Characteristics and Income Taxation of Business Entities - Sample Questions 1 - 6

1. The CFO of XYZ Corporation approached the board of directors with a concern that the company might be holding too much in retained earnings. The firm currently has $2,000,000 in accumulated earnings. Which of the following is TRUE?

(1) The corporation could be subject to an accumulated earnings tax if they don't reduce the retained earnings
(2) The penalty for excess accumulated earnings is 20%
(3) Corporations will sometimes retain their earnings to boost stock price
(4) XYZ corporation could keep $250,000 in earnings and not have to worry about any accumulated earnings tax
(5) The board can reduce earnings by declaring a stock dividend

A) 1 and 2 only
B)
2 and 3 only
C)
3, 4, and 5 only
D)
1, 3, 4, and 5 only
E) 1, 2, 3, 4, and 5


2. Roger has a profitable sole proprietor business that he would like to expand more rapidly to meet higher product demands. Roger makes a good income (over $750,000), but he really needs to raise at least another $5,000,000 to meet his expansion plans. Which would be the most appropriate business entity for Roger?

A) S-Corporation
B)
C-Corporation
C)
Partnership
D) Limited Liability Company

3. All of the following statements concerning S-Corporations are correct EXCEPT?

A) S-corporations are prohibited from having a trust as a shareholder
B)
S-corporations are not allowed to have more than 75 shareholders
C)
S-corporations cannot have more than one class of stock
D) S-corporations avoid double taxation with the payment of dividends

4. Betty owns shares of common stock in her local utility company which pays a $2.50 annual dividend directly into her individual brokerage account. Three years prior, she retired from XYZ Company (an S-corporation) and now travels with her husband. She still owns stock in XYZ Company. Which tax documents should Betty expect to receive at year end

I. Schedule C
II. Schedule K-1
III. W-2
IV. 1099-DIV

A) I and II only
B) I and III only
C) II and IV only
D) I and IV only

5.
Which of the following statements is correct concerning Partnerships?

A) A general partner has limited liability
B)
Partnerships continue after the death of a partner
C)
Partnerships must file a tax return Form 1120
D)
Partnerships are considered a "flowthrough" entity because income passes directly through to the individual partners

6. Greg Jones owns 100% of Jones Motors, Inc., which specializes in rebuilding high-end sports cars. Jones Motors, Inc. also owns 45% of an electronics company called FGR Electronics which pays large dividends to their shareholders. How much dividend exclusion (if any) will Jones Motors, Inc. receive?

A) 100% dividend exclusion
B)
80% dividend exclusion
C)
70% dividend exclusion
D) No exclusion


Answer Key
Related Articles
  1. Career Education & Resources

    The Top RIA Deals of 2015

    It was a big year for change within the RIA industry. Here are 2015's biggest mergers, acquisitions and buyouts.
  2. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  3. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  4. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  5. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  6. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  7. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  8. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  9. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  10. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center