CPA CH16

Truck Co., organized January 7th, 2015, has pretax accounting income of $720,000 and taxable income of $950,000 for the year ended December 31, 2015. The only temporary difference is accrued product warranty costs that are expected to be paid as follows: 2016 $ 150,000 2017 $ 70,000 2018 $ 50,000 2019 $ 120,000 Truck has never had any operating losses (book or tax) and does not expect any in the future. There were no temporary differences in prior years. The enacted income tax rates are 30% for 2015, 25% for 2016 through 2019. How should the deferred income tax associated with accrued product warranty be recorded in Truck's December 31, 2015 balance sheet? Multiple Choice $97,500 Asset $117,000 Asset $97,500 Liability $117,000 Liability

$97,500 Asset Explanation Warranty expenses are deductible in the year accrued for financial purposes, but deductible in the year paid for tax purposes. Therefore, the temporary difference for warranty expenses is a deductible temporary difference and will produce a deferred tax asset. Truck will calculate the deferred tax asset by multiplying the amount of the warranty liability that will be incurred in each future period by the enacted future tax rate for that period and adding the amounts. A total of $390,000 ($150,000 + $70,000 + $50,000 + $120,000) will be paid during 2016 to 2019, when the tax rate is 25%. As a result, those amounts will generate a deferred tax asset of $97,500.

Packer Co.'s 2015 income statement reported $130,000 in income before provisions for income taxes. To compute the provision for federal income taxes, the following 2015 data are provided: Rent received in advance $ 22,000 Income from exempt municipal bonds $ 17,000 Depreciation deducted for income tax purposes $ 18,000 Depreciation deducted for financial reporting $ 10,000 If the alternative minimum tax provisions are ignored, what amount should Packer report as taxable income? Multiple Choice 130,000 117,000 125,000 127,000

127,000 Explanation Financial statement income is increased by $22,000 of rent received in advance because it is taxable in the year received. It will be reduced by the $17,000 municipal bond interest because it is not taxable. It will also be reduced by the additional amount of $8,000 deducted for tax purposes ($18,000 for tax - $10,000 for financial). As a result, taxable income is $127,000 ($130,000 + $22,000 - $17,000 - $8,000).

A company preparing its financial statements under IFRS has a net operating loss carry-forward that has the potential to save a total of $40,000 in taxes, $5,000 in the next taxable period and $35,000 in the remaining carry-forward periods. The company considers it likely that there will be sufficient future taxable income to obtain all except $3,000 of the benefit from the carry-forward. The company will recognize Multiple Choice A current deferred tax asset of $5,000 and a noncurrent deferred tax asset of $35,000. A current deferred tax asset of $5,000 and a noncurrent deferred tax asset of $32,000. Deferred tax assets are not recognized under IFRS. A noncurrent deferred tax asset of $37,000.

A noncurrent deferred tax asset of $37,000. Explanation IFRS allows the recognition of tax benefits from tax loss carry-forwards only to the extent that future profits are expected to be available to enable their application. In this case, only a total of $37,000 will be recognized. IFRS requires that all deferred tax assets and liabilities are recognized as noncurrent.

Chapter 16 Roger CPA Question 16-6 When accounting for income taxes, a permanent difference occurs in which of the following scenarios? Multiple Choice The accrual method of accounting is used. An item is included in the calculation of net income in one year and in taxable income in a different year. An item is included in the calculation of net income, but is neither taxable nor deductible. An item is treated identically for financial and for tax purposes.

An item is included in the calculation of net income, but is neither taxable nor deductible. Explanation An item included in the calculation of net income, but neither taxable nor deductible creates a difference that does not reverse over time and therefore represents a permanent difference. The fact that the accrual method is used does not create a difference unless it is used for financial reporting purposes only. An item included in the calculation of net income in one year and in taxable income in a different year creates a difference that will be reversed over time and therefore represents a temporary difference. An item treated identically for financial and for tax purposes does not create either a permanent or a temporary difference.

Because Gene Co. uses different methods to depreciate buildings for financial statement and income tax purposes, Gene has temporary differences that will reverse during the next year and reduce taxable income. Deferred income taxes that are based on these temporary differences should be classified in Gene's balance sheet as a: Multiple Choice Noncurrent liability. Current liability. Noncurrent asset. Current asset.

Noncurrent asset. Explanation A difference in methods for computing depreciation for financial statement and tax purposes is a temporary difference. Since the reversal will reduce future taxable income, it is a deductible temporary difference, which will result in a deferred tax asset. Despite the fact that it will reverse in the next period, it is a noncurrent asset because the temporary difference relates to buildings, a noncurrent asset.