Exam 3

15. Recognition of tax benefits in the loss year due to a loss carryforward requires a. the establishment of a deferred tax liability. b. the establishment of a deferred tax asset. c. the establishment of an income tax refund receivable. d. only a note to the financial statements

B

1 Taxable income of a corporation differs from pretax financial income because of Permanent Temporary Differences Differences a. No No b. No Yes c. Yes Yes d. Yes No

C

14. Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 20% in 2025, its first year of operations. In 2025, the company had the following transactions: Received rent from Jane, Co. for 2026 $ 96,000 Municipal bond income 120,000 Depreciation for tax purposes in excess of book depreciation 60,000 Installment sales profit to be taxed in 2026 162,000 Which of the following deferred tax accounts and balances would Rowen report atDecember 31, 2025? Account _ Balance a. Deferred Tax Asset $24,000 b. Deferred Tax Liability $24,000 c. Deferred Tax Asset $44,400 d. Deferred Tax Liability $44,400

($60,000 + $162,000) x .20 = $19,200 Deferred tax asset.

16. Recognizing a valuation allowance for a deferred tax asset requires that a company a. consider all positive and negative information in determining the need for a valuationallowance. b. consider only the positive information in determining the need for a valuationallowance. c. take an aggressive approach in its tax planning. d. pass a recognition threshold, after assuming that it will be audited by taxing authorities

A

2. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Future Taxable Amounts Deductible Amounts a. Yes Yes b. Yes No c. No Yes d. No No

A

2.8. The computation of pension expense includes all the following except a. service cost component measured using current salary levels. b. interest on projected benefit obligation. c. expected/actual return on plan assets. d. amortization of prior service cost

A

9. Which of the following temporary differences results in a deferred tax asset in the yearthe temporary difference originates? I. Accrual for product warranty liability II. Subscriptions received in advance III. Prepaid insurance expense a. I and II only b. II only c. III only d. I and III only

A

19. Horner Corporation has a deferred tax asset at December 31, 2026 of $200,000 due tothe recognition of potential tax benefits of an operating loss carryforward. The enactedtax rates are as follows: 30% for 2023-2025; 25% for 2026; and 20% for 2027 andthereafter. Assuming that management expects that only 50% of the related benefits willbe realized, a valuation account should be established in the amount of a. $100,000. b. $40,000. c. $35,000. d. $30,000.

A $200,000 x .50 = $100,000.

13. Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 20% in 2025,its first year of operations. In 2025, the company had the following transactions: Received rent from Jane, Co. for 2026 $ 96,000 Municipal bond income 120,000 Depreciation for tax purposes in excess of book depreciation 60,000 Installment sales profit to be taxed in 2026 162,000 Which of the following deferred tax accounts and balances would Rowen report atDecember 31, 2025? Account _ Balance a. Deferred Tax Asset $19,200 b. Deferred Tax Liability $19,200 c. Deferred Tax Asset $31,200 d. Deferred Tax Liability $31,200

A $96,000 x .20 = $19,200 Deferred tax asset

2.1. In a defined benefit plan, a formula is used that a. requires that the benefit of gain or the risk of loss from the assets contributed to thepension plan be borne by the employee. b. defines the benefits that the employee will receive at the time of retirement. c. requires that pension expense and the cash funding amount be the same. d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employee

B

2.10. Gains and losses that relate to the computation of pension expense should be a. recorded currently as an adjustment to pension expense in the period incurred. b. recorded currently and in the future by applying the corridor method which providesthe amount to be amortized. c. amortized over a 15-year period. d. recorded only if a loss is determined

B

2.3. Interest cost included in pension expense recognized for a period by an employersponsoring a defined-benefit pension plan represents the a. shortage between the expected and actual returns on plan assets. b. increase in the projected benefit obligation due to the passage of time. c. increase in the fair value of plan assets due to the passage of time. d. amortization of the discount on accumulated OCI (PSC)

B

2.4. The actual return on plan assets a. is equal to the change in the fair value of the plan assets during the year. b. includes interest, dividends, and changes in the fair value of the fund assets. c. is equal to the expected rate of return times the fair value of the plan assets at thebeginning of the period. d. is equal to interest expenses accrued each year on the projected benefit obligation, just as it does on any discounted debt

B

12. Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 20% in 2025,its first year of operations. In 2025, the company had the following transactions: Received rent from Jane, Co. for 2026 $ 96,000 Municipal bond income 120,000 Depreciation for tax purposes in excess of book depreciation 60,000 Installment sales profit to be taxed in 2026 162,000 What is the amount of income taxes payable for Rowen for 2025? a. $452,400 b. $490,800 c. $514,800 d. $579,600

B $2,700,000 + $96,000 - $120,000 - $60,000 - $162,000 = $2,454,000; $2,454,000 x .20 = $490,800.

2.5. Kraft, Inc. sponsors a defined benefit pension plan. The following data relates to theoperation of the plan for the year 2026: Service cost $ 345,000 Contributions to the plan 330,000 Actual return on plan assets 270,000 Projected benefit obligation (beginning of year) 3,600,000 Fair value of plan assets (beginning of year) 2,400,000 Settlement rate 10% If the actual return equals the expected return on plan assets, the amount of pensionexpense reported for 2026 is a. $345,000. b. $435,000. c. $465,000. d. $705,000.

B $345,000 + ($3,600,000 × .10) - $270,000 = $435,000

2.7. At December 31, 2026, the following information was provided by the Vargas Corp.pension plan administrator: Fair value of plan assets $5,400,000 Accumulated benefit obligation 6,700,000 Projected benefit obligation 8,900,000 What is the amount of the pension liability that should be shown on Vargas' December31, 2026 balance sheet? a. $8,900,000 b. $3,500,000 c. $2,200,000 d. $1,300,000

B $8,900,000 - $5,400,000 = $3,500,00

5. At the end of 2024, its first year of operations, Hopkins Company prepared areconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2025 when it isexpected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 20% for all years.Income taxes payable is a. $0. b. $200,000. c. $600,000. d. $900,000.

B ($1,000,000 × 20%) = $200,000

4. At the beginning of 2025, Pitman Co. purchased an asset for $1,800,000 with an estimated useful life of 5 years and an estimated salvage value of $150,000. For financial reporting purposes, the asset is being depreciated using the straight-line method; for tax purposes, the double-declining-balance method is being used. Pitman's tax rate is 20% for 2025 and all future years. At the end of 2025, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet? Account _ Balance a.Deferred Tax Asset $78,000 b. Deferred Tax Liability $78,000 c. Deferred Tax Asset $117,000 d. Deferred Tax Liability $117,000

B ($1,470,000 - $1,080,000) x .20 = $78,000 Deferred tax liability.

2.6. The following data are for the pension plan for the employees of Lockett Company. 1/1/25 12/31/25 12/31/26 Accumulated benefit obligation $5,000,000 $5,200,000 $6,800,000 Projected benefit obligation 5,400,000 5,600,000 7,400,000 Plan assets (at fair value) 4,600,000 6,000,000 6,600,000 AOCL - net loss -0- 960,000 1,000,000 Settlement rate (for year) 10% 9% Expected rate of return (for year) 8% 7% Lockett's contribution was $840,000 in 2026 and benefits paid were $750,000. Lockettestimates that the average remaining service life is 15 years.The actual return on plan assets in 2026 was a. $600,000. b. $510,000. c. $

B ($6,600,000 - $6,000,000) - $840,000 + $750,000 = $510,000

18. Wilcox Corporation reported the following results for its first three years of operation: 2024 income (before income taxes) $ 300,000 2025 loss (before income taxes) (2,700,000) 2026 income (before income taxes) 3,000,000 There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 20% for 2024 and 2025, and 30% for 2026. Assuming that Wilcox elects to use the carry forward provision and not the carry back provision, what income (loss) is reported in 2025? a. $(2,700,000) b. $(1,890,000) c. $ -0- d. $(2,640,000)

B (($2,700,000) × 30%) = ($810,000); ($2,700,000) - ($810,000) = ($1,890,000)

2.12. The following data are for the pension plan for the employees of Lockett Company. 1/1/25 12/31/25 12/31/26 Accumulated benefit obligation $5,000,000 $5,200,000 $6,800,000 Projected benefit obligation 5,400,000 5,600,000 7,400,000 Plan assets (at fair value) 4,600,000 6,000,000 6,600,000 AOCL - net loss -0- 960,000 1,000,000 Settlement rate (for year) 10% 9% Expected rate of return (for year) 8% 7% Lockett's contribution was $840,000 in 2026 and benefits paid were $750,000. Lockettestimates that the average remaining service life is 15 years.Assume that the actual return on plan a

B 7% x $6,000,000 = $420,000; $510,000 - $420,000 = $90,000

2.2. Alternative methods exist for the measurement of the pension obligation (liability). Whichmeasure requires the use of future salaries in its computation?a. Vested benefit obligation b. Accumulated benefit obligation c. Projected benefit obligation d. Restructured benefit obligation

C

2.9. When a company amends a pension plan, for accounting purposes, prior service costsshould be a. treated as a prior period adjustment because no future periods are benefited. b. amortized in accordance with procedures used for income tax purposes. c. recorded in other comprehensive income (PSC). d. reported as an expense in the period the plan is amended

C

17. Operating income and tax rates for C.J. Company's first three years of operations wereas follows: Income _ Enacted tax rate 2024 $400,000 25% 2025 ($1,000,000) 20% 2026 $1,680,000 30% Assuming that C.J. Company opts to carryforward its 2025 NOL, what is the amount ofdeferred tax asset or liability that C.J. Company would report on its December 31, 2025balance sheet? Amount _ Deferred tax asset or liability a. $200,000 Deferred tax liability b. $300,000 Deferred tax liability c. $300,000 Deferred tax asset d. $200,000 Deferred tax asset

C $1,000,000 x .30 = $300,000 DTA

3. At the beginning of 2025, Pitman Co. purchased an asset for $1,800,000 with anestimated useful life of 5 years and an estimated salvage value of $150,000. Forfinancial reporting purposes, the asset is being depreciated using the straight-linemethod; for tax purposes, the double-declining-balance method is being used. Pitman'stax rate is 20% for 2025 and all future years.At the end of 2025, what are the book basis and the tax basis of the asset? Book basis Tax basis a. $1,320,000 $ 930,000 b. $1,470,000 $ 930,000 c. $1,470,000 $1,080,000 d. $1,320,000 $1,080,000

C $1,800,000 - [($1,800,000 - $150,000) / 5)] = $1,470,000; $1,800,000 - ($1,800,000 x 1/5 x 2) = $1,080,000

7. At the end of 2024, its first year of operations, Hopkins Company prepared areconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2025 when it isexpected to be paid. Use of the depreciable assets will result in taxable amounts of$2,000,000 in each of the next three years. The income tax rate is 20% for all years.The amount of deferred tax liability to be recognized is a. $800,000. b. $600,000. c. $1,200,000. d. $1,000,000.

C ($6,000,000 × 20%) = $1,200,000

10. An example of a permanent difference is a. proceeds from life insurance on officers. b. interest expense on money borrowed to invest in municipal bonds. c. insurance expense for a life insurance policy on officers. d. All of these answers are correct as they are all examples of permanent differences

D

11. A major distinction between temporary and permanent differences is a. permanent differences are not representative of acceptable accounting practice. b. temporary differences occur frequently, whereas permanent differences occur onlyonce. c. once an item is determined to be a temporary difference, it maintains that status;however, a permanent difference can change in status with the passage of time. d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

D

8. Which of the following differences would result in future taxable amounts?a. expenses or losses that are tax deductible after they are recognized in financial income b. revenues or gains that are taxable before they are recognized in financial income c. revenues or gains that are recognized in financial income but are never included intaxable income d. expenses or losses that are tax deductible before they are recognized in financial income

D

2.14. On January 1, 2026, Parks Co. has the following balances: Projected benefit obligation $5,600,000 Fair value of plan assets 5,000,000 The settlement rate is 10%. Other data related to the pension plan for 2026 are: Service cost $320,000 Amortization of prior service costs 72,000 Contributions 360,000 Benefits paid 335,000 Actual return on plan assets 352,000 Amortization of net gain 24,000 The balance of the projected benefit obligation reported at December 31, 2026 is a. $5,992,000. b. $6,128,000. c. $6,480,000. d. $6,145,000.

D $5,600,000 + $320,000 - $335,000 + ($5,600,000 × .10) = $6,145,000

6. At the end of 2024, its first year of operations, Hopkins Company prepared areconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2025 when it isexpected to be paid. Use of the depreciable assets will result in taxable amounts of$2,000,000 in each of the next three years. The income tax rate is 20% for all years.The deferred tax asset to be recognized is a. $200,000. b. $400,000. c. $600,000. d. $800,000.

D ($4,000,000 × 20%) = $800,00

2.13. The following data are for the pension plan for the employees of Lockett Company. 1/1/25 12/31/25 12/31/26 Accumulated benefit obligation $5,000,000 $5,200,000 $6,800,000 Projected benefit obligation 5,400,000 5,600,000 7,400,000 Plan assets (at fair value) 4,600,000 6,000,000 6,600,000 AOCL - net loss -0- 960,000 1,000,000 Settlement rate (for year) 10% 9% Expected rate of return (for year) 8% 7% Lockett's contribution was $840,000 in 2026 and benefits paid were $750,000. Lockett estimates that the average remaining service life is 15 years. The corridor for 2026 was $600,000. T

D ($960,000 - $600,000) ÷ 15 = $24,000

2.11. The following information is related to the pension plan of Long, Inc. for 2026. Actual return on plan assets $400,000 Amortization of net gain 165,000 Amortization of prior service cost due to increase in benefits 300,000 Expected return on plan assets 460,000 Interest on projected benefit obligation 725,000 Service cost 1,700,000 Pension expense for 2026 is a. $2,490,000. b. $2,430,000. c. $2,160,000. d. $2,100,000

D 1,700,000+725,000-460,000+300,000-165,000 = $2,100,000