Accy 304: Ch 19
A temporary difference arises when a revenue item is reported for tax purposes in a period After it is reported in financial income Before it is reported in financial income a. Yes Yes b. Yes No c. No Yes d. No No
A
Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture. For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%. If Ewing's December 31, 2011, balance sheet includes a deferred tax liability of $300,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of a. $2,500,000. b. $1,000,000. c. $750,000. d. $300,000.
A
Horner Corporation has a deferred tax asset at December 31, 2011 of $80,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2008-2010; 35% for 2011; and 30% for 2012 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of: a. $40,000 b. $16,000 c. $14,000 d. $12,000
A
Larsen Corporation reported $100,000 in revenues in its 2010 financial statements, of which $44,000 will not be included in the tax return until 2011. The enacted tax rate is 40% for 2010 and 35% for 2011. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2010? a. $15,400 b. $17,600 c. $19,600 d. $22,400
A
Lehman Corporation purchased a machine on January 2, 2009, for $2,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2009 $400,000 2012 $230,000 2010 640,000 2013 230,000 2011 384,000 2014 116,000 Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Lehman's balance sheet at December 31, 2010, should be Deferred Tax Liability Current Noncurrent a. $0 $72,000 b. $4,800 $67,200 c. $67,200 $4,800 d. $72,000 $0
A
Lyons Company deducts insurance expense of $84,000 for tax purposes in 2010, but the expense is not yet recognized for accounting purposes. In 2011, 2012, and 2013, no insurance expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $72,000 at the end of 2010. There were no deferred taxes at the beginning of 2010. What is the amount of income tax expense for 2010? a. $105,600 b. $100,800 c. $84,000 d. $72,000
A
Lyons Company deducts insurance expense of $84,000 for tax purposes in 2010, but the expense is not yet recognized for accounting purposes. In 2011, 2012, and 2013, no insurance expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $72,000 at the end of 2010. There were no deferred taxes at the beginning of 2010. What is the amount of the deferred tax liability at the end of 2010? a. $33,600 b. $28,800 c. $12,000 d. $0
A
Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Taxable Amounts Future Deductible Amounts a. Yes Yes b. Yes No c. No Yes d. No No
A
Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000) Taxable income $ 750,000 The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years. The income tax expense is a. $150,000. b. $225,000. c. $250,000. d. $500,000.
A
Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2011 $ 900,000 Tax exempt interest (75,000) Originating temporary difference (225,000) Taxable income $600,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2011 is 35%. What amount should be reported in its 2011 income statement as the deferred portion of income tax expense? a. $90,000 debit b. $120,000 debit c. $90,000 credit d. $105,000 credit
A
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 valuation allowance. b. consider only the positive information in determining the need for a valuation allowance. 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
Rodd Co. reports a taxable and pretax financial loss of $400,000 for 2011. Rodd's taxable and pretax financial income and tax rates for the last two years were: 2009 $400,000 30% 2010 400,000 35% The amount that Rodd should report as an income tax refund receivable in 2011, assuming that it uses the carryback provisions and that the tax rate is 40% in 2011, is a. $120,000. b. $140,000. c. $160,000. d. $180,000.
A
Rowen, Inc. had pre-tax accounting income of $900,000 and a tax rate of 40% in 2010, its first year of operations. During 2010 the company had the following transactions: Received rent from Jane, Co. for 2011 $32,000 Municipal bond income $40,000 Depreciation for tax purposes in excess of book depreciation $20,000 Installment sales revenue to be collected in 2011 $54,000 At the end of 2010, which of the following deferred tax accounts and balances is reported on Rowen, Inc.'s balance sheet? Account _ Balance a. Deferred tax asset $12,800 b. Deferred tax liability $12,800 c. Deferred tax asset $20,800 d. Deferred tax liability $20,800
A
Watson Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2011 $1,200,000 Tax exempt interest (100,000) Originating temporary difference (300,000) Taxable income $800,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2011 is 28%. What amount should be reported in its 2011 income statement as the current portion of its provision for income taxes? a. $224,000 b. $320,000 c. $336,000 d. $480,000
A
Which of the following temporary differences results in a deferred tax asset in the year the 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
A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax a. Temporary Liability b. Temporary Asset c. Permanent Liability d. Permanent Asset
B
A reconciliation of Gentry Company's pretax accounting income with its taxable income for 2010, its first year of operations, is as follows: Pretax accounting income $3,000,000 Excess tax depreciation (90,000) Taxable income $2,910,000 The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2010, 35% in 2011 and 2012, and 30% in 2013. The total deferred tax liability to be reported on Gentry's balance sheet at December 31, 2010, is a. $36,000. b. $30,000. c. $31,500. d. $27,000.
B
At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2011, a future taxable amount will occur and a. pretax financial income will exceed taxable income in 2011. b. Unruh will record a decrease in a deferred tax liability in 2011. c. total income tax expense for 2011 will exceed current tax expense for 2011. d. Unruh will record an increase in a deferred tax asset in 2011.
B
At the beginning of 2010, Pitman Co. purchased an asset for $600,000 with an estimated useful life of 5 years and an estimated salvage value of $50,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-decliningbalance method is being used. Pitman Co.'s tax rate is 40% for 2010 and all future years. At the end of 2010, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet? Account _ Balance a. Deferred tax asset $52,000 b. Deferred tax liability $52,000 c. Deferred tax asset $78,000 d. Deferred tax liability $78,000
B
At the beginning of 2010; Elephant, Inc. had a deferred tax asset of $4,000 and a deferred tax liability of $6,000. Pre-tax accounting income for 2010 was $300,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $24,000 Accrued warranty costs, estimated to be paid in 2011 $52,000 Operating loss carryforward $38,000 Installment sales revenue, will be collected in 2011 $26,000 Prepaid rent expense, will be used in 2011 $12,000 The ending balance in Elephant, Inc's deferred tax liability at December 31, 2010 is a. $9,200 b. $15,200 c. $10,400 d. $31,200
B
At the beginning of 2010; Elephant, Inc. had a deferred tax asset of $4,000 and a deferred tax liability of $6,000. Pre-tax accounting income for 2010 was $300,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $24,000 Accrued warranty costs, estimated to be paid in 2011 $52,000 Operating loss carryforward $38,000 Installment sales revenue, will be collected in 2011 $26,000 Prepaid rent expense, will be used in 2011 $12,000 What is Elephant, Inc.'s taxable income for 2010? a. $300,000 b. $252,000 c. $348,000 d. $452,000
B
Based on the following information, compute 2011 taxable income for South Co. assuming that its pre-tax accounting income for the year ended December 31, 2011 is $230,000. Future taxable Temporary difference (deductible) amount Installment sales $192,000 Depreciation $60,000 Unearned rent ($200,000) a. $282,000 b. $178,000 c. $482,000 d. $222,000
B
Cross Company reported the following results for the year ended December 31, 2010, its first year of operations: 2007 Income (per books before income taxes) $ 750,000 Taxable income 1,200,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2011. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2010, assuming that the enacted tax rates in effect are 40% in 2010 and 35% in 2011? a. $180,000 deferred tax liability b. $157,500 deferred tax asset c. $180,000 deferred tax asset d. $157,500 deferred tax liability
B
Deferred taxes should be presented on the balance sheet a. as one net debit or credit amount. b. in two amounts: one for the net current amount and one for the net noncurrent amount. c. in two amounts: one for the net debit amount and one for the net credit amount. d. as reductions of the related asset or liability accounts.
B
Ferguson Company has the following cumulative taxable temporary differences: 12/31/11 12/31/10 $1,350,000 $960,000 The tax rate enacted for 2011 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2011 is $2,400,000 and there are no permanent differences. Ferguson's pretax financial income for 2011 is a. $3,750,000. b. $2,790,000. c. $2,010,000. d. $1,050,000.
B
Fleming Company has the following cumulative taxable temporary differences: 12/31/11 12/31/10 $640,000 $900,000 The tax rate enacted for 2011 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2011 is $1,600,000 and there are no permanent differences. Fleming's pretax financial income for 2011 is: a. $960,000 b. $1,340,000 c. $1,730,000 d. $2,240,000
B
Hopkins Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 750,000 Estimated litigation expense 1,000,000 Extra depreciation for taxes (1,500,000) Taxable income $ 250,000 The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all years. Income tax payable is a. $0. b. $75,000. c. $150,000. d. $225,000.
B
Kraft Company made the following journal entry in late 2010 for rent on property it leases to Danford Corporation. Cash 60,000 Unearned Rent 60,000 The payment represents rent for the years 2011 and 2012, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $92,000 at the end of 2010, and its tax rate is 35%. What amount of income tax expense should Kraft Company report at the end of 2010? a. $53,000 b. $71,000 c. $81,500 d. $113,000
B
Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2010 related to $600,000 of excess depreciation. In December of 2010, a new income tax act is signed into law that lowers the corporate rate from 40% to 35%, effective January 1, 2012. If taxable amounts related to the temporary difference are scheduled to be reversed by $300,000 for both 2011 and 2012, Palmer should increase or decrease deferred tax liability by what amount? a. Decrease by $30,000 b. Decrease by $15,000 c. Increase by $15,000 d. Increase by $30,000
B
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
Rowen, Inc. had pre-tax accounting income of $900,000 and a tax rate of 40% in 2010, its first year of operations. During 2010 the company had the following transactions: Received rent from Jane, Co. for 2011 $32,000 Municipal bond income $40,000 Depreciation for tax purposes in excess of book depreciation $20,000 Installment sales revenue to be collected in 2011 $54,000 For 2010, what is the amount of income taxes payable for Rowen, Inc? a. $301,600 b. $327,200 c. $343,200 d. $386,400
B
Taxable income of a corporation a. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. b. differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. c. is based on generally accepted accounting principles. d. is reported on the corporation's income statement.
B
The deferred tax expense is the a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability. b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability. d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability
B
Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income? a. Advance rental receipts. b. Product warranty liabilities. c. Depreciable property. d. Fines and expenses resulting from a violation of law.
B
Wilcox Corporation reported the following results for its first three years of operation: 2010 income (before income taxes) $ 100,000 2011 loss (before income taxes) (900,000) 2012 income (before income taxes) 1,000,000 There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2010 and 2011, and 40% for 2012. Assuming that Wilcox elects to use the carryforward provision and not the carryback provision, what income (loss) is reported in 2011? a. $(900,000) b. $(540,000) c. $ -0- d. $(870,000)
B
A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be a. the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year. b. totally eliminated from the financial statements if the amount is related to a noncurrent asset. c. based on the classification of the related asset or liability for financial reporting purposes. d. the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.
C
Accounting for income taxes can result in the reporting of deferred taxes as any of the following except a. a current or long-term asset. b. a current or long-term liability. c. a contra-asset account. d. All of these are acceptable methods of reporting deferred taxes.
C
All of the following are procedures for the computation of deferred income taxes except to a. identify the types and amounts of existing temporary differences. b. measure the total deferred tax liability for taxable temporary differences. c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks. d. All of these are procedures in computing deferred income taxes.
C
Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes. a. item II only b. items I and II only c. items II and III only d. items I and IV only
C
At the beginning of 2010, Pitman Co. purchased an asset for $600,000 with an estimated useful life of 5 years and an estimated salvage value of $50,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-decliningbalance method is being used. Pitman Co.'s tax rate is 40% for 2010 and all future years. At the end of 2010, what is the book basis and the tax basis of the asset? Book basis Tax basis a. $440,000 $310,000 b. $490,000 $310,000 c. $490,000 $360,000 d. $440,000 $360,000
C
Duncan Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Profits of $300,000 recognized for books in 2010 will be collected in the following years: Collection of Profits 2011 $ 50,000 2012 $100,000 2013 $150,000 The enacted tax rates are: 40% for 2010, 35% for 2011, and 30% for 2012 and 2013. Taxable income is expected in all future years. What amount should be included in the December 31, 2010, balance sheet for the deferred tax liability related to the above temporary difference? a. $17,500 b. $75,000 c. $92,500 d. $120,000
C
Hopkins Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 750,000 Estimated litigation expense 1,000,000 Extra depreciation for taxes (1,500,000) Taxable income $ 250,000 The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all years. The deferred tax liability to be recognized is Current Noncurrent a. $150,000 $300,000 b. $150,000 $225,000 c. $0 $450,000 d. $0 $375,000
C
Kraft Company made the following journal entry in late 2010 for rent on property it leases to Danford Corporation. Cash 60,000 Unearned Rent 60,000 The payment represents rent for the years 2011 and 2012, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $92,000 at the end of 2010, and its tax rate is 35%. Assuming the taxes payable at the end of 2011 is $102,000, what amount of income tax expense would Kraft Company record for 2011? a. $81,000 b. $91,500 c. $112,500 d. $123,000
C
Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000) Taxable income $ 750,000 The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years. The deferred tax liability—current to be recognized is a. $75,000. b. $225,000. c. $150,000. d. $300,000.
C
Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2011 $ 900,000 Tax exempt interest (75,000) Originating temporary difference (225,000) Taxable income $600,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2011 is 35%. In Mitchell's 2011 income statement, what amount should be reported for total income tax expense? a. $330,000 b. $315,000 c. $300,000 d. $210,000
C
Operating income and tax rates for C.J. Company's first three years of operations were as follows: Date----Income----Enacted tax rate 2010---- $100,000---- 35% 2011---- ($250,000)---- 30% 2012---- $420,000---- 40% Assuming that C.J. Company opts only to carryforward its 2011 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2011 balance sheet? Amount _ Deferred tax asset or liability a. $75,000 Deferred tax liability b. $87,500 Deferred tax liability c. $100,000 Deferred tax asset d. $75,000 Deferred tax asset
C
Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be a. a balance in the Unearned Rent account at year end. b. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. c. a fine resulting from violations of OSHA regulations. d. making installment sales during the year.
C
Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if a. it is probable that a future tax rate change will occur. b. it appears likely that a future tax rate will be greater than the current tax rate. c. the future tax rates have been enacted into law. d. it appears likely that a future tax rate will be less than the current tax rate.
C
Taxable income of a corporation differs from pretax financial income because of Permanent Differences Temporary Differences a. No No b. No Yes c. Yes Yes d. Yes No
C
When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be a. handled retroactively in accordance with the guidance related to changes in accounting principles. b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. c. reported as an adjustment to tax expense in the period of change. d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.
C
Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income? a. Subscriptions received in advance. b. Prepaid royalty received in advance. c. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes. d. Interest received on a municipal obligation.
C
With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when a. it is probable and can be reasonably estimated. b. there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities. c. it is more likely than not that the tax position will be sustained upon audit. d. Any of the above exist.
C
A company uses the equity method to account for an investment. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax a. Permanent Asset b. Permanent Liability c. Temporary Asset d. Temporary Liability
D
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 only once. 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
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.
D
At December 31, 2010 Raymond Corporation reported a deferred tax liability of $90,000 which was attributable to a taxable type temporary difference of $300,000. The temporary difference is scheduled to reverse in 2014. During 2011, a new tax law increased the corporate tax rate from 30% to 40%. Raymond should record this change by debiting a. Retained Earnings for $30,000. b. Retained Earnings for $9,000. c. Income Tax Expense for $9,000. d. Income Tax Expense for $30,000.
D
At the beginning of 2010; Elephant, Inc. had a deferred tax asset of $4,000 and a deferred tax liability of $6,000. Pre-tax accounting income for 2010 was $300,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $24,000 Accrued warranty costs, estimated to be paid in 2011 $52,000 Operating loss carryforward $38,000 Installment sales revenue, will be collected in 2011 $26,000 Prepaid rent expense, will be used in 2011 $12,000 Which of the following is required to adjust Elephant, Inc.'s deferred tax asset to its correct balance at December 31, 2010? a. A debit of $20,800 b. A credit of $15,200 c. A debit of $15,200 d. A debit of $16,800
D
Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on a. their expected reversal dates. b. their debit or credit balance. c. the length of time the deferred tax amounts will generate future tax deferral benefits. d. the classification of the related asset or liability.
D
Eckert Corporation's partial income statement after its first year of operations is as follows: Income before income taxes $3,750,000 Income tax expense Current $1,035,000 Deferred 90,000 1,125,000 Net income $2,625,000 Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $1,500,000. No other differences existed between book income and taxable income except for the amount of depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year? a. $1,200,000 b. $1,425,000 c. $1,500,000 d. $1,800,000
D
Hopkins Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 750,000 Estimated litigation expense 1,000,000 Extra depreciation for taxes (1,500,000) Taxable income $ 250,000 The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all years. The deferred tax asset to be recognized is a. $75,000 current. b. $150,000 current. c. $225,000 current. d. $300,000 current.
D
In 2010, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $1,500,000. The facilities were sold in March 2011 and a $1,500,000 loss was recognized for tax purposes. Also in 2010, Krause paid $100,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2010 and 2011, and that Krause paid $780,000 in income taxes in 2010, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2010, should be a a. $420,000 asset. b. $360,000 asset. c. $360,000 liability. d. $450,000 asset.
D
Khan, Inc. reports a taxable and financial loss of $650,000 for 2011. Its pretax financial income for the last two years was as follows: 2009 $300,000 2010 400,000 The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2011, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is a. $650,000 loss. b. $ -0-. c. $195,000 loss. d. $455,000 loss.
D
Lyons Company deducts insurance expense of $84,000 for tax purposes in 2010, but the expense is not yet recognized for accounting purposes. In 2011, 2012, and 2013, no insurance expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $72,000 at the end of 2010. There were no deferred taxes at the beginning of 2010. Assuming that income tax payable for 2011 is $96,000, the income tax expense for 2011 would be what amount? a. $129,600 b. $107,200 c. $96,000 d. $84,800
D
Major reasons for disclosure of deferred income tax information is (are) a. better assessment of quality of earnings. b. better predictions of future cash flows. c. that it may be helpful in setting government policy. d. all of these.
D
Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000) Taxable income $ 750,000 The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years. The deferred tax asset to be recognized is a. $0. b. $75,000 current. c. $375,000 current. d. $375,000 noncurrent.
D
Operating income and tax rates for C.J. Company's first three years of operations were as follows: Date----Income----Enacted tax rate 2010---- $100,000---- 35% 2011---- ($250,000)---- 30% 2012---- $420,000---- 40% Assuming that C.J. Company opts to carryback its 2011 NOL, what is the amount of income tax payable at December 31, 2012? a. $68,000 b. $168,000 c. $123,000 d. $108,000
D
Tanner, Inc. incurred a financial and taxable loss for 2010. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2010 financial statements? a. The reduction of the loss should be reported as a prior period adjustment. b. The refund claimed should be reported as a deferred charge and amortized over five years. c. The refund claimed should be reported as revenue in the current year. d. The refund claimed should be shown as a reduction of the loss in 2010
D
The following information is available for Kessler Company after its first year of operations: Income before taxes $250,000 Federal income tax payable $104,000 Deferred income tax (4,000) Income tax expense 100,000 Net income $150,000 Kessler estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $95,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims? a. $105,000 b. $100,000 c. $95,000 d. $85,000
D
Uncertain tax positions I. Are positions for which the tax authorities may disallow a deduction in whole or in part. II. Include instances in which the tax law is clear and in which the company believes an audit is likely. III.Give rise to tax expense by increasing payables or increasing a deferred tax liability. a. I, II, and III. b. I and III only. c. II only. d. I only.
D
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 in taxable income. d. Expenses or losses that are tax deductible before they are recognized in financial income.
D
Which of the following is not considered a permanent difference? a. Interest received on municipal bonds. b. Fines resulting from violating the law. c. Premiums paid for life insurance on a company's CEO when the company is the beneficiary. d. Stock-based compensation expense.
D
Which of the following will not result in a temporary difference? a. Product warranty liabilities b. Advance rental receipts c. Installment sales d. All of these will result in a temporary difference.
D
Wilcox Corporation reported the following results for its first three years of operation: 2010 income (before income taxes) $ 100,000 2011 loss (before income taxes) (900,000) 2012 income (before income taxes) 1,000,000 There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2010 and 2011, and 40% for 2012. Assuming that Wilcox elects to use the carryback provision, what income (loss) is reported in 2011? (Assume that any deferred tax asset recognized is more likely than not to be realized.) a. $(900,000) b. $ -0- c. $(870,000) d. $(550,000)
D
A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.
F
A company should add a decrease in a deferred tax liability to income tax payable in computing income tax expense.
F
Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities.
F
Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.
F
Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.
F
Pretax financial income is the amount used to compute income tax payable.
F
Taxable income is a tax accounting term and is also referred to as income before taxes.
F
The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.
F
Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.
F
When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.
F
Nickerson Corporation began operations in 2007. There have been no permanent or temporary differences to account for since the inception of the business. The following data are available: Year Enacted Tax Rate Taxable Income Taxes Paid 2009 45% $750,000 $337,500 2010 40% 900,000 360,000 2011 35% 2012 30% In 2011, Nickerson had an operating loss of $930,000. What amount of income tax benefits should be reported on the 2011 income statement due to this loss? a. $409,500 b. $373,500 c. $372,000 d. $279,000
S
A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.
T
A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.
T
A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.
T
An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.
T
Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.
T
Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.
T
Permanent differences do not give rise to future taxable or deductible amounts.
T
Taxable amounts increase taxable income in future years.
T
Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered.
T
The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset
T
