61) When using the Bardahl formula, an increase in accounts payable (while holding purchases and operating expenses constant) has which of the following effects on the working capital requirements?
A) increase
B) decrease
C) no effect
D) increase, decrease, or no effect, depending on other factors
62) Identify which of the following statements is true.
A) A corporation accumulates earnings to fund the redemption of a shareholder’s stock following her death so as to provide her estate with liquidity to pay death taxes. Such an accumulation of earnings is a reasonable business need.
B) A corporation accumulates earnings to fund a buy-sell agreement. Such an accumulation of earnings is a reasonable business need.
C) A corporation’s net capital gain (minus any federal income taxes paid with respect to such gain) increases the tax base for the accumulated earnings tax.
D) All of the above are false.
63) A corporation cannot reasonably accumulate earnings to
A) protect against pending litigation.
B) fund an employee retirement plan.
C) self-insure.
D) redeem stock of an elderly shareholder where such accumulation occurs prior to the shareholder’s death.
64) The accumulated earnings tax is imposed at what rate?
A) 10%
B) 15%
C) 20%
D) 35%
65) When computing the accumulated earnings tax, which of the following is not a reduction to arrive at accumulated taxable income?
A) accumulated earnings credit
B) NOL deduction claimed
C) accrued federal income taxes
D) dividends-paid deduction
66) Identify which of the following statements is true.
A) Payment of deficiency dividends will prevent the imposition of the accumulated earnings tax.
B) All corporations are exempt from the accumulated earnings tax on their first $250,000 of accumulated earnings.
C) A health service corporation can claim an accumulated earnings credit of $250,000.
D) All of the above are false.
67) When computing the accumulated earnings tax, the dividends-paid deduction is not available for
A) dividends paid during the tax year.
B) throwback dividends.
C) stock dividends.
D) All of the above are deductible.
68) In determining accumulated taxable income for the purpose of the accumulated earnings tax, which one of the following is allowed as a deduction?
A) excess charitable contributions
B) dividends-received deduction
C) net operating loss deduction
D) net capital loss for the current year
69) Which of the following is not permitted an accumulated earnings credit based on reasonable needs of the business?
A) an operating company
B) an investment company
C) an incorporated engineer
D) All of the above are permitted a credit based on reasonable business needs.
70) Which of the following actions cannot be used to eliminate a potential accumulated earnings tax liability situation involving a corporation owned by a mother and a father?
A) Create plans to invest retained earnings in a plant expansion.
B) Make a cash distribution within 2 1/2 months after the end of the tax year.
C) Make a deficiency distribution within 90 days of the date on which the IRS determines that an accumulated earnings tax liability is owed.
D) Liquidate the corporation.
71) Identify which of the following statements is false.
A) A corporation files a Schedule AE to report the amount of its accumulated earnings tax liability for the tax year.
B) A corporation that is subject to the accumulated earnings tax may also be subject to interest and underpayment penalties on the amount of the unpaid liability.
C) A corporation files a Schedule PH to report its PHC tax for the tax year.
D) The corporate AMT liability is reported on Form 4626.
The Correct Answer and Explanation is :
61) When using the Bardahl formula, an increase in accounts payable (while holding purchases and operating expenses constant) has which of the following effects on the working capital requirements?
Answer: B) decrease
Explanation: The Bardahl formula relates to the working capital cycle of a business. An increase in accounts payable (while keeping purchases and operating expenses constant) delays cash outflows for goods and services purchased on credit. This effectively reduces the amount of cash a company needs to maintain on hand for its operations, decreasing its working capital requirements. Accounts payable are part of current liabilities, and the more a company can defer payments to suppliers, the less cash it needs to have immediately available.
62) Identify which of the following statements is true.
Answer: B) A corporation accumulates earnings to fund a buy-sell agreement. Such an accumulation of earnings is a reasonable business need.
Explanation: Accumulating earnings for a buy-sell agreement is generally considered a reasonable business need, as it involves preparing for an eventuality like the death or retirement of a shareholder, where the business may need cash to buy out the shareholder’s equity. This aligns with the “reasonable needs” test used by the IRS when assessing accumulated earnings tax. On the other hand, accumulating earnings for tax avoidance or personal purposes, such as funding stock redemption for a deceased shareholder’s estate, is generally not seen as a valid reason.
63) A corporation cannot reasonably accumulate earnings to
Answer: D) redeem stock of an elderly shareholder where such accumulation occurs prior to the shareholder’s death.
Explanation: Accumulating earnings to redeem stock of an elderly shareholder before their death is generally not considered a reasonable business need under IRS rules. The IRS expects that such redemption plans should be planned in advance (not as a reaction to the shareholder’s age or health) and not be used as a means to avoid taxation. This type of accumulation could be seen as primarily for the benefit of the shareholder’s estate, rather than for the corporation’s business needs.
64) The accumulated earnings tax is imposed at what rate?
Answer: B) 15%
Explanation: The accumulated earnings tax is a penalty tax imposed on corporations that retain earnings beyond what is considered necessary for reasonable business needs. As of the latest tax law, the tax rate is 15%. This tax is meant to prevent businesses from avoiding income taxes by accumulating excessive earnings instead of distributing them as dividends.
65) When computing the accumulated earnings tax, which of the following is not a reduction to arrive at accumulated taxable income?
Answer: C) accrued federal income taxes
Explanation: Accrued federal income taxes are not deductible when computing accumulated taxable income for the accumulated earnings tax. The allowable deductions to reduce accumulated taxable income typically include accumulated earnings credits, net operating loss (NOL) deductions, and dividends-paid deductions, but accrued federal income taxes are not included.
66) Identify which of the following statements is true.
Answer: A) Payment of deficiency dividends will prevent the imposition of the accumulated earnings tax.
Explanation: Deficiency dividends are payments made by a corporation to avoid the accumulated earnings tax. If the IRS determines a corporation has retained more earnings than necessary for its business needs, it may impose this tax. However, if the corporation makes a deficiency dividend distribution (i.e., paying out retained earnings) within a specified time frame, it can avoid the tax.
67) When computing the accumulated earnings tax, the dividends-paid deduction is not available for
Answer: C) stock dividends.
Explanation: Stock dividends are not deductible when calculating the accumulated earnings tax. While cash dividends and some other forms of distributions can reduce accumulated taxable income, stock dividends do not count because they do not involve a cash outflow from the corporation.
68) In determining accumulated taxable income for the purpose of the accumulated earnings tax, which one of the following is allowed as a deduction?
Answer: C) net operating loss deduction
Explanation: When computing accumulated taxable income, a corporation can deduct net operating losses (NOLs) incurred in prior years. This helps offset accumulated earnings that might otherwise be subject to the accumulated earnings tax. However, other items like excess charitable contributions or net capital losses are not allowed as deductions.
69) Which of the following is not permitted an accumulated earnings credit based on reasonable needs of the business?
Answer: B) an investment company
Explanation: Investment companies are generally not allowed an accumulated earnings credit for reasonable business needs. This is because their primary business involves managing investments, and the IRS typically views the retention of earnings for investment purposes as not constituting a valid business need for accumulation. Operating companies, on the other hand, can accumulate earnings for legitimate business expansion needs.
70) Which of the following actions cannot be used to eliminate a potential accumulated earnings tax liability situation involving a corporation owned by a mother and a father?
Answer: C) Make a deficiency distribution within 90 days of the date on which the IRS determines that an accumulated earnings tax liability is owed.
Explanation: While deficiency distributions can help eliminate the accumulated earnings tax liability, they must be made prior to the IRS determining that a liability is owed. A deficiency distribution made after the IRS’s determination of the liability does not prevent the tax from being imposed. Preemptive action is required to avoid the tax.
71) Identify which of the following statements is false.
Answer: A) A corporation files a Schedule AE to report the amount of its accumulated earnings tax liability for the tax year.
Explanation: The statement is false because a corporation does not file a Schedule AE. Instead, corporations subject to the accumulated earnings tax report their liabilities on Schedule PH, which is used for reporting personal holding company tax (PHC) liabilities. Schedule AE is used for reporting accumulated earnings tax but it was discontinued after 2019, and such tax is now reported through the general corporate tax return.