions. ⊚ true ⊚ false

48)

The first step in the tax research process is to locate relevant tax law authority. ⊚ true ⊚ false

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49) The final step in the tax research process is to document and communicate research conclusions. ⊚ true ⊚ false

50)

Effective tax research often omits the first two steps of the tax research process. ⊚ true ⊚ false

51) Professional tax research conclusions should always be based on relevant secondary authority. ⊚ true ⊚ false

52) A research memorandum is typically less detailed than a client letter in terms of discussing supporting legal authorities. ⊚ true ⊚ false

53) Novice tax researchers tend to examine less material in the course of a tax research project than experienced tax researchers. ⊚ true ⊚ false

54) Tax research typically occurs as part of the tax compliance process; however, it is rarely important in tax planning.

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⊚ ⊚

55)

true false

Tax research may occur as part of tax compliance or tax planning. ⊚ true ⊚ false

56) Step 4 of the tax research process is to repeat steps 1 through 3 as many times as necessary. ⊚ true ⊚ false

57) The results of the tax research process should be documented in a research memo, in a letter to the client, or both. ⊚ true ⊚ false

58) In circumstances requiring an evaluative judgment, the tax researcher can provide a definitive answer to the research question. ⊚ true ⊚ false

59)

Tax judicial decisions each have a single, unique citation. ⊚ true ⊚ false

60) In the citation Rev. Proc. 2002-32, 2002-1 C.B. 959, the abbreviation C.B. refers to Congressional Bulletin.

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⊚ ⊚

true false

61) If a trial court decision has been appealed and the appellate court reversed the trial court's decision, the trial court decision is considered authoritative. ⊚ true ⊚ false

62) Private letter rulings are authoritative only for the specific taxpayer to whom they are issued and cannot be relied on as authority by any other taxpayer. ⊚ true ⊚ false

63) Editorial explanations provided by electronic tax services are examples of secondary authority. ⊚ true ⊚ false

64) Technical advice memoranda are considered primary authority for any taxpayer in a similar tax situation. ⊚ true ⊚ false

65) Private letter rulings and technical advice memoranda are primary authority for those taxpayers to whom they were issued. ⊚ true ⊚ false

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66) The Internal Revenue Code is the primary source of statutory authority for federal income tax law. ⊚ true ⊚ false

67)

Treasury regulations are considered statutory authority. ⊚ true ⊚ false

68)

Revenue rulings are an example of administrative authority. ⊚ true ⊚ false

69) A revenue ruling cannot be relied on as authority by any taxpayer other than the taxpayer for whom the ruling was issued. ⊚ true ⊚ false

70) A taxpayer who loses a case in the U.S. Tax Court may appeal the case directly to the U.S. Supreme Court. ⊚ true ⊚ false

71)

Revenue procedures are a type of secondary authority. ⊚ true ⊚ false

72)

When the Supreme Court denies certiorari, the decision of the appellate court is final.

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⊚ ⊚

true false

73) Secondary authorities explain and interpret the tax law in language often easier to understand than that of primary authorities. ⊚ true ⊚ false

74)

Tax services are typically organized either topically or by Code section. ⊚ true ⊚ false

75) A Citator may be used to determine the status of tax judicial decisions, revenue rulings, and revenue procedures. ⊚ true ⊚ false

76) The Citator is a rarely used, unimportant source of information about the status of judicial and administrative tax decisions. ⊚ true ⊚ false

77)

Editorial explanations found within a tax service are a type of primary authority. ⊚ true ⊚ false

78) Secondary authorities should always be cited when documenting tax research conclusions.

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⊚ ⊚

true false

79) Secondary authorities are typically used only by novice researchers in searching for answers to tax questions. ⊚ true ⊚ false

80) Secondary authorities organize information about primary authorities in a manner that facilitates tax research. ⊚ true ⊚ false

81)

The editorial explanations in a commercial tax service are considered primary authority. ⊚ ⊚

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true false

Answer Key Test name: Chap 05_2023 5) D 6) D 7) A 8) B 9) B 10) A 11) A 12) D 13) A 14) C 15) B 16) D 17) D 18) B 19) A 20) C 21) B 22) C 23) D 24) A 25) C 26) C 27) A 28) A 29) C 30) A Version 1

31) D 32) D 33) D 34) A 35) B 36) B 37) C 38) C 39) C 40) C 41) D 42) D 43) C 44) A 45) B 46) FALSE 47) TRUE 48) FALSE 49) TRUE 50) FALSE 51) FALSE 52) FALSE 53) FALSE 54) FALSE 55) TRUE 56) FALSE 57) TRUE 58) FALSE 59) FALSE 60) FALSE Version 1

61) FALSE 62) TRUE 63) TRUE 64) FALSE 65) TRUE 66) TRUE 67) FALSE 68) TRUE 69) FALSE 70) FALSE 71) FALSE 72) TRUE 73) TRUE 74) TRUE 75) TRUE 76) FALSE 77) FALSE 78) FALSE 79) FALSE 80) TRUE 81) FALSE

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CHAPTER 6 1) Assuming a 21% marginal tax rate, compute the after-tax cost of the following business expenses. a.$12,300 business meals not provided by a restaurant. b.$42,000 rent on factory equipment. c.$8,050 business entertainment.

2) Randall Company uses the calendar year and the cash method of accounting. On December 31, 2022, Randall made the following cash payments. To what extent can Randall deduct the payments in 2022? a.$50,000 for a two-year warehouse lease beginning on March 1, 2023. b.$95,000 of inventory items held for sale to customers. c.$1,800 to purchase a new refrigerator for the employees' lounge. The refrigerator was delivered on February 1, 2023. d.$5,000 compensation to a consultant who spent two weeks in January 2023 analyzing Randall's payroll system. e.$22,000 property tax to the local government for the first six months of 2023.

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3) Zephex is a calendar year corporation. On December 1, 2022, Zephex received a $12,000 check from a tenant that leases office space owned by Zephex. This payment was rent for the four-month period from December 1, 2022, through March 31, 2023. On December 2, 2022, Zephex billed a client $38,250 for services rendered to the client in November. The client did not pay the bill until January 14, 2023. a.If Zephex is a cash basis taxpayer, how much 2022 taxable income should it recognize with respect to the above transactions? b.If Zephex is an accrual basis taxpayer, how much 2022 book income should it report and how much 2022 taxable income should it recognize with respect to the above transactions?

4) Krasco Incorporated's auditors prepared the following reconciliation between book and taxable income. The corporation has a 21% tax rate. Book income before tax Net permanent differences Net temporary differences Taxable income

$ 8,288,900 (35,770) 112,400 $ 8,365,530

a.Compute Krasco's tax expense per books and tax payable. b.Compute Krasco's net increase in deferred tax assets or deferred tax liabilities (identify which) for the year.

5) Marchal Incorporated, a calendar year, accrual basis taxpayer, made the following state income tax payments during 2022. March 11

Balance due of 2021 tax

$ 13,600

April 2

Estimated 2022 tax payment

$ 15,250

June 2

Estimated 2022 tax payment

$ 15,250

September 3

Estimated 2022 tax payment

$ 15,250

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December 2

Estimated 2022 tax payment

$ 15,250

On December 28, Marchal's tax department calculated that the corporation's actual 2022 state income tax liability was $67,140. Consequently, Marchal accrued a $6,140 liability for state income tax payable at year end. a.Compute Marchal's 2022 state income tax expense per books. b.If Marchal has not adopted the recurring item exception as its method of accounting for state income taxes, compute Marchal's 2022 federal deduction for state income tax.

6) Slumar, an accrual basis, calendar year corporation, reported $7,289,200 net income before tax on its financial statement prepared in accordance with GAAP. The corporate records reveal the following information. The allowance for bad debts on January 1 was $104,700. Write-offs for the year totaled $113,228, and the addition to the allowance for the year was $105,000. Slumar incurred $22,000 of entertainment costs and $32,000 of business meals not provided by a restaurant. At its December 16 meeting, Slumar's board of directors authorized a $100,000 salary bonus for the corporation's CEO. Slumar paid the bonus to the CEO on January 4. The CEO owns 62% of Slumar's outstanding stock. Slumar was incorporated last year. On its first tax return, it reported a $334,712 net operating loss. Compute Slumar's taxable income.

7) Which of the following statements most accurately defines taxable income from business operations?

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A) Gross income from the sales of goods or performance of services less allowable deductions. B) Gross income from whatever source derived less allowable deductions. C) Revenues from business transactions less expenses. D) Gross income from whatever source derived less expenses.

8) Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true? A) Jethro recognizes $1,000 income because of the settlement. B) Jethro recognizes no income because of the settlement. C) Jethro can deduct the $9,000 payment. D) Jethro can deduct a $1,000 bad debt expense.

9) Pim Incorporated operates a business with a natural annual operating cycle ending August 31. Which of the following can Pim adopt as its taxable year? A) A calendar year. B) Fiscal year ending June 30. C) Fiscal year ending August 31. D) Pim can adopt a calendar year or any fiscal year as its taxable year.

10) Tonto Incorporated has used a calendar year as its taxable year since its incorporation in 1990. Tonto has an excellent business reason for changing to a fiscal year ending May 31. Which of the following statements is true?

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A) Because it has a good business reason, Tonto can change to a fiscal year ending May 31 without IRS permission. B) If Tonto changes to a fiscal year ending May 31, it must file a short-period return for the seven-month period from June 1 to December 31 of the year of change. C) If Tonto changes to a fiscal year ending May 31, it must file a short-period return for the five-month period from January 1 to May 31 of the year of change. D) Because it has a good business reason, Tonto can change to a fiscal year ending May 31 without IRS permission and if Tonto changes to a fiscal year ending May 31, it must file a short-period return for the seven-month period from June 1 to December 31 of the year of change.

11) Welch Incorporated has used a fiscal year ending September 30 as its taxable year since its incorporation in 1988. The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31. Which of the following statements is false? A) Welch's final tax return will be a short-period return. B) Welch's final tax return will include its income from October 1 to March 31. C) Welch’s final tax return will include its income from January 1 to March 31. D) None of these choices are false.

12) Toro Incorporated has average gross receipts of $30 million annually. This year, Toro incurred $5 million of net business interest and has adjusted taxable income of $12 million. Toro’s current deduction for business interest is: A) $1.5 million B) $3.6 million C) $5 million D) $0

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13) Village Incorporated has average gross receipts of $100 million annually. This year, Village incurred $25 million of net business interest and has adjusted taxable income of $42 million. Village’s current deduction for business interest is: A) $0 B) $7.5 million C) $12.6 million D) $25 million

14) Which of the following statements about tax policy objectives regarding business expenses is false? A) Lobbying expenses are not deductible because Congress does not want to subsidize political activities. B) By disallowing a tax deduction, Congress increases the after-tax cost of undesirable expenditures. C) The tax treatment of meals and entertainment expenses is intended to make the law more equitable. D) The business interest expense limitation increases the disparity between the tax treatment of debt and equity financing.

15)

Which of the following statements about methods of accounting is false?

A) The IRS has the right to determine if a taxpayer's method of accounting clearly reflects the taxpayer's income. B) A taxpayer must request permission from the IRS to change its method of accounting for tax purposes. C) A taxpayer engaged in more than one business can use a different method of accounting for each business. D) Taxpayers must use the same method of accounting to compute taxable income as they use to compute financial statement income.

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16) Which of the following methods of accounting is never permissible for computing taxable income? A) Cash receipts and disbursements method B) Accrual method C) Hybrid method that combines the cash and accrual methods D) All of the above are permissible methods of accounting.

17) JKL Incorporated and Matthew Incorporated enter into a business transaction. The two corporations are related parties for tax purposes. Which of the following statements is true? A) JKL and Matthew must account for the transaction using the same method of accounting. B) The IRS has the right to reallocate income from the transaction to prevent distortion. C) The cash method of accounting must be used to account for such transactions. D) JKL and Matthew must request permission from the IRS to engage in the related party transaction.

18) Which of the following business expenses always results in a difference between taxable income and book income? A) Rent expense B) Interest expense C) Client entertainment D) Salary expense

19) Why does the federal tax law disallow a business deduction for a fine or penalty paid to any government?

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A) A deduction for the payment of a fine or penalty would be a subsidy for bad behavior and also against public policy. B) The payment of a fine or penalty is not an ordinary business expense. C) The payment of a fine or penalty is not an expense for financial reporting purposes. D) A deduction for the payment of a fine or penalty would distort the measurement of taxable income.

20)

Why does the federal tax law disallow a business deduction for political contributions?

A) A deduction for the payment of a political contribution would be a subsidy for bad behavior. B) A deduction for the payment of a political contribution would subsidize partisan political activities. C) The payment of a political contribution is not an expense for financial reporting purposes. D) A deduction for the payment of a fine or penalty would distort the measurement of taxable income.

21) Stack Incorporated 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 Incorporated 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 Incorporated 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 Incorporated 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 Incorporated 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.

22)

Which of the following statements about the cash method of accounting isfalse?

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A) Under the cash method, annual taxable income equals annual net cash inflow. B) The revenue from a sale of goods is recognized when payment is received. C) An expense is generally recognized when the expense is paid. D) None of these choices are false.

23) Pozzi Company, a cash basis business, received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago. The payment consisted of a $15,000 principal payment and $1,930 interest. On receipt of the cash, Pozzi recognizes: A) No taxable income. B) $1,930 taxable income. C) $15,000 taxable income. D) $16,930 taxable income.

24) 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.

25) On December 12, 2022, Hook Company, a calendar year, cash basis business, mailed a $5,600 bill to Mrs. Gilder for professional services rendered during the month of November. Mrs. Gilder dropped off her $5,600 check at Hook's office on December 28, but the company secretary did not deposit the check in Hook's bank account until January 3, 2023. Which of the following statements is true?

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A) According to the constructive receipt doctrine, Hook must recognize $5,600 income in 2022. B) According to the substance over form doctrine, Hook does not recognize $5,600 income until 2023. C) As a cash basis taxpayer, Hook does not recognize $5,600 income until 2023. D) As a cash basis taxpayer, Hook can elect to recognize $5,600 income in either 2022 or 2023.

26)

Which of the following statements about the constructive receipt doctrine is false?

A) The doctrine applies to cash basis taxpayers. B) The doctrine relates to the time period variable in tax planning. C) Application of the doctrine by the IRS is subjective and depends on the facts and circumstances of each case. D) None of these choices are false.

27)

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.

28) Eaton Incorporated is a calendar year, cash basis taxpayer. On October 1, 2022, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following is true?

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A) As a cash basis taxpayer, Eaton can deduct the $4,800 expense in 2022. B) Eaton can deduct $600 in 2022, and the remaining $4,200 in 2023. C) Eaton can deduct $600 in 2022, $2,400 in 2023, and $1,800 in 2024. D) None of these choices are true.

29) Addis Company operates a large retail men's clothing store that has annual gross receipts of $30 million. Because Addis has merchandise inventory, it must use: A) The accrual method as its overall method of accounting. B) The accrual method to account only for sales of merchandise. C) The accrual method to account only for purchases of merchandise. D) The accrual method to account for both sales and purchases of merchandise.

30) Which of the following businesses can't use the cash receipts and disbursement method of accounting for tax purposes? A) Sole proprietorship with $8 million average annual gross receipts B) Corporation with $50 million average annual gross receipts C) Partnership of individuals with $20 million average annual gross receipts D) Personal service corporation with $50 million average annual gross receipts

31) Which of the following businesses is prohibited from using the cash receipts and disbursement method of accounting for tax purposes? A) Partnership with two individual partners with $9 million average annual gross receipts B) Personal service corporation with $8 million average annual gross receipts C) Corporation with $3 million average annual gross receipts D) None of the businesses are prohibited from using the cash method

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32)

Which of the following statements about the accrual method of accounting is false?

A) The accrual method is the required method of accounting under GAAP. B) Every publicly held corporation must use the accrual method of accounting to prepare financial statements. C) The accrual method of accounting under GAAP and the accrual method of accounting for computing taxable income are identical. D) Corporations with more than $27 million average annual gross receipts are required to use the accrual method to compute taxable income.

33)

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.

34) Which of the following statements concerning the principle of accounting conservatism is true? A) According to the GAAP principle of conservatism, financial statements should report expenses and losses in the earliest reasonable year. B) The GAAP principle of conservatism tries to prevent the overstatement of book income and the understatement of taxable income. C) According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the earliest reasonable year. D) According to the tax law principle of conservatism, taxpayers should deduct expenses and losses in the same year as they are reported on the taxpayers' financial statements.

35)

Which of the following statements describes a permanent book/tax difference?

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A) An expense reported on the current income statement but deducted on next year's tax return B) A revenue item included in current taxable income but not reported on the income statement until next year C) An expense (or loss) is realized for book purposes but never recognized for tax purposes D) A revenue item reported on the current income statement but not included in taxable income until an indefinite future year

36)

Which of the following does not result in a permanent book/tax difference? A) Business meal and entertainment expense B) Nondeductible fines and penalties C) Premiums paid on key-person life insurance policies D) All of the above result in a permanent book/tax difference.

37)

Which of the following does not result in a permanent book/tax difference? A) Tax-exempt interest on state and local bonds B) NOL carryforwards C) Business entertainment expenses D) Lobbying expenses

38)

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 one or more future tax years. D) The tax cost or benefit of a permanent book/tax difference is recouped over time.

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39)

Southlawn Incorporated's taxable income is computed as follows: