MGMT 343 Section 001 Fall 2020

Name: Breann Morris

Exam #2

1. (5 points) What is the difference between a temporary and permanent book/tax difference
item? List an example of each:
Permanent differences happen in the tax year they occur in and temporary happens over
several years to reverse the effects of the difference.
 Permanent: Meal expenses
 Temporary: Bad debt expense

2. (5 points) For every $1,000 of deductions for a C Corporation, how much will the
corporation save in taxes? $210

3. (10 points) Woodward Corporation reported pretax book income of $1,200,000. Relative

to this amount, Woodward had favorable temporary differences of $200,000, unfavorable
temporary differences of $150,000, and favorable permanent differences of $120,000 for
tax purposes. Compute the company’s current income tax expense.

Pre-tax $1,200,000
Favor Temp diff (200,000)
Unfav Temp diff 150,000
Favor Perm diff (120,000)
Taxable income $1,030,000
Corp Tax Rate 21%
Tax Expense $216,300

4. (5 points) How does the matching principle relate to the determination of the tax
provision?

The matching principle means that revenues and expenses match in the same period. If a
business has to pay taxes on the payroll at the end of March but doesn’t pay them till the
beginning of next month, the company should recognize tax expense in March.
5. (10 points) X Corporation records Bad Debt Expense of $100,000 for 2020 for book
purposes and $0 for tax purposes. Does this item result in a deferred tax asset or deferred
tax liability? Why? deferred tax liability. Bad debt expense is a temporary account and
since none of the expenses was for tax purposes it caused the liability.

6. (10 points) Does Section 179 expense result in a deferred tax asset or deferred tax
liability? Why? Deferred tax liability. A company can take the whole depreciation of an
item and apply it for the same period.

7. (10 points) This year Bobcat Company reports a deficit in current E&P of ($200,000)
that accrued evenly throughout the year. At the beginning of the year, Bobcat’s
accumulated E&P was $200,000. Bobcat distributed $200,000 to its sole shareholder,
Melanie Rushmore, on June 30 of this year. Melanie’s tax basis in her Bobcat stock
before the distribution was $75,000. What is the tax treatment of the June 30th
distribution? What is Melanie’s ending tax basis in her stock?
$200,000*(181/365)=99178
$200,000-99178=$100,822
Tax basis $75,000

8. (10 points) Hawkeye Company reports a current E&P of $300,000 this year and
accumulated E&P at the beginning of the year of $400,000. Hawkeye distributed
$350,000 to its sole shareholder, Ray Kinsella, on December 31 of this year. Ray’s tax
basis in his Hawkeye stock is $75,000. What is the treatment of this distribution?
$350,000 is treated as a dividend because it’s less than $700,000 in earnings earned by
the company.

9. (10 points) Boilermaker Inc. reported a taxable income of $700,000 this year and paid
federal income taxes of $147,000. Not included in the company’s computation of taxable
income is a tax-exempt income of $42,000, disallowed meals and entertainment expenses
of $45,000, and disallowed expenses related to the tax-exempt income of $2,000.
Compute the company’s current E&P.
$700,000-147,000-45,000-2,000=$506,000+$42,000=$548,000
 10. (20 points) Carla incorporated her sole proprietorship by transferring inventory, a
building, and land to the corporation in return for 100 percent of the corporation’s stock.
The property transferred to the corporation had the following fair market values and
adjusted bases:

Adjusted
  FMV   Basis
Inventory $ 34,000   $ 17,000
Building   200,000     147,000
Land   350,000     329,000
Total $ 584,000   $ 493,000

The corporation also assumed a mortgage of $180,000 attached to the building and land.
The fair market value of the corporation’s stock received in the exchange was $404,000.

a) What is Carla’s basis in the stock received?

493,000-180,000=$313,000
b) What is the corporation’s basis in the property received?
584,000-493,000=$91,000

11.) (5 points) What is the tax result if a transferring group controls less than 80% of a
corporation’s stock following the transfer? It is treated like a sale at fair market value and doesn’t
qualify for tax-free treatment.