chapter c5

Prentice Hall's Federal Taxation 2016: Corporations, 29e (Pope)Chapter C5: Other Corporate Tax Levies

LO1: The Alternative Minimum Tax

1) The alternative minimum tax is the excess of the tentative minimum tax amount over the regular tax amount.Answer: TRUEPage Ref.: C:5-2Objective: 1

2) Corporations cannot use the installment method in calculating alternative minimum taxable income (AMTI) for noninventory items.Answer: FALSEPage Ref.: C:5-10Objective: 1

3) The NOL deduction is calculated the same for regular and alternative minimum tax purposes.Answer: FALSEPage Ref.: C:5-8Objective: 1

4) The ACE adjustment always increases alternative minimum taxable income (AMTI).Answer: FALSEPage Ref.: C:5-9Objective: 1

5) Life insurance proceeds are a positive adjustment for adjusted current earnings (ACE), but not alternative minimum taxable income (AMTI).Answer: TRUEPage Ref.: C:5-9Objective: 1

6) The minimum tax credit available for a corporation's alternative minimum tax liability can be carried forward indefinitely and offsets regular tax liabilities in future years.Answer: TRUEPage Ref.: C:5-12Objective: 1

7) The general business credit can be used to offset the alternative minimum tax.Answer: FALSEPage Ref.: C:5-13Objective: 1

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8) Identify which of the following statements is false.A) The alternative minimum tax is the excess of the tentative minimum tax amount over the regular tax amount.B) All corporations with gross receipts of less than $10 million are exempt from the AMT.C) If the firm does not qualify for Small C corporation status, the C corporation statutory exemption amount for alternative minimum tax purposes is phased out when alternative minimum taxable income reaches $310,000.D) The purpose of the AMT is to ensure that every taxpayer with substantial economic income pays a minimum tax.Answer: BPage Ref.: C:5-2Objective: 1

9) Identify which of the following statements is false.A) The corporate AMT produces relatively little tax revenue.B) The small corporation AMT exemption exempts 95% of all corporations from the AMT.C) The corporate AMT is similar to the AMT for individuals.D) The starting point for computing a corporation's AMT is book income.Answer: DPage Ref.: C:5-2Objective: 1

10) The Small C corporation exemption from AMT continues as long as average gross receipts for the three preceding tax years areA) $6.5 million or less.B) $7.0 million or less.C) $7.5 million or less.D) $8.0 million or less.Answer: CPage Ref.: C:5-3Objective: 1

11) When computing a corporation's alternative minimum taxable income, its taxable income isA) only increased (never decreased) by tax preference items.B) only increased (never decreased) by adjustments.C) increased by the statutory exemption of $40,000.D) increased by 75% of the excess of adjusted current earnings over taxable income.Answer: APage Ref.: C:5-5Objective: 1


12) In the last three years, Wolf Corporation had gross receipts of $3,000,000, $5,000,000, and $10,000,000. Which of the following statements is correct?A) Wolf receives a statutory exemption of $40,000 based on its receipts.B) Wolf is exempt from the AMT.C) Wolf is subject to the AMT in the current year.D) There is insufficient information to determine whether Wolf is subject to the AMT.Answer: BPage Ref.: C:5-5Objective: 1

13) Identify which of the following statements is true.A) The corporate alternative minimum tax rate is 35%.B) No credits are allowed when computing the tentative minimum tax.C) Tax preference items always increase alternative minimum taxable income.D) All of the above are false.Answer: CPage Ref.: C:5-5Objective: 1

14) Which of the following items are tax preference items for purposes of arriving at alternative minimum taxable income?A) excess intangible drilling costs on oil and gas propertiesB) interest income earned on federal obligationsC) all depreciation claimed on pre-1987 real property acquisitionsD) excess of net long-term capital gains over short-term capital lossesAnswer: APage Ref.: C:5-5Objective: 1

15) Foggy Corporation has regular taxable income of $1,200,000. It has $250,000 of interest income on private activity bonds and $100,000 of interest on City of New Orleans bonds. How much is Foggy's preadjustment AMTI?A) $1,200,000B) $1,350,000C) $1,450,000D) $1,550,000Answer: CPage Ref.: C:5-5Objective: 1

16) Identify which of the following statements is true.A) Depreciation on real property may be a tax preference item for purposes of computing AMT.B) Depreciation on real property may be an adjustment item for purposes of computing AMT.C) Adjustments to taxable income always increase alternative minimum taxable income.D) Both A and B are true.Answer: DPage Ref.: C:5-6 and C:5-7Objective: 1

17) Identify which of the following statements is false.A) Tax-exempt interest on certain private activity bonds may be taxed under the alternative minimum tax.B) Tax preference items and adjustments may either increase or decrease taxable income to obtain AMTI.C) Depending on the date an asset is placed in service, depreciation may be an adjustment


to taxable income or a tax preference item for alternative minimum tax purposes.D) Different depreciation rules are used when computing taxable income and alternative minimum taxable income.Answer: BPage Ref.: C:5-5Objective: 1

18) Which of the following items are adjustments made to arrive at alternative minimum taxable income?A) excess percentage depletionB) excess of deprecation claimed on personalty acquired in the current year for taxable income purposes over that claimed for alternative minimum tax purposesC) tax-exempt interest income earned on private activity bondsD) statutory exemptionAnswer: BPage Ref.: C:5-6Objective: 1

19) Becky places five-year property in service during June 2014 using the half-year convention. Depreciation is $1,500 under the 150% declining balance method and $2,000 under 200% declining balance. Becky uses the 200% declining balance method for regular income tax purposes. What is the amount of Becky's AMT adjustment?A) $0B) $1,500 positive adjustmentC) $500 positive adjustmentD) $500 negative adjustmentAnswer: CPage Ref.: C:5-7Objective: 1

20) Becky places five-year property in service during June 2014 using the half-year convention. Depreciation is $1,500 under the 150% declining balance method and $2,000 under 200% declining balance. Becky uses the 150% declining balance method for regular income tax purposes. What is the amount of Becky's AMT adjustment?A) $0B) $1,500 positive adjustmentC) $500 positive adjustmentD) $500 negative adjustmentAnswer: APage Ref.: C:5-7Objective: 1


21) Which of the following statements about the alternative minimum tax depreciation rules is correct?A) The MACRS depreciation rules are used to calculate the depreciation deduction when calculating alternative minimum taxable income regardless of the date the property was placed in service.B) The excess of the gain reported on the disposition of tangible personal property for income tax purposes over the gain reported for alternative minimum tax purposes is a positive adjustment to taxable income in arriving at alternative minimum taxable income.C) A 31.5-year recovery period is used when calculating the commercial real property depreciation deduction for alternative minimum taxable income purposes.D) No depreciation adjustment is made when computing AMT for real property acquired after 1998.Answer: DPage Ref.: C:5-7Objective: 1

22) Identify which of the following statements is true.A) A corporation's adjusted current earnings (ACE) amount is calculated by making adjustments that are similar to those used in computing earnings and profits (E&P).B) The adjusted current earnings (ACE) adjustment attempts to adjust the AMT tax base towards a corporation's economic income.C) Adjusted current earnings (ACE) is computed beginning with preadjustment alternative minimum taxable income.D) All of the above are true.Answer: DPage Ref.: C:5-9Objective: 1

23) Which of the following is not an adjustment in calculating AMTI?A) gain on installment sales of noninventory propertyB) the regular tax NOL deductionC) production activities deductionD) the difference between the gains for AMTI and regular tax purposesAnswer: APage Ref.: C:5-8Objective: 1

24) How does the deduction for U.S. production activities affect AMTI?A) The computation of qualified production activities is the same for taxable income and AMTI.B) The computation of qualified production activities is based on qualified production activities income for AMTI.C) The computation of qualified production activities is based on AMTI before the deduction for qualified production activities.D) The computation of qualified production activities is based on the lesser of qualified production activities income or AMTI before the deduction for qualified production activities.Answer: DPage Ref.: C:5-8Objective: 1


25) Identify which of the following statements is false.A) Adjusted current earnings (ACE) is the same as E&P.B) A corporation's positive adjusted current earnings (ACE) adjustment equals 75% of the excess of its ACE over its preadjustment AMTI (AMTI before this adjustment and the alternative tax NOL deduction).C) A corporation's negative adjusted current earnings (ACE) adjustment equals 75% of the excess of its preadjustment AMTI (AMTI before this adjustment and the alternative tax NOL deduction) over its ACE, but may not exceed the cumulative "net" ACE adjustment amounts from all post-1989 tax years.D) The ACE adjustment is not required of S corporations.Answer: APage Ref.: C:5-9Objective: 1

26) Tax-exempt interest income on state and local municipal bonds that are not a private activity isA) a tax preference item.B) a positive adjustment in calculating alternative minimum taxable income (AMTI).C) a negative adjustment in calculating alternative minimum taxable income (AMTI).D) included in calculating ACE (adjusted current earnings).Answer: DPage Ref.: C:5-9Objective: 1

27) Certain adjustments must be made to alternative minimum taxable income (AMTI) to arrive at adjusted current earnings (ACE). Which one of the following adjustments increases AMTI to arrive at ACE?A) federal income taxes paidB) the 80% dividends-received deductionC) gain realized on the installment sale of noninventory propertyD) excess of capital losses over capital gainsAnswer: CPage Ref.: C:5-10Objective: 1

28) Identify which of the following statements is true.A) The ACE adjustment is required of S corporations.B) The 70% dividends-received deduction reduces preadjustment AMTI to arrive at ACE.C) The 80% dividends-received deduction can be claimed when computing a corporation's adjusted current earnings (ACE).D) All of the above are false.Answer: CPage Ref.: C:5-9Objective: 1


29) Mountaineer, Inc. has the following results:

Regular corporate tax liability $ 400,000 Taxable income 2,000,000 Preferences 500,000 Adjustments (200,000)

What is the amount of the tentative minimum tax?A) $500,000B) $360,000C) $460,000D) none of the aboveAnswer: CPage Ref.: C:5-10 through C:5-12Objective: 1

30) Mountaineer, Inc. has the following results:

Regular corporate tax liability $ 400,000 Taxable income 2,000,000 Preferences 500,000 Adjustments (200,000)

What is the amount of the alternative minimum tax?A) $0B) $60,000C) $100,000D) none of the aboveAnswer: BPage Ref.: C:5-10 through C:5-12Objective: 1

31) Identify which of the following statements is true.A) The minimum tax credit carries forward indefinitely and offsets regular tax liabilities in future years.B) The minimum tax credit available for a corporation's alternative minimum tax liability can be carried over for five years.C) The general business credit is permitted to offset 100% of the larger of (1) a corporation's regular tax amount, or (2) its tentative minimum tax amount.D) All of the above are false.Answer: APage Ref.: C:5-12Objective: 1


32) Which of the following statements regarding the minimum tax credit is correct?A) It can only be carried forward.B) It must be carried back before being carried forward.C) Taxpayers may elect to forgo the carryback period and carry the credit forward.D) There are not carryforwards or carrybacks of the minimum tax credit.Answer: APage Ref.: C:5-12Objective: 1

33) Hydrangia Corporation reports the following results for the current year:

Taxable income $300,000Interest on private activity bonds 20,000Life insurance proceeds 250,000Dividends-received deduction 50,000Depreciation claimed for:

Taxable income purposes 175,000AMT purposes 130,000

Adjusted current earnings 800,000

What is Hydrangia Corporation's alternative minimum tax liability?Answer: Taxable income $300,000Plus: interest on private activity bonds 20,000Plus: depreciation adjustment 45,000Preadjustment AMTI $365,000ACE adjustment:Adjusted current earnings $800,000

Minus: preadjustment AMTI (365,000)Excess amount $435,000Times: inclusion percentage × 0 .75 326,250

AMTI $691,250Minus: statutory exemption 0

AMT tax base $691,250Times: tax rate × 0 .20

Tentative minimum tax $138,250Minus: federal income taxes (100,250)AMT liability $ 38,000Page Ref.: C:5-2 through C:5-13; Comprehensive ExampleObjective: 1


34) Barker Corporation, a personal service company, has $200,000 of taxable income. Barker has tax preferences and positive adjustments of $200,000 and negative adjustments of $140,000 for alternative minimum tax purposes. No credits are available. Barker's regular tax liability is $70,000. What is the tentative minimum tax amount?Answer: Taxable income 200,000Plus: tax preferences and positive adjustments 200,000Less: negative adjustments (140,000 ) Alternative minimum taxable income $260,000Statutory exemption (40,000 - .25(260,000 - 150,000))( 12,500 ) AMT base $247,500Times: tax rate × 0 .20 Tentative minimum tax $ 49,500Page Ref.: C:5-3Objective: 1

35) Arnold Corporation reports taxable income of $250,000, tax preference items of $20,000, and positive AMT adjustments of $20,000. What is its statutory exemption, when computing alternative minimum taxable income?Answer: $40,000 - {[($250,000 + $20,000 + $20,000) - $150,000] × 0.25} = $5,000Page Ref.: C:5-2Objective: 1

36) Door Corporation's alternative minimum taxable income before the statutory exemption is $200,000. What is Door's tentative minimum tax before credits?Answer: AMTI $200,000Minus: statutory exemption threshold (150,000)Excess over threshold $ 50,000Times: phase-out percentage × 0 .25 Reduction in statutory exemption $ 12,500Statutory exemption $ 40,000Minus: reduction ( 12,500)Remaining statutory exemption $ 27,500AMTI $200,000Minus: remaining statutory exemption ( 27,500)Tax base $172,500Times: rate × 0 .20 Tentative minimum tax $ 34,500Page Ref.: C:5-3Objective: 1


37) Barker Corporation, a personal service company, has $200,000 of taxable income. Barker has tax preferences and positive adjustments of $200,000 and negative adjustments of $140,000 for alternative minimum tax purposes. No credits are available. Barker's regular tax liability is $70,000. How much is its alternative minimum tax liability?Answer: There is no alternative minimum tax liability since the tentative minimum tax amount ($49,500) [see C:5-73] does not exceed the regular tax amount ($70,000).Page Ref.: C:5-2Objective: 1

38) Drury Corporation, which was organized three years ago, reports the following adjusted current earnings (ACE) and preadjustment alternative minimum taxable income (AMTI) amounts.

Second previous

yearLast year Current year

ACEAMTI (excluding ACE adjustment)

$3,0002,500

$2,0002,000

$1,0002,500

What is the ACE adjustment to increase (or decrease) taxable income to arrive at AMTI for the second previous year?Answer: $3,000 - $2,500 = $500 × 0.75 = $375Page Ref.: C:5-9; Example C:5-11Objective: 1

39) Drury Corporation, which was organized three years ago, reports the following adjusted current earnings (ACE) and preadjustment alternative minimum taxable income (AMTI) amounts.

Second previous

yearLast year Current year

ACEAMTI (excluding adjustments)

$3,0002,500

$2,0002,000

$1,0002,000

What is the ACE adjustment to increase (or decrease) taxable income to arrive at AMTI for the current year?Answer: Adjusted Current Earnings $ 1,000Minus: AMTI ( 2,000)Difference ($ 1,000)Times: adjustment percentage × 0 .75 Tentative ACE adjustment ($ 750)

The negative ACE adjustment is limited to the $375 of positive ACE adjustments made in previous years (i.e., the second previous year).Page Ref.: C:5-13; Example C:5-12Objective: 1


40) Flower Corporation, a C corporation but not a personal service corporation, has taxable income of $200,000 plus $125,000 of positive adjustments plus $150,000 of tax preferences. Its regular tax liability is $68,000. Calculate Flower Corporation's minimum tax credit.Answer: For post-1989 tax years, the entire corporate AMT liability may be claimed as a credit.

Taxable income $200,000 AMT base $475,000Plus: adjustments 125,000 Times: rate × 0.20Preferences 150,000 TMT $ 95,000AMTI and tax base $475,000 Minus: regular tax ( 68,000)

AMT and AMT credit $ 27,000

Page Ref.: C:5-12Objective: 1

41) In the current year, Sun Corporation's federal income taxes before credits are $220,000. Its TMT is $100,000. Their only available credit is a research credit (part of the general business credit) of $160,000. The general business credit is limited to what amount?Answer: The lesser of: (a) $160,000 tentative general business credit, or (b) $220,000 minus the greater of: (1) 25% of net regular tax liability in excess of $25,000 ($48,750, or (2) net income tax liability minus the tentative minimum tax ($100,000), or $120,000.Page Ref.: C:5-13; Example C:5-13Objective: 1

42) How is alternative minimum taxable income computed?Answer: Alternative minimum taxable income is the corporation's taxable income (1) increased by tax preferences, (2) adjusted either up or down for income, gain, deduction, and loss items that have to be recomputed under the AMT, (3) increased or decreased for 75% of the difference between preadjustment AMTI and adjusted current earnings (ACE), and (4) reduced by the alternative tax NOL deduction.Page Ref.: C:5-3Objective: 1


43) What are the four general rules that provide a framework for the ACE calculation?Answer: Any amount that is permanently excluded from gross income when computing AMTI, but taken into account in determining E&P, is included in gross income for ACE. This adjustment is reduced by any deduction that would have been allowed in computing AMTI had the excluded income amount been included in gross income for AMTI purposes. No adjustment is made for any timing differences. In other words, any item that is, has been, or will be included in preadjustment AMTI will not be included in this category of ACE adjustment.

Second, a deduction cannot be claimed when computing ACE for any item that is not deductible in the tax year when computing E&P, even if such item has already been deducted in determining preadjustment AMTI. These deduction items increase ACE to the extent that they have already been deducted in determining preadjustment AMTI. Special rules apply for the dividends-received deductions.

Third, income items included in preadjustment AMTI are included in ACE, even if the item is not included in E&P.

Finally, items not deductible in determining preadjustment AMTI are not deducted when computing ACE, even if the item is deductible in arriving at E&P.Page Ref.: C:5-9Objective: 1

44) Explain the carryover provisions of the minimum tax credit.Answer: The minimum tax credit carries forward indefinitely and offsets regular tax liabilities in future years, but only to the extent the regular tax exceeds the corporation's TMT in the carryforward year. The minimum tax credit cannot be carried back to an earlier tax year.Page Ref.: C:5-12Objective: 1


45) Larry Corporation purchased a new precision casting machine for its manufacturing facility. The machine cost $2 million, and another $150,000 was spent on installation. The machine was placed in service in June 2009. The old machine, which was placed in service in 2003, was sold in 2009 to an unrelated party for a $250,000 financial accounting profit. What asset disposition and capital recovery issues do you need to address when removing the old machine from, and placing the new machine on, the financial accounting and tax books and in calculating the 2009 tax depreciation?Answer: The following tax issues need to be addressed regarding Larry's asset acquisition and disposition (assuming the corporation does not qualify for the small business exemption):

Old machine:• What amount of depreciation can be claimed for financial accounting, taxable income, AMTI, ACE, and E&P purposes in the year of disposition?• What is the amount and character of the gain to be reported on the disposition of the old machine for financial accounting, taxable income, AMTI, ACE, and E&P purposes?• What costs incurred in connection with the disposition of the old machine are deductible?

New machine:• What costs incurred in connection with the acquisition of the new machine must be capitalized?• What costs incurred in connection with the acquisition of the new machine can be expensed?• Should a Sec. 179 expensing election be made for part of the cost of the new machine?• What amount of depreciation can be claimed on the new machine for financial accounting, taxable income, AMTI, ACE, and E&P purposes in the year of acquisition? Should any special MACRS elections be made (e.g., 150% DB or straight-line depreciation) for any of the four tax-related depreciation calculations?

The cost of the precision casting machine and the installation costs must be capitalized. Different capital recovery calculations must be made for taxable income, AMTI, ACE, and E&P purposes, although, for property placed in service after 1993, AMTI and ACE depreciation are the same. Consideration should be made to using the same capital recovery method for taxable income and AMT purposes. In addition, the $250,000 financial accounting profit must be adjusted to determine the gain recognized for taxable income, AMTI, ACE, and E&P purposes with respect to the old machine.Page Ref.: C:5-4 through C:5-11Objective: 1

46) Rich Company sold equipment this year for $50,000. The equipment had been depreciated using 200% declining balance. Accumulated depreciation totals $60,000 for regular tax purposes and $70,000 for AMTI. The equipment originally cost $90,000. What AMT issues does this sale present?Answer: • What is the adjusted basis for regular tax purposes?• What is the adjusted basis for AMTI?• What is the gain for regular tax purposes?• What is the gain for AMTI?• How is the difference in the gain for regular and AMT purposes treated?

Rich has a $30,000 Sec. 1245 gain for the regular income tax and a $20,000 gain for AMTI. The sale results in a $10,000 positive adjustment in calculating AMTI ($30,000 - $20,000).Page Ref.: C:5-6 and C:5-7Objective: 1


LO2: Personal Holding Company Tax

1) All corporations, except S corporations and small C corporations, must calculate the ACE adjustment.Answer: TRUEPage Ref.: C:5-9Objective: 1

2) Wind Corporation is a personal holding company. Its taxable income for this year is $100,000. The corporation's charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation. Wind's UPHCI is $95,000, assuming no other adjustments must be made.Answer: TRUEPage Ref.: C:5-20Objective: 2

3) The personal holding company tax might be imposedA) on both partnerships and corporations.B) on companies whose gross income arises solely from rentals, if the lessors render no services to the lessees.C) if more than 50% of the company is owned by five or fewer individuals for the entire year.D) on small business investment companies licensed by the Small Business Administration.Answer: CPage Ref.: C:5-15Objective: 2

4) Foster Corporation has gross income for regular tax purposes of $100,000, which includes a net Sec. 1231 gain of $10,000 and a net capital gain of $10,000. Ordinary gross income for personal holding company purposes isA) $70,000.B) $80,000.C) $90,000.D) $100,000.Answer: BPage Ref.: C:5-15Objective: 2

5) Identify which of the following statements is false.A) Askew Corporation has ten unrelated shareholders, each of whom owns 10% of the outstanding stock. This corporation is a personal holding company.B) Stock owned by an individual, in addition to stock attributed from her spouse, parents, children, and siblings, are all counted towards whether or not the personal holding company stock ownership test has been met.C) S corporations and tax-exempt organizations are excluded from the personal holding company (PHC) definition.D) A person who holds an option to acquire stock is considered to own the stock for purposes of the PHC stock requirements.Answer: APage Ref.: C:5-15Objective: 2

6) Identify which of the following statements is true.A) The personal holding company tax is levied to prevent closely held corporations from sheltering passive income.B) Caleb Corporation is owned by a mother and her two daughters. It reports $100,000 of rental income, $30,000 of depreciation, interest, and property taxes on the rental real


estate, and $10,000 of dividend income. Caleb Corporation is classified as a personal holding company.C) Luke Corporation is owned by a father and his son. The corporation employs 10 individuals to provide public accounting services. Father and son make all of the work assignments for the professional employees. The professional fees earned by the corporation are personal holding company income.D) All of the above are false.Answer: APage Ref.: C:5-14Objective: 2

7) Identify which of the following statements is true.A) The personal holding company taxes that are paid by a corporation can be used as a credit against its regular tax amount.B) Whether a corporation is subject to the personal holding company tax is determined by using two objective tests, while the determination of whether a corporation is subject to the accumulated earnings tax is determined subjectively.C) Income from personal service contracts are not included in personal holding company income.D) All of the above are false.Answer: BPage Ref.: C:5-15 and C:5-22Objective: 2

8) The personal holding company penalty tax rate isA) 20%.B) 10%.C) 15%.D) 35%.Answer: APage Ref.: C:5-19Objective: 2

9) Which of the following is not an adjustment to taxable income when computing the personal holding company tax?A) dividends-received deductionB) dividends-paid deductionC) NOL carryover from immediately preceding tax yearD) All of the above are adjustments.Answer: DPage Ref.: C:5-20; Figure C:5-2Objective: 2


10) Identify which of the following statements is false.A) The 80% dividends-received deduction can be claimed when computing a corporation's undistributed personal holding company income (UPHCI).B) Rental expenses in excess of rental income are added back to taxable income to arrive at personal holding company income (PHCI).C) Wind Corporation is a personal holding company. Its taxable income for this year is $100,000. The corporation's charitable contributions are $5,000 greater than its income tax charitable contribution deduction limitation. Wind's UPHCI is $95,000, assuming no other adjustments must be made.D) The PHC tax is assessed at 20%.Answer: APage Ref.: C:5-20Objective: 2

11) Identify which of the following statements is true.A) Consent dividends are cash dividends paid following an authorizing vote of the shareholders.B) Dividends that are paid in the two preceding tax years can be used as a dividend carryover to reduce the amount of the current year's personal holding company (PHC) tax liability.C) Dividends paid by a personal holding company in the first 2 1/2 months of a tax year are automatically throwback dividends.D) All of the above are false.Answer: BPage Ref.: C:5-22 and C:5-23Objective: 2

12) Identify which of the following statements is true.A) A deficiency dividend is included in the shareholder's gross income for his/her tax year that includes the last day of the tax year in which the personal holding company claims a dividends-paid deduction.B) A shareholder who receives a deficiency dividend must report the dividend as gross income for the tax year that includes the last day of the distributing corporation's tax year on which it was a PHC.C) A personal holding company's payment of a deficiency dividend eliminates its need to pay the personal holding company tax as well as any interest and underpayment penalties on the tax deficiency.D) All of the above are false.Answer: DPage Ref.: C:5-22 and C:5-23Objective: 2

13) A personal holding company cannot take a dividends-paid deduction forA) throwback dividends.B) consent dividends.C) deficiency dividends.D) preferential dividends.Answer: DPage Ref.: C:5-22 and C:5-23Objective: 2


14) Investors Corporation has ten unrelated individual shareholders who each own 10% of the outstanding stock. For their tax year ended December 31 of this year, Investors' gross income includes:

Interest on federal government obligations $10,000Dividends from savings and loan associations

on passbook savings accounts $2,000Interest earned on notes receivable $5,000Net rental income $3,000

No dividends are paid during the tax year or during the 2-1/2 month throwback period. Deductible administrative expenses total $4,000 for the year. Rental income has been reduced by $1,000 of depreciation and $2,000 of interest expense. What is Investors' undistributed personal holding company income?Answer: Investors is not a personal holding company since it is not more than 50% owned by five or fewer shareholders.Page Ref.: C:5-15Objective: 2

15) Khuns Corporation, a personal holding company, reports the following:

Rental income $50,000Depreciation 10,000Interest expense 5,000Real estate taxes 2,000Maintenance expenses 5,000Administrative expenses 5,000

Calculate Khuns Corporation's adjusted income from rents (AIR).Answer: Rental income $50,000Minus:depreciation (10,000)

interest ( 5,000)Real estate taxes ( 2,000)Adjusted income from rents $33,000Page Ref.: C:5-16; Example C:5-14Objective: 2


16) Lake Corporation is a personal holding company. Lake reports the following results for the current year:

Rental income $100,000Operating profit 80,000Dividend income 30,000Interest income 20,000Depreciation 30,000Mortgage interest expense 18,000Real estate taxes 8,000Other expenses 20,000

No dividends are paid during the current year or the 2-and-one-half-month throwback period. The mortgage relates to the rental properties. Calculate the adjusted income from rents exclusion from personal holding company income.Answer: OGI $230,000Minus: rental expenses ( 56,000)AOGI $174,000

Rental income $100,000Minus:depreciation ( 30,000)

interest ( 18,000)real estate taxes ( 8,000)

AIR $ 44,000

The rents cannot be excluded since AIR ($44,000) does not exceed 50% of AOGI ($87,000 = $174,000 × 0.50).Page Ref.: C:5-18; Example C:5-15Objective: 2


17) Eagle Corporation, a personal holding company, has the following results:

Taxable income $200,000Dividends-received deduction 30,000Excess charitable contributions 10,000Long-term capital gains 10,000Federal income taxes 61,000

Calculate the PHC tax.Answer: Taxable income $200,000Plus: dividends-received deduction 30,000Minus: excess charitable contributions ( 10,000)Long-term capital gains (net of taxes)* ( 6,100)*Federal income taxes ( 61,000)Undistributed personal holding company income$152,900Times: rate × 0 .20 Personal holding company tax $ 30,580

*$10,000 - (0.39 × $10,000) = $6,100Page Ref.: C:5-22; Example C:5-18Objective: 2


18) Raptor Corporation is a PHC for 2009 and reports $200,000 of taxable income on its federal income tax return.

Operating profit $100,000Long-term capital gain 80,000Dividends (20%-owned corporation) 90,000Interest 100,000Gross income 370,000Salaries expense (50,000)General and administrative expense (25,000)Dividends-received deduction (72,000 ) Taxable income $223,000Regular tax liability $ 70,220

What is Raptor's PHC tax, assuming that it does not pay any dividends?Answer: Taxable income 223,000Less: federal tax (70,220)Less: Net capital gain (net of taxes)* (48,800)Plus DRD 72,000PHCI 175,980PHC Tax (0.20 tax rate × 175,980) 35,196

* 80,000-(80,000 * .39) = 48,800Page Ref.: C:5-21 and C:5-22Objective: 2


19) Mullins Corporation is classified as a PHC for the current year, reporting $263,000 of taxable income on its federal income tax return:

Operating profit $150,000Long-term capital gain 20,000Short-term capital gain 20,000Dividends (from 25%-owned domestic corporation)200,000Interest 150,000Gross income $540,000Minus: general and administrative expenses ( 40,000)Minus: salaries ( 30,000)"Adjusted" taxable income $470,000Minus: charitable contributions ( 47,000)Taxable income before special deductions $423,000Minus: dividends-received deduction (160,000)Taxable income $263,000

Actual charitable contributions made by Mullins Corporation were $75,000. What are the federal income tax due and the personal holding company (PHC) tax liability? Discuss the methods (if any) by which payment of the PHC tax can be avoided.Answer: The federal income tax liability is determined as follows:

Tax on first $100,000 of taxable income $ 22,250Tax on remaining taxable income ($163,000 × 0.39) 63,570Income tax liability $ 85,820

Taxable income $263,000Plus: dividends-received deduction 160,000Minus: excess charitable contributions ($75,000 - $47,000)( 28,000)Federal income tax ( 85,820)Long-term capital gain (net of taxes) ( 12,200)aUPHCI $296,980Times: tax rate × 0 .20 PHC tax $ 59,396

a$20,000 - ($20,000 × 0.39) = $12,200

Payment of the PHC tax can be avoided by paying a timely deficiency dividend in the amount of $296,980.Page Ref.: C:5-22; Example C:5-18Objective: 2


20) What is a personal holding company?Answer: A personal holding company is any corporation that (1) has five or fewer individual shareholders who own more than 50% of the corporation's outstanding stock at any time during the last half of its tax year, and (2) has personal holding company income that is at least 60% of its adjusted ordinary gross income for the tax year. Corporations that have certain special tax status generally are excluded from the PHC definition. Among those excluded are S corporations and tax-exempt organizations.Page Ref.: C:5-14Objective: 2

21) Define personal holding company income.Answer: Personal holding company income includes dividends, interest, annuities, adjusted income from rents, royalties, produced film rents, income from personal service contracts involving a 25% or more shareholder, rental income for corporate property used by a 25% or more shareholder, and distributions from estates or trusts.Page Ref.: C:6-16Objective: 2

22) What is the effect of the two-pronged test that allows the exclusion from PHCI of certain AIR (adjusted income from rents)?Answer: The effect of the two-pronged test is that it makes it difficult to use rents to shelter other passive income. PHCI does not include rents if (1) AIR is at least 50% of AOGI, and (2) the dividends-paid deduction equals or exceeds the amount by which nonrental PHCI exceeds 10% of OGI.Page Ref.: C:5-17Objective: 2


23) Church Corporation is a closely held C corporation. All of the stock is owned by Charles and Chanda Church. The corporation, in its second month of operation in its initial tax year, anticipates earning $150,000 of gross income in the current year. Gross income is expected to be approximately 40% dividends, 30% corporate bond interest, and 30% net real estate rentals (after interest, property taxes, and depreciation). Administrative expenses are expected to be $20,000. What special problems does the large amount of passive income that Church Corporation expects to earn present to you as their CPA?Answer: The following tax issues need to be addressed about Church Corporation's first year of operations:

• Will Church Corporation be classified as a PHC based on its first-year income projections? Do the projections forecast that this will be a long-term problem?• If Church Corporation is projected to be a PHC for its initial year of operation, what action can be taken before year-end to avoid being classified as a PHC?• Would Church Corporation benefit by making a timely S election applicable to its initial tax year? To a later tax year?• If Church Corporation is a PHC for its initial year of operation, what action (e.g., throwback distributions) can be taken after year-end to avoid incurring the PHC penalty tax?

Projections indicate that 70% of Church Corporation's gross income will be interest and dividends. The remaining 30% is net rental income. Therefore, it appears that all of Church's income is personal holding company income. Since Church has only two shareholders (both of whom are related), it is quite likely that Church Corporation will be classified as a personal holding company. Church can attempt to change the nature of its activities to increase net rental income above 50% of AOGI and reduce the level of other PHCI earned (e.g., dividends and interest). If such changes are made, perhaps personal holding company status can be avoided in the initial tax year. If personal holding company status cannot be avoided for the initial year, the PHC can pay a large enough amount of dividends to minimize the penalty tax, interest, and penalties. Alternatively, Church Corporation might consider an S election for its initial year or its second year, although the built-in gains tax may pose a possible problem when the corporation has retained C corporation status in its initial tax year and makes an S election for its second tax year.Page Ref.: C:5-15 through C:5-17Objective: 2

LO3: Accumulated Earnings Tax

1) A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.Answer: FALSEPage Ref.: C:5-25Objective: 3

2) To avoid the accumulated earnings tax, a corporation needs to have a definite plan for expending the accumulated earnings.Answer: TRUEPage Ref.: C:5-26Objective: 3


3) The accumulated earnings tax does not apply to corporations thatA) have more than one class of stock.B) are personal holding companies.C) are members of a controlled group.D) are closely held corporations.Answer: BPage Ref.: C:5-23Objective: 3

4) Identify which of the following statements is true.A) A corporation can be subject to both the accumulated earnings tax and the personal holding company tax in the same year.B) The accumulated earnings tax is applied to a corporation's earnings. If the earnings are not subsequently distributed, the earnings will be taxed again under the accumulated earnings tax the next year.C) The accumulated earnings tax is not levied on the corporation's total accumulated earnings balance, but only on its current-year addition to the balance.D) All of the above are false.Answer: CPage Ref.: C:5-23Objective: 3

5) Which of the following entities is subject to the accumulated earnings tax?A) Sec. 501 tax-exempt corporationB) personal holding companyC) C corporationD) S corporationAnswer: CPage Ref.: C:5-23Objective: 3

6) Identify which of the following statements is true.A) In practice, the accumulated earnings tax applies only to closely held corporations.B) A corporation bears the burden of proving that its earnings are not being accumulated to avoid income taxes.C) To avoid the accumulated earnings tax, a corporation needs to have a definite plan for expending the accumulated earnings.D) All of the above are true.Answer: DPage Ref.: C:5-23 through C:5-25Objective: 3


7) Which of following generally does not indicate an unreasonable earnings accumulation?A) loans to shareholdersB) expenditure of corporate funds for the personal benefit of the shareholdersC) planned expansion of business facilitiesD) investments in properties or securities unrelated to the activities of the corporationAnswer: CPage Ref.: C:5-25Objective: 3

8) All of the following are recognized as reasons for accumulating earnings exceptA) working capital needs.B) product liability loss reserves.C) redemption of stock of deceased shareholder.D) All of the above are recognized reasons for accumulating earnings.Answer: DPage Ref.: C:5-25Objective: 3

9) When using the Bardahl formula, an increase in annual credit sales (while holding the average accounts receivable balance constant) has which of the following effects on the working capital requirements?A) increaseB) decreaseC) no effectD) increase, decrease, or no effect, depending on other factorsAnswer: BPage Ref.: C:5-27 and C:5-28; Example 19Objective: 3

10) Identify which of the following statements is true.A) The Bardahl formula is based on the firm's inventory period, receivables period, credit period, and total cash expenditures for cost of sales and operating expenses.B) The Bardahl formula uses the concept of working capital, cash over current liabilities.C) The Bardahl formula provides mathematical exactness when calculating reasonable working capital needs for accumulated earnings tax purposes.D) All of the above are false.Answer: APage Ref.: C:5-27 and C:5-28; Example 19Objective: 3

11) When using the Bardahl formula, an increase in accounts payable (while holding purchases and operating expenses constant) has which of the following effects on the working capital requirements?A) increaseB) decreaseC) no effectD) increase, decrease, or no effect, depending on other factorsAnswer: BPage Ref.: C:5-28Objective: 3

12) Identify which of the following statements is true.A) A corporation accumulates earnings to fund the redemption of a shareholder's stock following her death so as to provide her estate with liquidity to pay death taxes. Such an accumulation of earnings is a reasonable business need.B) A corporation accumulates earnings to fund a buy-sell agreement. Such an accumulation of earnings is a reasonable business need.


C) A corporation's net capital gain (minus any federal income taxes paid with respect to such gain) increases the tax base for the accumulated earnings tax.D) All of the above are false.Answer: APage Ref.: C:5-29Objective: 3

13) A corporation cannot reasonably accumulate earnings toA) protect against pending litigation.B) fund an employee retirement plan.C) self-insure.D) redeem stock of an elderly shareholder where such accumulation occurs prior to the shareholder's death.Answer: DPage Ref.: C:5-29Objective: 3

14) The accumulated earnings tax is imposed at what rate?A) 10%B) 20%C) 15%D) 35%Answer: BPage Ref.: C:5-29Objective: 3

15) When computing the accumulated earnings tax, which of the following is not a reduction to arrive at accumulated taxable income?A) accumulated earnings creditB) NOL deduction claimedC) accrued federal income taxesD) dividends-paid deductionAnswer: BPage Ref.: C:5-30Objective: 3


16) Identify which of the following statements is true.A) Payment of deficiency dividends will prevent the imposition of the accumulated earnings tax.B) All corporations are exempt from the accumulated earnings tax on their first $250,000 of accumulated earnings.C) A health service corporation can claim an accumulated earnings credit of $250,000.D) All of the above are false.Answer: DPage Ref.: C:5-31Objective: 3

17) When computing the accumulated earnings tax, the dividends-paid deduction is not available forA) dividends paid during the tax year.B) throwback dividends.C) stock dividends.D) All of the above are deductible.Answer: CPage Ref.: C:5-31Objective: 3

18) In determining accumulated taxable income for the purpose of the accumulated earnings tax, which one of the following is allowed as a deduction?A) excess charitable contributionsB) dividends-received deductionC) net operating loss deductionD) net capital loss for the current yearAnswer: DPage Ref.: C:5-30Objective: 3

19) Which of the following is not permitted an accumulated earnings credit based on reasonable needs of the business?A) an operating companyB) an investment companyC) an incorporated engineerD) All of the above are permitted a credit based on reasonable business needs.Answer: BPage Ref.: C:5-31Objective: 3

20) Which of the following actions cannot be used to eliminate a potential accumulated earnings tax liability situation involving a corporation owned by a mother and a father?A) Create plans to invest retained earnings in a plant expansion.B) Make a cash distribution within 2 1/2 months after the end of the tax year.C) Make a deficiency distribution within 90 days of the date on which the IRS determines that an accumulated earnings tax liability is owed.D) Liquidate the corporation.Answer: CPage Ref.: C:5-31Objective: 3

21) The following information is reported by Acme Corporation.

Cost of goods sold $350,000Average inventory balance 35,000Average accounts receivable balance 65,000


Sales (all on account) 325,000Average accounts payable balance 45,000Operating expenses (excluding depreciation) 500,000Purchases 40,000

What is Acme Corporation's average operating cycle as a percentage of the year?Answer: Inventory turnover = ($35,000/$350,000) × 365 = 36.50 daysReceivables turnover = ($65,000/$325,000) × 365 = 73.00 daysPayables turnover = [$45,000/($40,000 + $500,000)] × 365 = 30.42 daysOperating cycle = [(36.50 + 73.00 - 30.42)/365] × 100 = 21.67% of a yearPage Ref.: C:5-27 and C:5-28; Example 19Objective: 3

22) Given the following information about Jones Corporation, what are Jones's working capital needs using the Bardahl formula, assuming that federal income taxes are not an operating expense?

Average inventory $ 33,000Cost of goods sold 300,000Purchases 250,000Average accounts receivable balance 80,000Average credit sales 320,000Average accounts payable balance 30,000Operating expense 400,000Depreciation claimed as operating expense 50,000Federal income taxes 25,000Advances to suppliers 30,000Answer: Inventory turnover (as a percent of the year) = $33,000/$300,000 = 0.11.Accounts receivable turnover = $80,000/$320,000 = 0.25.Credit turnover = $30,000/($400,000 - $50,000 + $250,000) = 0.05.Operating cycle = (0.11 + 0.25 - 0.05) = 0.31.Working capital needs = 0.31 × ($400,000 - $50,000 + $300,000 + $25,000) = $209,250.Page Ref.: C:5-27 and C:5-28; Example 19Objective: 3


23) A manufacturing corporation has accumulated E&P of $210,000 and current E&P of $65,000. Accumulated taxable income, before reduction for the accumulated earnings credit, is $90,000 for the current year. No dividends were paid during the year. The corporation has an increase in reasonable business needs of $35,000. If the corporation is not a service corporation and has reported no long-term capital gains, what is the amount of earnings subject to the accumulated earnings tax?Answer: $90,000 - $40,000 accumulated earnings credit* = $50,000 accumulated taxable income.

1.* Accumulated E&P $210,0002. Lifetime minimum credit 250,0002a. Current year minimum credit 40,0003. Current E&P 65,0003a. Current E&P retained for reasonable needs 35,0003b. Current E&P greater than reasonable needs 30,0004. Accumulated earnings credit (greater of 2a or 3a)40,000Page Ref.: C:5-32 and C:5-33; Example C:5-21Objective: 3

24) Green Corporation, a closely held operating corporation, reports the following:

Taxable income $200,000Long-term capital gain 30,000Dividends-received deduction 20,000Federal income taxes on long-term capital gain 11,700Accumulated earnings credit 80,000Federal income taxes 65,150

Calculate Green's accumulated taxable income.Answer: Taxable income $200,000Plus: dividends-received deduction 20,000Minus: LTCG (net of taxes)* ( 18,300)Minus: accumulated earnings credit ( 80,000)Minus: federal income taxes ( 65,150)Accumulated taxable income $ 56,550

*$30,000 - $11,700 = $18,300Page Ref.: C:5-32 and C:5-33; Example C:5-21Objective: 3


25) Lawrence Corporation reports the following results during the current year:

Taxable income $500,000Federal income taxes 170,000Dividends paid: June 5 50,000Accumulated E&P balance: January 1 800,000

No dividends were paid in the throwback period. A long-term capital gain of $50,000 is included in taxable income. The statutory accumulated earnings tax exemption has been used up in prior years. An additional earnings accumulation of $60,000 for the current year can be justified as meeting the reasonable needs of the business. What is Lawrence Corporation's accumulated earnings tax liability?Answer: Taxable income $500,000Minus: long-term capital gain $50,000Minus: income taxes (17,000) ( 33,000)Minus: federal income taxes (170,000)Minus: dividends-paid deduction ( 50,000)Minus: accumulated earnings credit ( 27,000)*Accumulated taxable income $220,000Times: tax rate × 0 .20 Accumulated earnings tax $ 44,000

*$60,000 reasonable needs of business accumulation - $33,000 capital gains net of taxes = $27,000.Page Ref.: C:5-32 and C:5-33; Example C:5-21Objective: 3

26) The courts and the Treasury Regulations have mentioned a number of reasonable needs that allow a corporation to accrue earnings and avoid the accumulated earnings tax. What are these reasons?Answer: • Expansion of a business or replacement of plant• Acquisition of a business enterprise• Debt retirement• Working capital• Loans to suppliers or customers• Product liability losses• Stock redemptions• Business contingenciesPage Ref.: C:5-26Objective: 3

27) How is the accumulated earnings tax liability computed?Answer: See Figure C:5-3 on p. C:5-30.Page Ref.: C:5-30Objective: 3


28) Eight individuals own Navy Corporation, a C corporation. Three shareholders make up the board of directors and own 51% of the stock. The corporation has a successful manufacturing business. It has accumulated $3 million of E&P and expects to accumulate another $200,000 of E&P annually. Annual dividend payments are $30,000. Demand for Navy's goods has been strong, but the company does not anticipate any expansion or repair of the current plant for three to five years. Management has invested $200,000 annually in growth stocks. Its current investment portfolio is $1.2 million. The portfolio is held as protection against a business slowdown. Loans to shareholder-employees currently are $400,000. As Navy's CPA, what tax issues should you have your client consider?Answer: The following tax issues need to be addressed about Navy Corporation's earnings accumulation:

• Has Navy Corporation accumulated earnings beyond the reasonable needs of the business?• If Navy Corporation has accumulated earnings beyond the reasonable needs of the business, was tax avoidance one of the directors' motivations for retaining the earnings?• What business needs can Navy Corporation's management use to justify the current and prior years' earnings accumulation?• What business needs can Navy Corporation's management use to justify any future earnings accumulations?• What steps can Navy Corporation take to reduce its current accumulated earnings tax exposure? Its future accumulated earnings tax exposure?• Should Navy Corporation bring the accumulated earnings tax issue to the IRS's attention?• Should an S election be made to reduce future exposure to the accumulated earnings tax?

Navy Corporation has a large E&P balance ($3 million currently), which is growing annually at a $200,000 rate. Few dividends have been paid, and a substantial portion of the current-year profit has been invested in portfolio investments or loaned to shareholders. The investment activities and loans indicate a possible accumulated earnings tax problem. Guidance should be provided to Navy Corporation that "active business" investments should replace "portfolio" investments if the corporation is to avoid the accumulated earnings penalty tax. The corporation is well past its statutory exemption and needs to document that the earnings are being retained to meet the reasonable needs of the business. No indication has been given whether such documentation exists, although there is an indication that some of the investments are being made to protect against a business downturn, which is a legitimate use of corporate earnings.Page Ref.: C:5-25 through C:5-29Objective: 3


LO4: Tax Planning Considerations

1) Dragon Corporation reports a distribution on its return from the third previous year as a stock redemption producing a capital gain. When the return is audited during the current year, the distribution of the third previous year is characterized by the IRS as a dividend. This change causes Dragon Corporation to be classified as a personal holding company for the third previous year. Which of the following statements is correct?A) Dragon Corporation will owe no interest and/or underpayment penalty if the PHC tax is avoided by a deficiency dividend.B) Dragon Corporation will owe interest and/or underpayment penalty even if the PHC tax is avoided by a deficiency dividend.C) A deficiency dividend is not permitted to be paid by Dragon.D) A dividend must be paid within 120 days of establishing the PHC tax liability and a claim for a dividends-paid deduction must be filed within 90 days of the determination date.Answer: BPage Ref.: C:5-22 and C:5-23Objective: 2

2) Which of the following actions cannot be used to eliminate a possible personal holding company tax liability involving a corporation owned by a mother and a father?A) Sell additional stock to other family members.B) Make a cash distribution within 2 1/2 months of the end of the tax year.C) Make a deficiency distribution within 90 days of the date on which the IRS determines that a personal holding company liability is owed.D) Liquidate the corporation.Answer: APage Ref.: C:5-22 and C:5-23Objective: 2

3) The personal holding company taxA) may be imposed regardless of the number of equal stockholders in a corporation.B) may be eliminated by the payment of a deficiency dividend.C) qualifies as a tax credit, which may be used by the shareholders to reduce their individual income taxes.D) applies to any corporation whose shareholders satisfy the stock ownership requirement.Answer: BPage Ref.: C:5-22 and C:5-23Objective: 2


4) Smartmoney, Inc. was formed by three wealthy dentists to pool their investment funds. They each invested $200,000 in the corporation, which was immediately used to purchase stocks to be held as investments. The first year, the corporation received dividends of $70,000 and filed a tax return paying a corporation tax in the amount of $3,150 [($70,000 dividends - $49,000 DRD) × .15 = $3,150]. The IRS audits this corporation and sends a tax bill in the amount of $13,370 ($66,850 UPHCI × 0.20 = $13,370) plus underpayment penalty and interest. What is this additional tax and what should the dentists do about it? What action(s) do you recommend the corporation take for the tax year in question and subsequent tax years?Answer: This additional tax that was imposed is the personal holding company tax. The dentists should arrange to have the corporation pay deficiency dividends so as to avoid the penalty tax. The interest and penalties that have been imposed cannot be avoided by the payment of the deficiency dividend. The dentists should consider liquidating the corporation and have the assets held individually by the shareholders. The liquidating distributions are eligible for the dividends-paid deduction and can reduce the UPHCI amount. An S election might be considered. It could alleviate the personal holding company problem for future tax years, but not for prior tax years.Page Ref.: C:5-21 and C:5-22Objective: 2

LO5: Compliance and Procedural Considerations

1) Identify which of the following statements is false.A) A corporation files a Schedule AE to report the amount of its accumulated earnings tax liability for the tax year.B) A corporation that is subject to the accumulated earnings tax may also be subject to interest and underpayment penalties on the amount of the unpaid liability.C) A corporation files a Schedule PH to report its PHC tax for the tax year.D) The corporate AMT liability is reported on Form 4626.Answer: APage Ref.: C:5-36Objective: 5


LO6: Financial Statement Implications

1) Beta Corporation incurs an $80,000 regular tax liability and a $20,000 AMT liability. Assuming no restrictions on Beta's ability to use the minimum tax credit, what journal entry would be necessary to record tax expense?

A) Federal income tax expense 60,000Deferred tax asset 20,000

Taxes payable 80,000

B) Federal income tax expense 80,000


C) Federal income tax expense 60,000


D) Federal income tax expense 80,000

Deferred tax asset 20,000Taxes payable 60,000

Answer: APage Ref.: C:5-37Objective: 6

2) ASC 740 requires thatA) the AMT is not considered as federal income tax expense.B) companies must establish a valuation allowance for the minimum tax credit.C) the minimum tax credit creates a deferred tax asset.D) the minimum tax credit increases federal income tax expense.Answer: CPage Ref.: C:5-37Objective: 6


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