Question

ACCOUNTING TAX QUESTION

Multiple choice

1. Shock Inc. has several uncertain tax positions this year. It should do which of the following:

a. Determine if the probability of the position being sustained upon IRS challenge is greater than 50%.

b. Determine the largest dollar amount of benefit of the position that has a greater than 50% chance of being realized upon settlement.

c. For financial accounting purposes, record the benefit calculated in b.

d. All of the above.

2. Bevco incurred start-up expenditures while investigating the acquisition of a business. With respect to such expenditures, Bevco:

a. Can expense them in the year incurred

b. Must capitalize them and deduct them in the year of liquidation

c. Can expense the first $5,000 in the year incurred and elect to amortize the remaining costs over 180 months.

d. Must capitalize them but may elect to amortize them over 50 months.

3. XYZ is a corporation. It needs to raise some capital and is uncertain whether to issue debt or equity. Wchich of the following statements is true?

a. Both interest payments and dividned payments are nor deductible as expenses.

b. Interest payments are deductible but dividend payments are not deductible as expenses.

c. Principlal repayment and stock retirement are deductible expenses.

d. The shareholders (noncorporate and corporate) are indifferent as to whether they receive interest or dividends.

e. Alll of the above are true.

f. None of the above are true.

Answer 1

Solution:-

1. Shock Inc. has several uncertain tax positions this year. It should do which of the following:-

d. All of the above

Explanation:-

ASC 740 applies a two-step process to evaluating tax positions. ASC 740 refers to the first step as recognition. A company must determine whether it is more likely than not (a greater than 50% probability) that a tax position will be sustained on examination by the IRS or other taxing authority, including resolution of any appeals at the court of last resort (the Supreme Court in the United States), based on the technical merits of the position.

The second step is referred to as measurement. If the tax position meets the more-likely-than-not threshold (a subjective determination), the company must determine the amount of the benefit to record in the financial statements. The company records the largest amount of the benefit, as calculated on a cumulative probability basis, that is more-likely-than-not to be realized on the ultimate settlement of the tax position. The portion not recognized is referred to as an “unrecognized tax benefit” and is recorded as an increase in income taxes payable on the balance sheet.

2. Bevco incurred start-up expenditures while investigating the acquisition of a business. With respect to such expenditures, Bevco:-

c. Can expense the first $5,000 in the year incurred and elect to amortize the remaining costs over 180 months.

Explanation:-

Starting in 2010 and thereafter, or both start up expenses and organization expenses, you can deduct up to $5,000 of start up expenses in the year in which the business begins. Any startup costs that exceed this $5,000 amount must be amortized over a period of at least 180 months as long as the total start up costs are less than $50,000. However, Congress can’t do anything with any degree of simplicity. If the startup costs exceed $50,000, for every dollar that these costs exceed $60,000, you lose part of your $5,000 immediate write off.

Thus, if you incur $55,000 of start up costs, you can deduct only $5,000 of these costs. The remainder must be amortized over at least the next 180 months. If your start up costs are $60,000 or more, all of it must be amortized over 180 months or more.

3. XYZ is a corporation. It needs to raise some capital and is uncertain whether to issue debt or equity. Wchich of the following statements is true:-

b. Interest payments are deductible but dividend payments are not deductible as expenses.