Chapter 16 - Corporate Operations

Chapter 16 Corporate Operations SOLUTIONS MANUAL Discussion Questions
1. [LO 1] In general terms, identify the similarities and differences between the corporate taxable income formula and the individual taxable income formula. Similarities: Both start with the gross income (income after exclusions) for the taxable year. Both formulas reduce gross income by deductions to determine taxable income. Both formulas apply tax rates to taxable income to determine the tax liability. Finally, both formulas reduce the tax liability by credits and tax payments to determine taxes due or the refund. Both formulas include are allowed to take deductions for business expenses to come to taxable income. Differences: Individuals distinguish deductions between for and from AGI deductions and they report adjusted gross income. Corporations don’t distinguish deduction types and don’t report adjusted gross income. This means corporations don’t itemize deductions nor do they deduct standard deductions. Finally, unlike individuals corporations don’t deduct personal exemptions. 2. [LO 1] Is a corporation’s choice of its tax year independent from its year-end for financial accounting purposes? No. The tax year must be the same year as it uses for financial accounting. 3. [LO 1] Can taxable corporations use the cash method of accounting? Explain. The three types of overall accounting methods which are available to corporations are accrual, cash, and hybrid. Generally, corporations must use the accrual method of accounting unless it is a small corporation (average gross receipts for the past 3 years are $5 million or less). For tax purposes, corporations with average gross receipts for the past three years of $5 million or less may use the cash method of accounting. Corporations that have not been in existence for at least three years may compute their