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)
$0
$560
$2,800
$3,500

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)
$0
$204,000
$210,000
$306,000
$900,000

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)
$0
$7,099,060
$8,703,900
$18,300,580
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)
$0
$20,000
$25,000
$37,500
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)

$73,000
$138,000
$142,000
$166,000
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)
400
600
700
1,000
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 reorganization.
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
Partnerships
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 longterm 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

Click on the link below for the solution:

https://devryfinalexams.com/products/acct-424midterm-exam-2/