Chapter 13
1. Continuity of life refers to whether an entity continues to operate or technically dissolves and ceases to exist in its
present form when a change occurs in the ownership structure.
a.
True
b.
False
True
2. As a limited partner in Technonics, Ltd., Dave is allowed to participate in the management of the business.
a.
True
b.
False
False
3. S corporation status is attained when a qualifying corporation elects this status.
a.
True
b.
False
True
4. There must be at least one member of a Limited Liability Company who is personally liable for the debts of the
business.
a.
True
b.
False
False
5. Paris is a CPA and a partner in a small firm. To limit her liability from the negligence or misconduct of her partners,
they can form the firm as a Limited Liability Partnership.
a.
True
b.
False
True
6. Sole proprietors are allowed to deduct owner-employee salaries and fringe benefits.
a.
True
b.
False
False
7. A corporation in which the performance of personal activities is the principal pursuit, services are performed by owner-
employees, and the owner-employees own 95% or more of the stock is taxed at a flat rate of 35%.
a.
True
b.
False
True
8. A guaranteed payment is a payment made to a partner for specific services performed by the partner and is made
without regard to the partnership’s income.
a.
True
b.
False
True
9. The shareholder of an S corporation can reduce income taxes by passing income to the owner-employee as a dividend
rather than paying salary.
Chapter 13
a.
True
b.
False
False
10. Once a corporation is formed, an exchange of the corporation’s stock for property is always a nontaxable event.
a.
True
b.
False
False
11. Partnership debts assumed by a partner is deemed to be a cash contribution and increases the partner’s basis in the
partnership.
a.
True
b.
False
True
12. Start-up and organizational costs can be expensed or capitalized and amortized over 60 months based on the election
of the taxpayer.
a.
True
b.
False
False
13. Partners have extensive flexibility in choosing their tax year-end for their partnership.
a.
True
b.
False
False
14. Corporations can use a 52– to 53–week fiscal year end, but the year must end on Saturday each year.
a.
True
b.
False
False
15. Corporations generally are required to use the accrual method of accounting.
a.
True
b.
False
True
16. Limited liability refers to
a.
b.
c.
d.
c
17. Nontax characteristics that should be considered in choosing an entity form include which of the following?
I.
Number of owners.
II.
Limited liability for owners.
III.
Ability to participate in management.
Chapter 13
IV.
Transferability of ownership interests.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Statements II and IV are correct.
d.
Statements I, II, and IV are correct.
e.
Statements I, II, III, and IV are correct.
e
18. A sole proprietor
I.
Can be an employee of the business.
II.
Has limited liability for the debts of the business.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
19. General partners
I.
Are liable for all debts of the partnership.
II.
Are taxed on distributions received from the partnership.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
20. A limited partner
I.
Can lose any or all of their investment in the partnership.
II.
Can participate in the management of the partnership.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
21. Limited liability refers to an owner’s liability for which of the following?
I.
The amount invested in the entity.
II.
The liabilities of the corporation that the owner has personally guaranteed.
III.
All of the outstanding liabilities of the corporation.
IV.
Only for the corporation’s loans from financial institutions
a.
Only statement I is correct.
b.
Only statement III is correct.
c.
Statements II and IV are correct.
Chapter 13
d.
Statements I, II, and IV are correct.
e.
Statements I, II, III, and IV are correct.
a
22. Which of the following characteristics distinguish a corporation from other forms of businesses?
I.
Centralization of management
II.
Continuity of life
III.
Free transferability of ownership interests
IV.
Limited liability
V.
Profit motive
a.
All are distinguishing characteristics.
b.
Statements I, II, III and IV are correct.
c.
Only statement III is correct.
d.
Statements IV and V are correct.
e.
Statements I, II, IV, and V are correct.
23. Which of the following facts would prevent an S Corporation election?
I.
Magnificent Corporation has125 shareholders.
II.
Simms Corporation, incorporated in Kansas, has only one class of common stock issued
and outstanding.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
24. Which of the following will render a corporation ineligible for S corporation status?
I.
The corporation has 125 stockholders.
II.
One of the stockholders is another corporation.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
25. Which of the following will render a corporation ineligible for S corporation status?
I.
The corporation has 95 stockholders.
II.
One of the stockholders is a citizen- resident of Canada.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
26. Western Corporation began operations in 1999. Its fiscal year end is October 31. This date coincides with its natural
business year. On June 2, 2014, Western elects S corporation status. All of the corporate shareholders consented to the
election. The earliest date the corporation is recognized as an S corporation is
a.
November 1, 2016.
b.
January 1, 2015.
c.
June 2, 2015.
d.
November 1, 2015.
e.
December 31, 2015.
d
27. Assume a corporation’s status as an S corporation is revoked or terminated. How many years must the corporation wait
before making a new S corporation election, in absence of IRS consent to an earlier election?
a.
1
b.
3
c.
5
d.
7
e.
A new election is not permitted.
c
28. Which of the following is/are correct with respect to limited liability companies (LLCs)?
I.
An advantage of an LLC when compared to a regular corporation is the ability to pass
through tax attributes to owners.
II.
A disadvantage of a general partnership when compared with an LLC is the inability of
owners to have limited liability.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
29. A partner in a limited liability partnership (LLP)
I.
Has no liability for acts of malfeasance of any of the other partners.
II.
Has no liability for the debts of the partnership.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
30. Which of the following entities directly bear the burden of income taxes?
I.
Limited Liability Company
II.
Corporations
III.
Partnerships
a.
Only statement I is correct.
b.
Only statement II is correct.
Chapter 13
c.
Statements I and II are correct.
d.
Statements I, II, and III are correct.
31. Julian and Tanya each contribute $50,000 cash to form the M&T Partnership on January 4, 2015. Julian and Tanya
share profits and losses in the ratio of 60% and 40%, respectively. During 2015, the partnership generates ordinary income
of $80,000. A cash distribution of $5,000 is made to Julian in December 2015. How much income must Julian recognize
from the partnership in 2015?
a.
$5,000
b.
$32,000
c.
$45,000
d.
$48,000
e.
$53,000
32. Ricardo is the marketing manager and owns a 40% interest in the Fielder Partnership. Fielder’s taxable income before
considering payments to partners is $80,000. Ricardo withdraws $40,000 for his personal living expenses. How much
income must Ricardo report from Fielder?
a.
$32,000
b.
$40,000
c.
$56,000
d.
$72,000
a
33. Tax characteristics of corporations include which of the following?
I.
At higher income levels, the lower tax rates phase out by the use of a surtax.
II.
The corporate tax rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
34. Rockhill Corporation operates a women’s clothing boutique. Taxable income for the current year is $60,000. What is
Rockhill’s income tax liability?
a.
$- 0 –
b.
$6,000
c.
$9,000
d.
$10,000
e.
$15,000
35. Santana Corporation operates a golf shop. It properly elected Subchapter S status on March 1 of the current year.
Taxable income for the current year is $120,000. What is Santana Corporation’s income tax liability?
a.
$- 0 –
b.
$3,000
Chapter 13
c.
$18,000
d.
$30,050
e.
$40,800
a
36. Danube Corporation operates a theatrical costume shop. Taxable income for the current year is $1,000,000. What is
Danube’s income tax liability?
a.
$- 0 –
b.
$340,000
c.
$373,250
d.
$390,000
37. Carmen owns 10% of the stock of Fitness Design Corporation, and is its manager. Fitness Design reports taxable
income of $70,000 and pays $60,000 in dividends to shareholders before considering payments to Carmen. Carmen
receives a $50,000 salary. What is Carmen’s income from Fitness Design?
a.
$6,000
b.
$7,000
c.
$50,000
d.
$56,000
e.
$57,000
38. Claudia owns 10% of the stock of Fitness Design Corporation, an S corporation. She is also its controller. Fitness
Design reports taxable income of $70,000 and pays $60,000 in dividends to shareholders before considering Claudia’s
salary. Claudia receives a $75,000 salary. What is Claudia’s income from Fitness Design?
a.
$6,000
b.
$74,500
c.
$75,000
d.
$81,000
e.
$82,000
39. Marty owns 30% of the stock of Myron Corporation. Myron reports taxable income of $100,000 and pays $80,000 in
dividends to shareholders. What is Marty’s income from Myron Corporation?
a.
$-0-
b.
$24,000
c.
$30,000
d.
$54,000
e.
$80,000
40. Personal Service Corporations (PSCs) have certain special characteristics. Which of the following describes a PSC?
I.
A PSC is not permitted to reduce any of its income from portfolio investments with a
passive activity loss.
II.
The owner-employees aggregately own more than 95% of the corporate stock.
III.
The performance of personal services by owner-employees is the principal activity.
Chapter 13
IV.
PSCs are subject to a flat income tax of 35% of taxable income.
a.
Only statement I is correct
b.
Only statement III is correct.
c.
Only statements III and IV are correct.
d.
Only statements II, III, and IV are correct.
e.
Statements I, II, III, and IV are correct.
e
41. Larry and Laureen own LL Legal Services Corporation equally. The two owners are practicing attorneys employed by
the corporation. The only business activity of the entity is the provision of legal services. During the current tax year, the
corporation’s taxable income is $100,000. What is the corporation’s income tax liability?
a.
$22,250
b.
$34,000
c.
$35,000
d.
$26,150
c
42. Leonor is the financial vice-president and owns 60% of Ruston Co. Ruston is an S corporation and reports taxable
income of $200,000, before Leonor’s salary. Leonor receives a $50,000 salary. What is Leonor’s income from Ruston?
a.
$50,000
b.
$120,000
c.
$140,000
d.
$170,000
43. Maria owns 30% of the stock of Marshmallow Inc., an electing S corporation. Marshmallow reports taxable income of
$100,000 and pays $80,000 in dividends to shareholders. What is Maria’s income from Marshmallow?
a.
$-0-
b.
$24,000
c.
$30,000
d.
$54,000
e.
$80,000
c
44. “Double taxation” occurs
a.
because corporate tax rates are double that of individual taxpayers for the same amount of taxable income.
b.
when corporations pay taxable dividends to shareholders.
c.
because corporations receive a deduction for the distribution of dividends to shareholders.
d.
when individual taxpayers pay for their shares of corporate stock.
45. Which of the following entities can provide fringe benefits to owner/employees that are not taxable to the
owner/employee?
I.
Sole proprietorships
II.
S corporations
III.
Partnerships
Chapter 13
IV.
Corporations
a.
Statements I and II are correct.
b.
Statements II, III and IV are correct.
c.
Statements II and IV are correct.
d.
Only statement IV is correct.
e.
Statements I and III are correct.
46. Jack owns a 50% interest in the Westhaven Partnership. Jack receives a distribution of $100,000 from Westhaven and
is provided with medical insurance and a $50,000 group-term life insurance policy that costs the company $4,000.
Westhaven’s taxable income before considering the payments to and on behalf of Jack is $180,000. How much income
does Jack have from Westhaven?
a.
$4,000
b.
$90,000
c.
$92,000
d.
$94,000
e.
$100,000
c
47. Carlotta is the director of golf for Birck Enterprises, an electing S corporation. Carlotta owns a 20% interest in Birck.
She receives a salary of $60,000 and fringe benefits costing $6,000. Birck’s taxable income before considering the
payments to and on behalf of Carlotta is $250,000. Birck’s distributes a $50,000 dividend to its shareholders. How much
income does Carlotta have from Birck?
a.
$66,000
b.
$70,000
c.
$96,800
d.
$98,000
e.
$102,800
e
48. Carlos is the contoller for Rooney Corporation. Carlos owns a 20% interest in Rooney. He receives a salary of
$60,000 and fringe benefits costing $6,000. Rooney’s taxable income before considering the payments to and on behalf of
Carlos is $250,000. Rooney distributes a $50,000 dividend to its shareholders. How much income does Carlos have from
Rooney?
a.
$60,000
b.
$70,000
c.
$76,000
d.
$96,800
e.
$102,800
49. Bison Financial Group has a health-care plan for all employees. Dan, an employee, is single and owns 10% of Bison
Financial. In 2015, the company paid $2,000 for Dan’s health plan. Which of the following are correct statements?
I.
If Bison Financial Group is an S corporation, Dan must report the $2,000 as income
and can deduct the $2,000 as an itemized medical expense deduction.
II.
If Bison Financial Group is a partnership, Dan must report the $2,000 as income and
can deduct $2,000 as a deduction for AGI.
Chapter 13
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
50. Pomeroy Corporation has a company health-care plan for all employees. Albert, an employee, owns 15% of the stock.
Philip, also an employee, owns 1% of the stock. The cost to the company of Albert’s health plan is $3,000 and Philip’s is
$2,100. What amount of the health plan must Albert and Philip report as income?
Albert Philip
a.
$-0- $-0-
b.
$3,000 $2,100
c.
$3,000 $-0-
d.
$-0- $2,100
a
51. The Brooks Corporation, an S corporation, has a company health-care plan for all employees. Lars, an employee,
owns 20% of the corporate stock. Dorothy, also an employee, owns 1%. The cost to the company of Lars’ health plan is
$2,800 and Dorothy’s is $3,000. What amount of the health plan must Lars and Dorothy report as income?
Lars Dorothy
a.
$-0- $-0-
b.
$-0- $200
c.
$2,800 $200
d.
$2,800 $-0-
e.
$2,800 $3,000
52. Rosen Group has a company health-care plan for all employees. Will, an employee, owns 10% of Rosen. The cost to
Rosen for Will’s health plan is $2,500. What amount must Will report as income if Rosen is a
Regular
Corporation Partnership
a.
$2,500 $2,500
b.
$-0- $-0-
c.
$-0- $2,500
d.
$2,500 $-0-
c
53. Moses is a 20% partner in an auto parts store where he works full-time. His share of the partnership income is
$70,000, which is also his net-self-employment income.
I.
Moses must pay self-employment tax at the rate of 15.3% on 92.35% of the partnership
income.
II.
Moses is allowed a deduction for AGI for 50% of the self-employment tax he pays
during the year.
a.
Only statement I is correct.
Chapter 13
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
54. June is a 20% owner-employee in the Woodbourne Corporation, an S corporation. She is not paid a salary and her
share of the corporation’s income is $57,000.
I.
June must pay self-employment tax at the rate of 15.3% on her share of the S
corporation’s income.
II.
June must pay Social Security at a rate of 7.65% on her share of the S corporation
income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
55. Foster owns 27% of the Baxter Corporation, whose ordinary income is $100,000. His salary for the year is $50,000.
What amount must Foster pay in Social Security taxes if Baxter is a(n)
Corporation S Corporation
a.
$-0- $3,825
b.
$3,825 $-0-
c.
$3,825 $3,825
d.
$3,825 $7,650
e.
$3,825 $11,475
c
56. During 2015, Jimmy incorporates his data processing business. Jimmy is the sole shareholder. The following assets
are transferred to the corporation:
Cash $2,000
Computer Equipment:
Fair market value 20,000
Adjusted basis 12,000
Original cost 24,000
Furniture:
Fair market value 20,000
Adjusted basis 32,000
Original cost 64,000
How much gain (loss) will Jimmy recognize from the transfer of the assets to the corporation?
a.
$-0-
b.
$(4,000)
c.
$8,000
d.
$20,000
e.
$(12,000)
a
57. During 2015, Jimmy incorporates his data processing business. Jimmy is the sole shareholder. The following assets
are transferred to the corporation:
Cash $2,000
Computer Equipment:
Fair market value 20,000
Adjusted basis 12,000
Original cost 24,000
Furniture:
Fair market value 20,000
Adjusted basis 32,000
Original cost 64,000
What will be the basis of the assets to the corporation after the transfer?
Computer Equipment Furniture
a.
$20,000 $20,000
b.
$12,000 $20,000
c.
$20,000 $32,000
d.
$12,000 $32,000
e.
$24,000 $64,000
58. Gomer is admitted to the Mouton Partnership on July 1, 2015. Gomer contributes ABC common stock purchased in
1991 for $20,000 with a fair market value of $100,000 on July 1, 2015, for a 25% interest in the partnership. After
Gomer’s admission to the partnership, Mouton’s net asset fair market value is $400,000. What is Gomer’s taxable gain or
income due to the exchange of ABC stock for the Mouton Partnership interest?
a.
$- 0 –
b.
$80,000 long-term capital gain.
c.
$80,000 ordinary income.
d.
$80,000 short-term capital loss.
e.
$100,000 ordinary income.
a
59. Chase, Marty and Barry form a partnership. Barry will contribute a building worth $240,000 (adjusted basis of
$110,000), inventory worth $55,000 (adjusted basis of $30,000) and $15,000 in cash for a 25% interest in the partnership.
How much gain will Barry have to recognize from the exchange of his property for the partnership interest?
a.
$-0-
b.
$125,000 ordinary gain.
c.
$130,000 long-term capital gain.
d.
$5,000 ordinary gain.
e.
$130,000 long-term capital gain and $5,000 ordinary loss.
a
60. Sergio and Chris agree to combine their sole proprietorships and form a corporation. Sergio will contribute cash of
$20,000 and business property worth $120,000 (adjusted basis of $50,000) for a 25% interest. Chris will contribute cash
of $200,000 and business property worth $220,000 (adjusted basis of $200,000) for a 75% interest. Which of the
following statements concerning the tax treatment of Sergio and Chris’s exchange of assets is/are correct?
I.
Because neither owner owns more than 80% of the stock in the corporation, the
transfers do not qualify for tax-free treatment.