M/C-Part III
Pine Corp.'s books showed pretax income of $800,000 for the year ended December 31, year 1. In the computation of federal income taxes, the following data were considered: Gain on an involuntary conversion $350,000 (Pine has elected to replace the property within the statutory period using total proceeds.) 50,000 Depreciation deducted for the tax purposes in excess of depreciation deducted for book purposes Federal estimated tax payments, year 1 70,000 Enacted federal tax rates, year 1 30% What amount should Pine report as its current federal income tax liability on its December 31, year 1 balance sheet? $ 50,000 $ 65,000 $120,000 $135,000
$ 50,000 The current federal income tax liability is based on taxable income, which is computed in the "book to tax reconciliation" below. Accounting income $ 800,000 Nontaxable gain (350,000) Excess tax depreciation (50,000) Taxable income $ 400,000 The gain on involuntary conversion was included in accounting income but is deferred for tax purposes. Depreciation deducted for tax purposes in excess of book depreciation also causes taxable income to be less than accounting income. Taxes payable before considering estimated tax payments is $120,000 ($400,000 × 30%). Since tax payments of $70,000 have already been made, the 12/31/Y1 current federal income tax liability is $50,000 ($120,000 − $70,000).
West Corp. leased a building and received the $36,000 annual rental payment on June 15, year 1. The beginning of the lease was July 1, year 1. Rental income is taxable when received. West's tax rates are 30% for year 1 and 40% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should West report in its December 31, year 1 balance sheet? $ 5,400 $ 7,200 $10,800 $14,400
$ 7,200 At 12/31/Y1, unearned rent for financial accounting purposes is $18,000 ($36,000 × 6/12). The amount of rent revenue recognized on the income statement is six of twelve months (36,000 × 6/12) = 18,000. Rental income on the tax return is $36,000 because rental income is taxed when received. Therefore, the timing difference is $18,000 ($36,000 − $18,000 = $18,000) giving rise to a deferred tax asset on the balance sheet of $18,000 × 40% = $7,200. The deferred tax asset to be recorded is measured using the future enacted tax rate of 40%.
A temporary difference that would result in a deferred tax liability is Interest revenue on municipal bonds. Accrual of warranty expense. Excess of tax depreciation over financial accounting depreciation. Subscriptions received in advance.
Excess of tax depreciation over financial accounting depreciation. An excess of tax depreciation over financial accounting depreciation results in future taxable amounts and, therefore, a deferred tax liability.
Visor Co. maintains a defined benefit pension plan for its employees. The service cost component of Visor's net periodic pension cost is measured using the Unfunded accumulated benefit obligation. Unfunded vested benefit obligation. Projected benefit obligation. Expected return on plan assets.
Projected benefit obligation. This answer is correct. Per ASC Topic 715, the service cost component recognized shall be determined as the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period, which is known as the projected benefit obligation.
Note section disclosures in the financial statements for pensions do not require inclusion of which of the following? The components of period pension costs. The amount of unrecognized prior service cost. The differences in executive and nonexecutive plans. A detailed description of the plan including employee groups covered.
The differences in executive and nonexecutive plans. This answer is correct. The differences in executive and nonexecutive plans are not required disclosures.
Which of the following could require interperiod tax allocation? Percentage depletion in excess of cost depletion. Unearned service contract revenue. Interest received on municipal obligations. Nondeductible officers life insurance premium.
Unearned service contract revenue. This answer is correct because interperiod tax allocation is the adjustment process that reflects tax expense based on pretax accounting income where the tax expense is different from taxes paid. Unearned service contract revenue creates a temporary difference as it would be included in income for tax purposes but would not be recognized in pretax accounting income as revenue until it is earned.
Agard Company's enacted income tax rate is 30%. For the year ended December 31, year 3, Agard's income statement reflected depletion expense of $1,000,000 based on the cost of assets being depleted. However, Agard properly deducted $4,000,000 for percentage depletion on its year 3 tax return. How much should be reported as provision (expense) for deferred income taxes in Agard's year 3 financial statements? $1,200,000 $900,000 $300,000 $0
$0 This answer is correct. A common mistake when solving this problem would be to treat the depletion difference between book and tax income as a temporary difference, similar to using the MACRS for tax and the straight-line method for book purposes. GAAP depletion is based on the cost of the resources used while tax depletion is based on the revenue of resources sold. The difference in any period is a permanent difference. But using percentage depletion for tax, which means taking depletion in excess of cost, creates a permanent difference which does not affect the deferred income tax provision. Therefore, the correct answer would be $0.
Brass Co. reported income before income tax expense of $60,000 for year 2. Brass had no permanent or temporary timing differences for tax purposes. Brass has an effective tax rate of 30% and a $40,000 net operating loss carryforward from year 1. What is the maximum income tax benefit that Brass can realize from the loss carryforward for year 2? $12,000 $18,000 $20,000 $40,000
$12,000 This answer is correct. The $40,000 net operating loss carryforward is the amount of loss in year 1 which may be carried forward to future years to offset the tax due in those years. The value of the carryforward is the net operating loss multiplied by the tax rate for the year in which the carryforward is expected to be realized. Therefore, the maximum income tax benefit that Brass can realize from the carryforward in year 2 is $12,000 ($40,000 × 30%).
HG, Inc., a calendar year corporation, reported the following operating income (loss) before income tax and the enacted tax rates for the last three years of operations: Income Tax rate Year 2 $ 100,000 40% Year 3 $ (300,000) 30% Year 4 $ 400,000 40% There are no permanent or temporary differences between operating income (loss) for financial and income tax reporting purposes. What amount should HG record in Year 3 to account for the deferred tax asset? $0 $120,000 $90,000 80,000
$120,000 Correct! The net operating loss of $300,000 in year 3 multiplied by the future enacted tax rate of 40% results in a deferred tax asset of $120,000.
In year 2, Ajax, Inc. reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible premiums on Ajax's officers' life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax's enacted tax rate is 30%. In its year 2 income statement, what amount should Ajax report as income tax expense—current portion? $90,000 $102,000 $108,000 $120,000
$120,000 This answer is correct. The current portion of income tax is calculated as taxable income multiplied by the current tax rate. Therefore, this answer is correct because the income tax expense—current portion is $120,000 ($400,000 × 30%).
The following data pertains to Hall Co.'s defined-benefit pension plan at December 31, year 2: Unfunded projected benefit obligation $25,000 Unrecognized prior service cost 12,000 Net periodic pension cost 8,000 Hall made no contributions to the pension plan during year 2. In its December 31, year 2 statement of stockholders' equity, what amount should Hall report as accumulated other comprehensive income for pension liabilities before tax effects? $5,000 $13,000 $17,000 $25,000
$17,000 At December 31, year 2, Hall will record a pension expense of $8,000 and a pension liability of $8,000 for the current year's pension journal entry. The overfunded or underfunded status of the plan must be recognized on the balance sheet. Therefore, the unfunded PBO of $25,000 must be recognized as a liability. An entry must be made to record the adjustment to pension liability for $17,000 (25,000 − 8,000 liability already recorded). Ignoring the tax effect, the journal entry will include a debit to OCI for $17,000 and a credit to pension liability for $17,000.
Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan's adoption. The employees, A, B, C, and D, are expected to retire from the company as follows: A will retire after three years. B and C will retire after five years. D will retire after seven years. What is the amount of prior service cost amortization in the first year? $0 $5,000 $20,000 $25,000
$20,000 There are two methods approved for use in determining the assignment of prior service cost: the expected years of service method, and the straight-line basis over the average remaining service period of active employees method. Under the expected future years of service method, the total number of employee service years is calculated by grouping employees according to the time remaining to their retirement and multiplying the number in each group by the number of periods remaining to retirement. [(1 person × 3) + (2 people × 5) + (1 person × 7) = 20]. To calculate the amortization of prior service costs for a given year, the number of employee service years applicable to that period is used as the numerator of the fraction, and the denominator is the total employee service years based on all the identified groups. (4/20 × $100,000 = $20,000) For the straight-line basis over the average remaining service period method, the total number of service years (calculated above) is divided by the number of employees to find the weighted-average service life of each employee. (20/4 = 5 yrs.) The $100,000 of prior service cost will be amortized over the five years, or at $20,000 ($100,000 ÷ 5 = $20,000) a year.
For the year ended December 31, year 1, Grim Co.'s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following: Interest on municipal bonds $70,000 Premium expense on keyman life insurance (20,000) Total $ 50,000 Grim's enacted income tax rate is 30%. In its year 1 income statement, what amount should Grim report as current provision for income tax expense? $45,000 $51,000 $60,000 $66,000
$45,000 Income tax provision (expense) must be reported in two components: the amount currently payable (current portion) and the tax effects of temporary differences (deferred portion). The current portion is computed by multiplying taxable income by the current enacted tax rate ($150,000 × 30% = $45,000). Note that in this case, the deferred portion is $0, because both differences are permanent differences, which do not result in a deferred tax liability. Therefore, the current provision for income taxes should be reported at $45,000. It is important to note that if temporary differences did exist the tax effects would have been included in the tax expense for the current period.
Kent, Inc.'s reconciliation between financial statement and taxable income for year 3 follows: Pretax financial income $150,000 Permanent difference (12,000) 138,000 Temporary difference—depreciation (9,000) Taxable income $129,000 Additional information At 12/31/Y2 12/31/Y3 Cumulative temporary difference (future taxable amounts) $11,000 $20,000 The enacted tax rate was 34% for year 2 and 40% for year 3 and years thereafter. In its year 3 income statement, what amount should Kent report as current portion of income tax expense? $51,600 $55,200 $55,860 $60,000
$51,600 This answer is correct. ASC Topic 740 states that income tax expense must be reported in two components: the amount currently payable (current portion) and the tax effects of temporary differences (deferred portion). The amount currently payable, or current income tax expense, is computed by multiplying taxable income by the current enacted tax rate ($129,000 × 40% = $51,600).
Webb Co., a publicly traded company, implemented a defined benefit pension plan for its employees on January 1, year 1. During year 1 and year 2, Webb's contributions fully funded the plan. The following data are provided for year 4 and year 3: Year 4 Estimated Year 3 Actual Projected benefit obligation, December 31 $750,000 $700,000 Accumulated benefit obligation, December 31 520,000 500,000 Plan assets at fair value, December 31 675,000 600,000 Projected benefit obligation in excess of plan assets 75,000 100,000 Pension expense 90,000 75,000 Employer's contribution 90,000 50,000 What amount should Webb report as a pension liability in its December 31, year 4 balance sheet? $50,000 $60,000 $75,000 $100,000
$75,000 As of December 31, year 3, there was a pension liability only for the current year's portion of the pension cost that was not funded. The PBO is compared with the fair value of plan assets, and a liability must be recorded in the balance sheet for the underfunded plan. Therefore, the difference between the PBO and the fair value of the plan assets as of December 31, year 4 ($750,000 minus $675,000) of $75,000 must be reported as a liability on the balance sheet.
A company with a defined benefit pension plan must disclose in the notes to its financial statements all of the following except The funded status of its pension plan with the amounts recognized in the balance sheet showing separately the noncurrent assets, current liabilities, and noncurrent liabilities recognized. Rates for assumed discount rate, rate of compensation increase, and expected long-term rate of return on plan assets. A reconciliation of the accrued or prepaid pension cost reported in its balance sheet with the pension expense reported in its income statement. The recognized amount of the net periodic benefit cost with the components shown separately.
A reconciliation of the accrued or prepaid pension cost reported in its balance sheet with the pension expense reported in its income statement. A reconciliation of the accrued or prepaid pension cost reported in its balance sheet with the pension expense reported in its income statement is not required.
A company that maintains a defined benefit pension plan for its employees reports an unfunded pension liability. This cost represents the amount that the Cumulative net periodic cost accrued exceeds contributions to the plan. Cumulative net periodic cost exceeds the vested benefit obligation. Vested benefit obligation exceeds plan assets. Vested benefit obligation exceeds contributions to the plan.
Cumulative net periodic cost accrued exceeds contributions to the plan. The unfunded accrued pension cost is a liability recognized when the net periodic pension cost exceeds the amount the employer has contributed to the plan.
A deferred tax liability is computed using The current tax laws, regardless of expected or enacted future tax laws. Expected future tax laws, regardless of whether those expected laws have been enacted. Current tax laws, unless enacted future tax laws are different. Either current or expected future tax laws, regardless of whether those expected laws have been enacted.
Current tax laws, unless enacted future tax laws are different. A deferred tax liability is recognized for the amount of taxes payable in future years as a result of the deferred tax consequences (as measured by the provisions of enacted tax laws) of events recognized in the financial statements in the current or preceding years.
A company experiences a net operating loss of $225,000. The tax rate in the year of the net operating loss is 30% and the enacted tax rate for future years is 25%. To recognize the deferred tax consequence, the company will record a A. Deferred tax asset of $225,000 B. Deferred tax liability of $67,500 C. Deferred tax asset of $67,500 D. Deferred tax asset of $56,250
D. Deferred tax asset of $56,250 Correct! A net operating loss results in future tax benefits by offsetting future taxable income. A deferred tax asset is recorded. The deferred tax asset is a function of the net operating loss ($225,000) multiplied by the enacted tax rate for future years (25%).
No net deferred tax asset (i.e., deferred tax asset net of related valuation allowance) was recognized in the year 1 financial statements by the Chaise Company when a loss from discontinued operations was carried forward for tax purposes because it was more likely than not that none of this deferred tax asset would be realized. Chaise had no temporary differences. The tax benefit of the loss carried forward reduced current taxes payable on year 2 continuing operations. The year 2 income statement would include the tax benefit from the loss brought forward in Income from continuing operations. Gain or loss from discontinued operations. Extraordinary gains. Cumulative effect of accounting changes.
Income from continuing operations. The tax benefit of an operating loss carryforward or carryback shall be reported in the same manner as the source of income (loss) in the current year. Thus, in year 1, the tax benefit shall be reported under income from continuing operations.
No net deferred tax asset (i.e., deferred tax asset net of related valuation allowance) was recognized in the year 2 financial statements by the Chaise Company when a loss from discontinued segments was carried forward for tax purposes because it was more likely than not that none of this deferred tax asset would be realized. Chaise had no temporary differences. The tax benefit of the loss carried forward reduced current taxes payable on year 3 continuing operations. The year 3 income statement would include the tax benefit from the loss brought forward in Income from continuing operations. Gain or loss from discontinued segments. Extraordinary gains. Cumulative effect of accounting changes.
Income from continuing operations. This answer is correct. Per ASC Topic 740, the tax benefit of an operating loss carryforward or carryback shall be reported in the same manner as the source of income (loss) in the current year. The problem states that the tax benefit of the loss reduced taxes on continuing operations. Thus, in year 3, the tax benefit shall be reported under income from continuing operations.
At the end of year 1, Cody Co. reported a profit on a partially completed construction contract by applying the percentage-of-completion method. By the end of year 2, the total estimated profit on the contract at completion in year 3 had been drastically reduced from the amount estimated at the end of year 1. Consequently, in year 2, a loss equal to one-half of the year 1 profit was recognized. Cody used the completed-contract method for income tax purposes and had no other contracts. The year 2 balance sheet should include a deferred tax Asset Liability Yes Yes No Yes Yes No No No
No Yes This answer is correct because, per ASC Topic 740, a deferred tax liability is recognized for temporary differences that will result in net taxable amounts (taxable income exceeds book income) in future years. Although Cody Co. has recognized a loss (per books) in year 2 of the construction contract, the contract is still profitable over the 3 years. Therefore, in year 3 when the contract is completed, Cody will recognize the total profit on its tax return while only a portion of the profit will be recorded on its income statement. Thus, the contract will result in a taxable amount in year 3 and a deferred tax liability exists. Note that this liability was recorded at the end of year 1 and reduced by one-half at the end of year 2 due to a change in estimated profit.
The Codification requires a reconciliation of the beginning and ending balances of the benefit obligation for both defined benefit pension plans and defined postretirement plans. Which of the following items would appear in the schedule related to defined benefit pension plans? Service cost Benefits paid Yes No Yes Yes No Yes No No
Yes Yes The reconciliation schedule for the benefit obligation related to defined benefit pension plans would disclose both the amounts for service cost and benefits paid. Other items that would be disclosed in this reconciliation schedule include (1) interest cost, (2) contributions by plan participants, (3) actuarial gains and losses, (4) plan amendments, (5) divestitures, curtailments, and settlements, and (6) special termination benefits.