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DeVry ACCT 424 Midterm Exam 2

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1. Barry owns a 60% interest in an S corporation that earned $150,000 in 2011. He also owns 60% of the
stock in a C corporation that earned $150,000 during the year. The S corporation distributed $30,000 to
Barry, and the C corporation paid dividends of $30,000 to Barry. How much income must Barry report
from these businesses? (Points : 5)
$0 income from the S corporation, and $30,000 income from the C corporation
$90,000 income from the S corporation, and $30,000 income from the C corporation
$90,000 income from the S corporation, and $0 income from the C corporation
$30,000 income from the S corporation, and $30,000 of dividend income from the C corporation
None of the above

2. (TCO 2) Which statement is correct regarding the taxation of C corporations? (Points : 5)

The due date for a corporate income tax return (ignoring extensions) is the 15th day of the third month
following the close of the corporations tax year.
A corporation with taxable income of less than $500 need not file a tax return.
The alternative minimum tax does not apply.
In general, the required annual payment for corporate estimated taxes is 90% of the corporations final
tax for the current year.
None of the above

3. (TCO 1) Dawn and William form Orange Corporation. Dawn transfers equipment worth $475,000
(basis of $100,000) and $25,000 cash to Orange Corporation for 50% of its stock. William transfers a
building and land worth $525,000 (basis of $200,000) for 50% of Oranges stock and $25,000 cash.
Discuss the result of these transfers.(Points : 5)
Dawn recognizes a gain of $375,000; William recognizes a gain of $325,000.
Dawn recognizes a gain of $25,000; William recognizes no gain.
Neither Dawn nor William recognizes gain.
Dawn recognizes no gain; William recognizes a gain of $25,000.
None of the above

4. (TCO 1) Kevin owns 100% of the stock of Cardinal Corporation. In the current year, Kevin transfers an
installment obligation (basis of $30,000 and fair market value of $200,000) for additional stock in
Cardinal worth $200,000. Which gain, if any, will Kevin recognize on the transfer? (Points : 5)
Kevin recognizes no taxable gain on the transfer.
Kevin has a taxable gain of $170,000.
Kevin has a taxable gain of $180,000.
Kevin has a basis of $200,000 in the additional stock he received in Cardinal Corporation.
None of the above

5. (TCO 1) Earl and Mary form Yellow Corporation. Earl transfers property ($200,000 and value of
$1,600,000) for 50 shares in Yellow Corporation. Mary transfers property (basis of $80,000 and value of
$1,480,000) and agrees to serve as manager of Yellow for 1 year; in return, Mary receives 50 shares of
Yellow. The value of Marys services is $120,000. With respect to the transfers, _____. (Points : 5)
Mary will not recognize gain or income
Earl will recognize a gain of $1,400,000
Yellow Corporation has a basis of $1,480,000 in the property it received from Mary
Yellow will have a business deduction of $120,000 for the value of the services Mary will render
None of the above

6. (TCO 11) Harold, a calendar-year taxpayer subject to a 35% marginal tax rate, claimed a charitable
contribution deduction of $18,000 for a sculpture that the IRS later valued at $10,000. Which is the
applicable overvaluation penalty? (Points : 5)

7. (TCO 11) The privilege of confidentiality applies to a CPA tax preparer concerning the clients
information relative to _____. (Points : 5)
financial accounting tax accrual work papers
a tax research memo used to determine an amount reported on the tax return
building a defense against a penalty assessed for the use of a tax shelter
building a defense against a charge brought by the SEC
None of the above

8. (TCO 2) Staff Inc., has taxable income of $10 million this year. Which is the maximum DPAD tax
savings for this C corporation? (Points : 5)


9. (TCO 2) A corporation has the following items related to the AMT.

Alternative minimum tax base: $98,502,900
Regular tax: $11,201,520
Foreign AMT tax credit: $1,400,000
The corporations AMT, if any, is _____. (Points : 5)
None of the above

10. (TCO 3) As of January 1, Spruce Corporation has a deficit in accumulated E & P of $37,500. For the
tax year, current E & P (all of which accrued ratably) is $20,000 (prior to any distribution). On July 1,
Spruce Corporation distributes $25,000 to its sole, noncorporate shareholder. The amount of the
distribution that is a dividend is _____.(Points : 5)
None of the above

1. (TCO 3) Walnut Corporation, a calendar-year taxpayer, has taxable income of $110,000 for the year. In
reviewing Walnuts financial records, you discover the following occurred this year.
Federal income taxes paid: $25,000
Net operating loss carryforward deducted currently: $25,000
Gain recognized this year on an installment sale from a prior year: $12,000
Depreciation deducted on tax return (ADS depreciation would have been $8,000): $15,000
Interest income from Wisconsin state bonds: $37,000
Walnut Corporations current E & P is _____. (Points : 5)
None of the above

2. (TCO 3) Which statement regarding constructive dividends is not correct? (Points : 5)

Constructive dividends do not need to be formally declared or designated as a dividend.
Constructive dividends need not be paid pro rata to the shareholders.
Corporations that receive constructive dividends may not use the dividends received deduction.
Constructive dividends are taxable as dividends only to the extent of earnings and profits.
All of the above

3. (TCO 4) Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue
Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under 351. The assets
had a tax basis to her of $100,000, and a fair market value of $270,000 on the date of the transfer. In the
current year, Blue Corporation (E & P $800,000) redeems 250 shares from Eleanor for $220,000 in a
transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will
have a _____. (Points : 5)
$195,000 capital gain
$220,000 capital gain
$195,000 dividend
$220,000 dividend
None of the above

4. (TCO 4) Cardinal Corporation has 1,000 shares of common stock outstanding. John owns 400 of the
shares, Johns father owns 300 shares, Johns daughter owns 200 shares, and Redbird Corporation owns
100 shares. John owns 70% of the stock in Redbird Corporation. How many shares is John deemed to
own in Cardinal Corporation under the attribution rules of 318? (Points : 5)
None of the above

5. (TCO 5) One of the tenets of U.S. tax policy is to encourage business development. Which Code
section does not support this tenet? (Points : 5)
351, which allows entities to incorporate tax-free
1031, which allows the exchange of stock of one corporation for stock of another
368, which allows for tax-favorable corporate restructuring through mergers and acquisitions
381, which allows the target corporations tax benefits to carry over to the successor corporation
All of the above

6. (TCO 5) The French Corporation has assets valued at $1 million (adjusted basis of $700,000). There are
mortgages of $250,000 associated with these assets. Accent Corporation acquires all of Frenchs assets

by exchanging $800,000 of its voting stock, and assumes $200,000 of Frenchs liabilities. French
distributes the Accent stock and remaining liabilities to its shareholders in exchange for their French
stock, and then liquidates. Which, if any, statement is correct? (Points : 5)
This restructuring qualifies as a Type A reorganization.
This restructuring qualifies as a Type C reorganization.
The restructuring is taxable because liabilities cannot be distributed to shareholders in a tax-free
Accent recognizes a $50,000 gain on the restructuring.
None of the above

7. (TCO 5) Which type of reorganization can be used to divide a corporation? (Points : 5)

Type A
Type B
Type D
Type E
All of the above

8. (TCO 6) How are the members of a consolidated group affected by computations related to E & P?
(Points : 5)
E & P is computed solely on a consolidated basis.
Consolidated E & P is computed as the sum of the E & P balances of each of the group members.
Members E & P balances are frozen as long as the consolidation election is in place.
Each member keeps its own E & P account.

9. (TCO 6) Which corporation is not eligible for consolidated return status? (Points : 5)
Tax-exempt charitable corporations
Insurance companies
Corporations formed outside the United States
All of the above

10. (TCO 6) Members of a controlled group share all but which tax attribute? (Points : 5)
The lower tax rates on the first $75,000 of taxable income
The $40,000 AMT exemption
The 179 depreciation amount allowed
All of the above

1. (TCO 2) During the current year, Pet Palace Company had operating income of $510,000 and
operating expenses of $400,000. In addition, Pet Palace had a long-term capital gain of $30,000. How
does Lucinda, the sole owner of Pet Palace Company, report this information on her individual income
tax return under the following assumptions?
(I) Pet Palace is a proprietorship, and Lucinda does not withdraw any funds from the company during
the year.
(II) Pet Palace is an LLC, and Lucinda does not withdraw any funds from the company during the year.
(III) Pet Palace is an S corporation, and Lucinda does not withdraw any funds from the company during
the year.
(IV) Pet Palace is a regular corporation, and Lucinda does not withdraw any funds from the company
during the year.(Points : 30)
(TCO 11) Congress has set very high goals as to the number of Forms 1040 that should be filed
electronically. Summarize the benefits of e-filing from the perspectives of both the taxpayer and the
government.(Points : 30)
TCO 5) Shelton Corporation and Davis Corporation want to join forces as one corporation because their
businesses are complementary. They would like the resulting corporation to have a new name, because
both of them have been involved in high profile lawsuits due to environmental issues. Shelton is a
manufacturer with a basis in its assets of $2 million (value of $2.9 million) and liabilities of $500,000.
Davis is a distributor of a variety of products including those of Sheltons. Its basis in its assets is $1.2
million (value of $2 million) and it has liabilities of $400,000. Given these facts, which type of
reorganization would you suggest for Shelton and Davis? (Points : 30)
(TCO 6) In a federal consolidated tax return group, who is responsible to pay the tax liabilitythe
parent, the subsidiaries, or both? How are these tax-payable amounts determined? (Points : 30)

DeVry ACCT 424 Midterm Exam 2

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