Chapter 19 - Computational

Larsen Corporation reported $200,000 in revenues in its 2018 financial statements, of which $66,000 will not be included in the tax return until 2019. The enacted tax rate is 40% for 2018 and 35% for 2019. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2018? a. $23,100 b. $26,400 c. $29,400 d. $33,600

a. $23,100 $66,000 x .35 = $23,100.

Kraft Company made the following journal entry in late 2018 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2019 and 2020, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $230,000 at the end of 2018, and its tax rate is 35%. 74. Assuming the income taxes payable at the end of 2019 is $255,000, what amount of income tax expense would Kraft Company record for 2019? a. $202,500 b. $228,750 c. $281,250 d. $307,500

c. $281,250 $255,000 + ($75,000 × .35) = $281,250.

Khan, Inc. reports a taxable and financial loss of $2,250,000 for 2019. Its pretax financial income for the last two years was as follows: 2017 $900,000 2018 1,200,000 The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2019, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is a. $2,250,000 loss. b. $ -0-. c. $675,000 loss. d. $1,575,000 loss.

d. $1,575,000 loss. $2, 250,000 - (30% × $2, 250,000) = $1,575,000.

Nickerson Corporation began operations in 2016. There have been no permanent or temporary differences to account for since the inception of the business. The following data are available: Year 2016 2017 2018 2019 Enacted Tax Rate 45% 40% 35% 30% Taxable Income $2,000,000 2,400,000 Taxes Paid $900,000 960,000 In 2018, Nickerson had an operating loss of $2,480,000. What amount of income tax benefits should be reported on the 2018 income statement due to this loss assuming that it uses the carryback provision? a. $1,092,000 b. $996,000 c. $992,000 d. $744,000

a. $1,092,000 ($2,000,000 × .45) + [($2,480,000 - $2,000,000) × .40] = $1,092,000.

Horner Corporation has a deferred tax asset at December 31, 2019 of $200,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2016-2018; 35% for 2019; and 30% for 2020 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. $100,000 b. $40,000 c. $35,000 d. $30,000

a. $100,000 $200,000 X .50 = $100,000.

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2018 $ 1,800,000 Tax exempt interest (150,000) Originating temporary difference (350,000) Taxable income $1,300,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2018 is 35%. 66. What amount should be reported in its 2018 income statement as the deferred portion of income tax expense? a. $140,000 debit b. $175,000 debit c. $140,000 credit d. $175,000 credit

a. $140,000 debit $350,000 × .40 = $140,000 debit

Lehman Corporation purchased a machine on January 2, 2017, for $4,000,000. 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: 2017 $800,000 2020 $460,000 2018 1,280,000 2021 460,000 2019 768,000 2022 232,000 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, 2018 be a. $144,000 b. $134,400 c. $9,600 d. $0

a. $144,000 ($1,280,000 - $800,000) × 30% = $144,000 Noncurrent.

Lyons Company deducts insurance expense of $210,000 for tax purposes in 2018, but the expense is not yet recognized for accounting purposes. In 2019, 2020, and 2021, no insurance expense will be deducted for tax purposes, but $70,000 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 $180,000 at the end of 2018. There were no deferred taxes at the beginning of 2018. 71. What is the amount of income tax expense for 2018? a. $264,000 b. $252,000 c. $210,000 d. $180,000

a. $264,000 $180,000 + ($210,000 × .40) = $264,000.

Rodd Co. reports a taxable and pretax financial loss of $900,000 for 2018. Rodd's taxable and pretax financial income and tax rates for the last two years were: 2016 $900,000 30% 2017 900,000 35% The amount that Rodd should report as an income tax refund receivable in 2018, assuming that it uses the carryback provisions and that the tax rate is 40% in 2018, is a. $270,000. b. $315,000. c. $360,000. d. $405,000.

a. $270,000. ($900,000 × 30%) = $270,000.

Mathis Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 30% for all years. 55. The income tax expense is a. $360,000. b. $540,000. c. $600,000. d. $1,200,000.

a. $360,000. Income taxes payable = ($1,800,000 × 30%) = $540,000 Change in deferred tax liability = ($2,400,000 × 30%) = $720,000 Change in deferred tax asset = ($3,000,000 × 30%) = $900,000 $540,000 + $720,000 - $900,000 = $360,000 (or $1,200,000 x 30%.)

Watson Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2018 $2,700,000 Tax exempt interest (150,000) Originating temporary difference (450,000) Taxable income $2,100,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2018 is 28%. What amount should be reported in its 2018 income statement as the current portion of its provision for income taxes? a. $588,000 b. $840,000 c. $756,000 d. $1,080,000

a. $588,000 $2,100,000 X .28 = $588,000.

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, 2018, balance sheet includes a deferred tax liability of $900,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of a. $7,500,000. b. $3,000,000. c. $2,250,000. d. $675,000.

a. $7,500,000. $900,000 ÷ 30% = $3,000,000 temporary difference $3,000,000 ÷ 40% = $7,500,000.

Lyons Company deducts insurance expense of $210,000 for tax purposes in 2018, but the expense is not yet recognized for accounting purposes. In 2019, 2020, and 2021, no insurance expense will be deducted for tax purposes, but $70,000 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 $180,000 at the end of 2018. There were no deferred taxes at the beginning of 2018. 70. What is the amount of the deferred tax liability at the end of 2018? a. $84,000 b. $72,000 c. $30,000 d. $0

a. $84,000 $210,000 × .40 = $84,000.

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 40% in 2018, its first year of operations. During 2018 the company had the following transactions: Received rent from Jane, Co. for 2019 $ 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 2019 $162,000 80. At the end of 2018, which of the following deferred tax accounts and balances exist at December 31, 2018? Account _ Balance a. Deferred tax asset $38,400 b. Deferred tax liability $38,400 c. Deferred tax asset $62,400 d. Deferred tax liability $62,400

a. Deferred tax asset $38,400 $96,000 X .40 = $38,400 Deferred tax asset.

Wilcox Corporation reported the following results for its first three years of operation: 2017 income (before income taxes) $ 300,000 2018 loss (before income taxes) (2,700,000) 2019 income (before income taxes) 3,000,000 There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2017 and 2018, and 40% for 2019. 90. Assuming that Wilcox elects to use the carryforward provision and not the carryback provision, what income (loss) is reported in 2018? a. $(2,700,000) b. $(1,620,000) c. $ -0- d. $(2,610,000)

b. $(1,620,000) ($2,700,000 × 40%) = $1,080,000; $2,700,000 - $1,080,000 = $1,620,000.

At the beginning of 2018; Elephant, Inc. had a deferred tax asset of $20,000 and a deferred tax liability of $30,000. Pre-tax accounting income for 2018 was $1,500,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $120,000 Accrued warranty costs, estimated to be paid in 2019 $260,000 Operating loss carryforward $190,000 Installment sales profit, will be taxed in 2019 $130,000 Prepaid rent expense, will be used in 2019 $60,000 76. What is Elephant, Inc.'s taxable income for 2018? a. $1,500,000 b. $1,260,000 c. $1,740,000 d. $2,260,000

b. $1,260,000 $1,500,000 - $120,000 + $260,000 - $190,000 - $130,000 - $60,000 = $1,260,000.

Kraft Company made the following journal entry in late 2018 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2019 and 2020, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $230,000 at the end of 2018, and its tax rate is 35%. 73. What amount of income tax expense should Kraft Company report at the end of 2018? a. $132,500 b. $177,500 c. $203,750 d. $282,500

b. $177,500 $230,000 - ($150,000 × .35) = $177,500.

82. Fleming Company has the following cumulative taxable temporary differences: 12/31/18 12/31/17 $1,600,000 $2,250,000 The tax rate enacted for 2018 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2018 is $4,000,000 and there are no permanent differences. Fleming's pretax financial income for 2018 is: a. $2,400,000 b. $3,350,000 c. $4,325,000 d. $5,600,000

b. $3,350,000 $4,000,000 - ($2,250,000 - $1,600,000) = $3,350,000.

Hopkins Co. at the end of 2017, its first year of operations, prepared a reconciliation 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 2018 when it is expected 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 30% for all years. 58. Income taxes payable is a. $0. b. $300,000. c. $600,000. d. $900,000.

b. $300,000. ($1,000,000 × 30%) = $300,000 or Income tax expense = ($3,000,000 × 30%) = $900,000 Change in deferred tax liability = ($4,000,000 × 30%) = $1,200,000 Change in deferred tax asset = ($6,000,000 × 30%) = $1,800,000 $900,000 + $1,200,000 - $1,800,000 = $300,000.

Based on the following information, compute 2018 taxable income for South Co. assuming that its pre-tax accounting income for the year ended December 31, 2018 is $460,000. Future taxable Temporary difference (deductible) amount Installment sales $384,000 Depreciation $120,000 Unearned rent ($400,000) a. $564,000 b. $356,000 c. $964,000 d. $444,000

b. $356,000 $460,000 - $384,000 - $120,000 + $400,000 = $356,000.

Cross Company reported the following results for the year ended December 31, 2018, its first year of operations: 2018 Income (per books before income taxes) $ 2,000,000 Taxable income 3,200,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2019. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2018, assuming that the enacted tax rates in effect are 40% in 2018 and 35% in 2019? a. $480,000 deferred tax liability b. $420,000 deferred tax asset c. $480,000 deferred tax asset d. $420,000 deferred tax liability

b. $420,000 deferred tax asset ($3,200,000 - $2,000,000) × 35% = $420,000 deferred tax asset.

Ferguson Company has the following cumulative taxable temporary differences: 12/31/19 12/31/18 $3,600,000 $2,560,000 The tax rate enacted for 2019 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2019 is $6,400,000 and there are no permanent differences. Ferguson's pretax financial income for 2019 is a. $10,000,000. b. $7,440,000. c. $5,360,000. d. $2,800,000.

b. $7,440,000. $6,400,000 + ($3,600,000 - $2,560,000) = $7,440,000.

A reconciliation of Gentry Company's pretax accounting income with its taxable income for 2018, its first year of operations, is as follows: Pretax accounting income $4,500,000 Excess tax depreciation (225,000) Taxable income $4,275,000 The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2018, 35% in 2019 and 2020, and 30% in 2021. The total deferred tax liability to be reported on Gentry's balance sheet at December 31, 2018, is a. $90,000. b. $75,000. c. $78,750. d. $67,500.

b. $75,000. ($75,000 × 35%) + ($75,000 × 35%) + ($75,000 × 30%) = $75,000.

At the beginning of 2018; Elephant, Inc. had a deferred tax asset of $20,000 and a deferred tax liability of $30,000. Pre-tax accounting income for 2018 was $1,500,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $120,000 Accrued warranty costs, estimated to be paid in 2019 $260,000 Operating loss carryforward $190,000 Installment sales profit, will be taxed in 2019 $130,000 Prepaid rent expense, will be used in 2019 $60,000 78. The ending balance in Elephant, Inc.'s deferred tax liability at December 31, 2018 is a. $46,000 b. $76,000 c. $52,000 d. $156,000

b. $76,000 ($130,000 + $60,000) X .40 = $76,000.

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 40% in 2018, its first year of operations. During 2018 the company had the following transactions: Received rent from Jane, Co. for 2019 $ 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 2019 $162,000 79. For 2018, what is the amount of income taxes payable for Rowen, Inc? a. $904,800 b. $981,600 c. $1,029,600 d. $1,159,200

b. $981,600 $2,700,000 + $96,000 - $120,000 - $60,000 - $162,000 = $2,454,000 $2,454,000 x .40 = $981,600.

Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2017 related to $1,500,000 of excess depreciation. In December of 2017, a new income tax act is signed into law that lowers the corporate rate from 40% to 35%, effective January 1, 2019. If taxable amounts related to the temporary difference are scheduled to be reversed by $750,000 for both 2018 and 2019, Palmer should increase or decrease deferred tax liability by what amount? a. Decrease by $75,000 b. Decrease by $37,500 c. Increase by $37,500 d. Increase by $75,000

b. Decrease by $37,500 $750,000 × (.35 - .40) = $37,500 decrease.

At the beginning of 2018, 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 Co.'s tax rate is 40% for 2018 and all future years. 53. At the end of 2018, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet? Account _ Balance a. Deferred tax asset $156,000 b. Deferred tax liability $156,000 c. Deferred tax asset $234,000 d. Deferred tax liability $234,000

b. Deferred tax liability $156,000 ($1,470,000 - $1,080,000) X .40 = $156,000 Deferred tax liability.

At the beginning of 2018, 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 Co.'s tax rate is 40% for 2018 and all future years. 52. At the end of 2018, 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 d. $1,320,000 $1,080,000 c. $1,470,000 $1,080,000

c. $1,470,000 $1,080,000 $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.

Hopkins Co. at the end of 2017, its first year of operations, prepared a reconciliation 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 2018 when it is expected 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 30% for all years. 60. The amount of deferred tax liability to be recognized is a. $1,200,000 b. $900,000 c. $1,800,000 d. $1,500,000

c. $1,800,000 ($6,000,000 × 30%) = $1,800,000.

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 $1,200,000 recognized for books in 2017 will be collected in the following years: Collection of Profits 2018 $200,000 2019 $400,000 2020 $600,000 The enacted tax rates are: 40% for 2017, 35% for 2018, and 30% for 2019 and 2020. Taxable income is expected in all future years. What amount should be included in the December 31, 2017, balance sheet for the deferred tax liability related to the above temporary difference? a. $ 70,000 b. $300,000 c. $370,000 d. $480,000

c. $370,000 ($200,000 .35) + [($400,000 + $600,000) X .30] = $370,000.

Operating income and tax rates for C.J. Company's first three years of operations were as follows: Income _ Enacted tax rate 2017 $400,000 35% 2018 ($1,000,000) 30% 2019 $1,680,000 40% 94. Assuming that C.J. Company opts only to carryforward its 2018 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2018 balance sheet? Amount _ Deferred tax asset or liability a. $300,000 Deferred tax liability b. $350,000 Deferred tax liability c. $400,000 Deferred tax asset d. $300,000 Deferred tax asset

c. $400,000 Deferred tax asset $1,000,000 x .40 = $400,000.

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2018 $ 1,800,000 Tax exempt interest (150,000) Originating temporary difference (350,000) Taxable income $1,300,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2018 is 35%. 67. In Mitchell's 2018 income statement, what amount should be reported for total income tax expense? a. $690,000 b. $630,000 c. $595,000 d. $455,000

c. $595,000 ($1,300,000 × .35) + ($350,000 × .40) = $595,000

Mathis Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 30% for all years. 57. The deferred tax liability to be recognized is a. $180,000. b. $540,000. c. $720,000. d. $360,000.

c. $720,000. ($2,400,000 × 30%) = $720,000.

Wilcox Corporation reported the following results for its first three years of operation: 2017 income (before income taxes) $ 300,000 2018 loss (before income taxes) (2,700,000) 2019 income (before income taxes) 3,000,000 There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2017 and 2018, and 40% for 2019. 89. Assuming that Wilcox elects to use the carryback provision, what income (loss) is reported in 2018? (Assume that any deferred tax asset recognized is more likely than not to be realized.) a. $(2,700,000) b. $ -0- c. $(2,610,000) d. $(1,650,000)

d. $(1,650,000) ($300,000 × 30%) = $90,000; $2,400,000 × 40% = $960,000; ($2,700,000 - $90,000 - $960,000) = $1,650,000.

In 2018, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $3,600,000. The facilities were sold in March 2019 and a $3,600,000 loss was recognized for tax purposes. Also in 2018, Krause paid $150,000 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 2018 and 2019, and that Krause paid $1,170,000 in income taxes in 2018, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2018, should be a a. $1,020,000 asset. b. $540,000 asset. c. $540,000 liability. d. $1,080,000 asset.

d. $1,080,000 asset. ($3,600,000 × 30%) = $1,080,000.

Hopkins Co. at the end of 2017, its first year of operations, prepared a reconciliation 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 2018 when it is expected 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 30% for all years. 59. The deferred tax asset to be recognized is a. $300,000. b. $600,000. c. $900,000. d. $1,200,000.

d. $1,200,000. ($4,000,000 × 30%) = $1,200,000.

Lyons Company deducts insurance expense of $210,000 for tax purposes in 2018, but the expense is not yet recognized for accounting purposes. In 2019, 2020, and 2021, no insurance expense will be deducted for tax purposes, but $70,000 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 $180,000 at the end of 2018. There were no deferred taxes at the beginning of 2018. 72. Assuming that income taxes payable for 2019 is $240,000, the income tax expense for 2019 would be what amount? a. $324,000 b. $268,000 c. $240,000 d. $212,000

d. $212,000 $240,000 - ($70,000 × .40) = $212,000.

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 $2,800,000. 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. $2,500,000 b. $1,125,000 c. $2,800,000 d. $3,100,000

d. $3,100,000 (30% × Temporary Difference) = $90,000; Temporary Difference = ($90,000 ÷ 30%) = $300,000; $2,800,000 + $300,000 = $3,100,000.

Operating income and tax rates for C.J. Company's first three years of operations were as follows: Income _ Enacted tax rate 2017 $400,000 35% 2018 ($1,000,000) 30% 2019 $1,680,000 40% 93. Assuming that C.J. Company opts to carryback its 2018 NOL, what is the amount of income taxes payable at December 31, 2019? a. $272,000 b. $672,000 c. $492,000 d. $432,000

d. $432,000 [$1,680,000 - ($1,000,000 - $400,000)] .40 = $432,000.

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. $85,000 $95,000 - ($4,000 ÷ .40) = $85,000.

Mathis Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 30% for all years. 56. The deferred tax asset to be recognized is a. $0. b. $180,000 current. c. $900,000 current. d. $900,000 noncurrent.

d. $900,000 noncurrent. ($3,000,000 × 30%) = $900,000

At the beginning of 2018; Elephant, Inc. had a deferred tax asset of $20,000 and a deferred tax liability of $30,000. Pre-tax accounting income for 2018 was $1,500,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $120,000 Accrued warranty costs, estimated to be paid in 2019 $260,000 Operating loss carryforward $190,000 Installment sales profit, will be taxed in 2019 $130,000 Prepaid rent expense, will be used in 2019 $60,000 77. Which of the following is required to adjust Elephant, Inc.'s deferred tax asset to its correct balance at December 31, 2018? a. A credit of $104,000 b. A credit of $76,000 c. A debit of $76,000 d. A debit of $84,000

d. A debit of $84,000 ($260,000 X .40) - $20,000 = $84,000.

At December 31, 2017 Raymond Corporation reported a deferred tax liability of $240,000 which was attributable to a taxable temporary difference of $800,000. The temporary difference is scheduled to reverse in 2021. During 2018, a new tax law increased the corporate tax rate from 30% to 40%. Raymond should record this change by debiting a. Retained Earnings for $80,000. b. Retained Earnings for $24,000. c. Income Tax Expense for $24,000. d. Income Tax Expense for $80,000.

d. Income Tax Expense for $80,000. $800,000 x (.40 - .30) = $80,000 Income Tax Expense.