Group Work #1 – 10 points

ACCT 5413-30 Fall 2020

Please print and sign your name below:

______Solution____________________ _________________________________

1) Which of the following does NOT create a permanent book-tax difference?

A) Organizational and start-up expenses.
B) Key employee death benefit income.
C) Fines and penalties expenses.
D) Municipal bond interest income.

Explanation: Organizational and start-up expenses are capitalized and amortized for tax
purposes but immediately deducted for book purposes, so these create a temporary book-tax
difference.

2) Which of the following does NOT create a temporary book-tax difference?

A) Deferred compensation.
B) Bad-debt expense.
C) Depreciation expense.
D) Dividends received deduction.

Explanation: The dividends received deductions is a tax only deduction. It creates a favorable
permanent book-tax difference.

3) TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees
for which TrendSetter Inc. is the beneficiary. What is the nature of the book-tax difference
created by this expense?
A) Permanent; favorable.
B) Permanent; unfavorable.
C) Temporary; favorable.
D) Temporary; unfavorable.

Explanation: Life insurance premiums for key employees are not deductible for tax purposes.

4) iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the
nature of the book-tax difference relating to this expense?
A) Permanent; favorable.
B) Permanent; unfavorable.
C) Temporary; favorable.
D) Temporary; unfavorable.

Explanation: Interest expense on loans to acquire investments that produce tax-exempt income
is not deductible under section 265.

5) Corporation A receives a dividend from Corporation B. It includes the dividend in gross

income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting
income. If A has accounted for the dividend correctly (using the general rule), how much of B's
stock does A own?
A) A owns less than 20 percent of the stock of B.
B) A owns at least 20 but not more than 50 percent of the stock of B.
C) A owns more than 50 percent of the stock of B.
D) Cannot be determined.

Explanation: If a corporation receiving dividends owns at least 20% but not more than 50% of
the stock of a dividend-distributing corporation, it reports a pro-rata portion of the distributing
corporation's earnings in its financial accounting income under the equity method and it includes
the actual amount of the dividend in its taxable income.

6) Coop Inc. owns 40% of Chicken Inc., both Coop and Chicken are corporations. Chicken pays
Coop a dividend of $10,000 in the current year. Chicken also reports financial accounting
earnings of $20,000 for that year. Assume Coop follows the general rule of accounting for
investment in Chicken. What is the amount and nature of the book-tax difference to Coop
associated with the dividend distribution (ignoring the dividends received deduction)?
A) $2,000 unfavorable.
B) $2,000 favorable.
C) $10,000 unfavorable.
D) $10,000 favorable.
E) None of the choices are correct.

Explanation: Coop recognizes $10,000 in dividend income for tax purposes but only $8,000 of
book income (40 percent of the $20,000 earnings of Chicken). Because taxable income is greater
than book income, the difference is unfavorable.

7) Which of the following describes the correct treatment of incentive stock options (ISOs)?
A) Financial accounting—no expense; tax—no deduction.
B) Financial accounting—no expense; tax—deduct bargain element at exercise.
C) Financial—expense value over vesting period; tax—no deduction.
D) Financial—expense value over vesting period; tax—deduct bargain element at exercise.

Explanation: Under ASC 718, option values are expensed over the vesting period creating an
unfavorable permanent book-tax difference.

8) In January 2018, Khors Company issued nonqualified stock options to its CEO, Jenny Svaro.
Because the company did not expect Ms. Svaro to leave the company, the options vest at the
time they are granted with a total value of $50,000. In December of 2019, the company
experienced a surge in its stock price, and Ms. Svaro exercised the options. The total bargain
element at the time of exercise was $60,000. For 2019, what is the book-tax difference due to the
options exercised? Is it favorable or unfavorable? $60,000 favorable

For financial purposes, the company deducts the entire $50,000 value of the stock options in
2018, when the stock option is granted. For tax purposes, the company deducts the $60,000
bargain element in 2019, when the stock option is exercised. For 2019, the book-tax difference is
favorable in the amount of $60,000.

9) Which of the following statements regarding excess charitable contributions (contributions in

excess of the modified taxable income limitation) by corporations is true?
A) Corporations may not carry over or carry back excess charitable contributions.
B) Corporations can carry excess charitable contributions over to a future year or back to a prior
year.
C) Corporations can carry excess charitable contributions over to a future year but not
back to a prior year.
D) Corporations can carry excess charitable contributions back to a prior year but not over to a
future year.

Explanation: Corporations may carry excess charitable contributions over for up to five years
but they may not carry them back.

10) Jazz Corporation owns 50% of the Williams Corp. stock. Williams distributed a $10,000
dividend to Jazz Corporation. Jazz Corp.'s taxable income before the dividend was $100,000.
What is the amount of Jazz's dividends received deduction on the dividend it received from
Williams Corp.?

$6,500.

Because Jazz owns more than 20% and less than 80% of the Williams stock, it is entitled to a
65% dividends received deduction ($10,000 × 65%).