Ch.17 - Accounting for Income Taxes

Cavan's effective income tax rate for Year 1 is​ 30%. The depreciation difference will reverse equally over the next three years at enacted tax rates as​ follows:

$180,000

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of​ 30% for both years. 2018​ information: Sales on account in the amount of​ $650,000 Warranty expense and associated liability in the amount of​ $105,000 No other expenses incurred. 2019​ information: Sales on account in the amount of​ $225,000 Warranty repairs made in the amount of​ $68,000 No expenses incurred. What is​ MK's taxable income for​ 2018?

$650,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total​ $600,000. Included in this amount is​$20,000 in receivables from sales on installment. Installment sales are considered revenue for book​ purposes, but not for tax purposes. Operating expenses total​ $200,000 and are treated the same for book and tax purposes. Assuming a​ 35% tax​ rate, what is the amount of​Greenville's deferred tax asset or​ liability?

$7,000 deferred tax liability

Cavan's effective income tax rate for Year 1 is​ 30%. The depreciation difference will reverse equally over the next 3 years at enacted tax rates as​ follows:

$80,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $580,000. Included in this amount is $60,000 in receivables from sales on installment. Installment sales are considered revenue for book​ purposes, but not for tax purposes. Operating expenses total $180,000 and are treated the same for book and tax purposes. What is​ Greenville's tax basis in the installment sale​ receivable?

0

Greene Co. has pretax book income for the year ended December​ 31, 2018 in the amount of​ $285,000 and has a tax rate of​ 40%. Depreciation for tax purposes exceeded book depreciation by​ $13,500. What should Greene Co. record as its federal income tax liability for​ 2018?

108,600

What amount of income tax benefit will Zeus Corporation record in Year 6 under U.S.​ GAAP, assuming that Zeus elects to use the​ 2-year carryback/20-year carryforward option and that it is more likely than not that there will be no taxable earnings after Year​ 7? Assume the Year 7 tax rate is known in Year 6.

11750

Illusions Inc. just completed its second year of operations and has a deferred tax asset of $37,500 related to a net operating loss of $125,000 from the previous year. In the current year Illusions generates $410,000 in revenues and incurs $230,000 in expenses. There are no permanent or temporary book−tax differences. Assuming the same tax rate as last​ year, what amount will Illusions record for Income Tax Payable in the current​ year?

16,500

A valuation allowance was not considered necessary. Maple anticipates that​ $40,000 of the deferred tax liability will reverse in Year​ 7, that actual warranty costs will be incurred evenly in Years 8 and​ 9, and that the NOL carryforward will be used in Year 7. On​ Maple's December​ 31, Year 6 balance​ sheet, what amount should be reported as a​ non-current deferred tax asset under U.S.​ GAAP? Assume all deferred accounts are from the same taxing jurisdiction.

160,000

Tetra Corp. recorded book income of $225,000 in 2018. It does not have any permanent differences and the only temporary difference relates to $45,000 unearned income that it recorded for book purposes. Tetra anticipate satisfying this liability equally over the following three years. The current enacted tax rate is 40​%. The enacted tax rates for the following three years are 37​%, 42​%, and 47​%, respectively. Under U.S.​ GAAP, what deferred tax amount should Tetra Corp. record for this temporary​ difference?

18,900

In​ 2018, its first year of​ operations, Neuro Inc. experienced a $214,000 net operating loss and recorded a deferred tax asset of $74,900. Neuro decides that it is more likely than not that it will only be able to generate $155,000 of taxable income during the carryforward period. As a​ result, without generating additional future taxable income it will not be able to fully realize the NOL carryforward benefit. In order to account for​ this, what amount will Neuro Inc. record as a valuation​ allowance, assuming that the tax rate is​ unchanged?

20,650

The company is subject to a 35​% income tax rate and has no other book−tax differences. Income before depreciation and tax is presented​below: What is​ Infinity's taxable income for year​ 1?

250,000

What amount of income tax benefit will Zeus Corporation record in Year 6 under U.S.​ GAAP, assuming that Zeus elects to use the​ 2-year carryback/20-year carryforward​ option? Assume that the Year 7 tax rate is known in Year 6 and is enacted at the beginning of Year 7.

26,000

Danio​ Inc.'s income before taxes is $250,000 and its tax rate is 30​%. Danio included $20,000 of interest from municipal bonds in the $250,000. There are no other book−tax differences. What is the effective tax rate for Danio​ Inc.?

28%

In 2018​ Charmed, Inc. recorded book income of $370,000. The​ company's only temporary difference relates to a $81,000 installment sale that it recorded for book​ purposes; there are no permanent differences. Charmed anticipates receiving payments equally over the following three years. The current enacted tax rate in 2018 is 40​%. The substantively enacted tax rates for the following three years are 35​%, 40​%, and 48%, respectively. Under U.S.​ GAAP, what deferred tax amount should Charmed record for this temporary​ difference?

32,400

S and C​ Inc.'s income tax payable is $260,000 and its tax rate is 40​%. Assuming no book−tax ​differences, what is S and​ C's net​ income? (Round your answer to the nearest whole​ dollar.)

390,000

Kravitz Corporation had income before taxes of​ $890,000 and a tax rate of​ 45%. Included in the income are​ $40,000 in municipal bond interest and​ $20,000 in fines and penalties. There are no other​ book-tax differences. Refer to Kravitz Corporation. What is​ Kravitz' effective income tax​ rate?

44%

S​ & C Company reported $190,000 depreciation on its 2018 tax return​ However, they reported $60,000 depreciation expense on their 2018 income statement. The difference in depreciation is a temporary difference that will reverse over time. Assuming S​ & C's tax rate is constant at 40​%, what amount should be added to the deferred income tax liability in S​ & C's December​ 31, 2018, balance​ sheet?

52,000

Refer to Sonic Speaker Company. What is the largest amount of tax benefit​ allowed?

75,600

Under U.S.​ GAAP, if a firm writes down inventory for​ obsolescence, which of the following is​ created?

A deferred tax asset

Uncertain tax positions may result in a​ ________.

A. tax contingency

Kravitz Corporation had income before taxes of $820,000 and a tax rate of 35​%. Included in the income are $80,000 in municipal bond interest and $20,000 in fines and penalties. There are no other book−tax differences. Refer to Kraviz Corporation. What is the net amount of​ Kravitz' bookminus−tax ​difference?

Book income that is $60,000greater than taxable income

Book income refers to the amount of income reported on a​ company's tax return.

False

When a company adjusts the balance of a deferred tax account to reflect changes in the tax​ rate, prior-period financial statements will need to be adjusted to reflect this.

False

When a company carries forward a net operating loss​ (NOL), the income tax expense will be reduced in future​ years, but not income tax payable

False

Violet, Inc. recorded a deferred tax asset of $29,000 due to a book−tax difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 35​% of the deferred tax asset. What is the necessary journal entry to record the valuation​allowance?

Income Tax Expense 10,150 Valuation Allowance for Deferred TaxAsset 10,150

Brown​ Inc.'s net income is $220,000 and its tax rate is 35​%. Assuming no book−tax ​differences, what is the journal entry to record income tax​ expense? (Do not round intermediate calculations. Only round your final answer to the nearest whole​ dollar.)

Income Tax Expense 118,462 Income Tax Payable 118,462

Piper, Inc. reported a net deferred tax asset balance of $158,100 resulting from an estimated warranty expense accrual for book purposes. The total book−tax difference related to the bases of the estimated warranty liability is $465,000. The enacted statutory tax rate related to this balance changed from 34​% to 29​%, effective immediately. What journal entry will Piper need to make to adjust for this change in tax​rates?

Income Tax Expense 23,250 Deferred Tax Asset 23,250

Blue Corporation is an IFRS reporter.​ Blue's taxable income is $900,000 and the company estimates a deferred tax asset of $43,000 due to a book−tax difference in warranty liabilities. Management has assessed that it is probable that it will not realize30​% of the deferred tax asset. Assuming a 40​% tax​ rate, how should the realizable deferred tax asset be​ recorded?

Income Tax Expense 329,900 Deferred Tax Asset 30,100 Income Tax Payable 360,000

Betta Group just completed its second year of operations and has a deferred tax asset of $92,750 related to a net operating loss of $265,000 from the previous year. In the current year Betta generates $605,000 in revenues and incurs $331,000 in expenses. There are no permanent or temporary book−tax differences. Assuming the same tax rate as last​ year, what is the tax related journal entry for the current​year?

Income Tax Expense 95,900 Income Tax Payable 3,150 Deferred Tax Asset 92,750

Greene Co. has book income of​ $425,000, and a tax rate of​ 30%. Assuming there are no​ book-tax differences, what will the journal entry be to record the income tax​ expense?

Income Tax Expense ​127,500 Income Tax Payable ​127,500

Charmed​ Inc.'s income before taxes is​ $720,000 and its tax rate is​ 25%. Charmed included​ $30,000 in​ non-deductible life insurance premiums in the​ $720,000. There are no other​ book-tax differences. What is the journal entry to record income tax​ expense?

Income Tax Expense ​187,500 Income Tax Payable ​187,500

S​ & C Company reported income before taxes of $121,000 for the years​ 2016, 2017, and 2018. In 2019 they experienced a loss of $242,000. S​ & C had a tax rate of 30​% in 2016 and​ 2017, and a rate of 40​% is 2018 and 2019. The company elects to carry back the loss. What is the necessary journal entry to record the NOL carryback in the year of the​ loss?

Income Tax Refund Receivable 84,700 Income Tax Benefit 84,700

Which of the following statements best describes the effective tax​ rate?

It can be calculated by dividing income tax expense by book income before taxes.

_____ difference between book income and taxable income results in an effective tax rate that differs from the statutory tax rate

Permanent

Olympics Inc. recorded a dividends received deduction on their tax return this year. What​ (if any)​ book-tax difference will​ result?

Permanent​ difference; book income greater than taxable income.

Two independent situations are described below. Each involves future deductible amounts​ and/or future taxable amounts produced by temporary​ differences:

Situation 1: 2000 Situation 2: 4000 or Situation 1: 15000 Situation 2: 33000

The amount of income that a company reports on its tax return is known as​ ________.

Taxable income

In which of the following instances would a company most likely choose the carryforward option for a net operating​ loss?

The company expects higher tax rates in the future compared to the past.

A deferred tax asset represents a future reduction in income taxes payable.

True

Excluding potentially taxable income from a tax return is an example of an uncertain tax position.

True

The adjustment for a change in tax rates is treated as a change in accounting estimate.

True

U.S. GAAP requires companies to reconcile the federal statutory income tax rate to the effective tax rate

True

Under U.S.​ GAAP, companies generally use a balance sheet approach to account for temporary differences between book and tax treatment of transactions.

True

Under U.S.​ GAAP, when a firm determines that all or a portion of a deferred tax asset is not​ realizable, they will use a valuation allowance to reduce the balance.

True

The​ contra-asset to the Deferred Tax Asset account is called​ ________.

Valuation Allowance for Deferred Tax Asset

If a company chooses to carryback a net operating loss​ (NOL), but is not able to fully offset the​ loss, they will​ ________.

both A​ & C are viable options

The Wolf Group recorded a deferred tax asset of $50,000 due to a book−tax difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 20​% of the deferred tax asset. After recording the valuation​ allowance, Wolf's net income will​ ________ and assets will​ ________.

decrease by $10,000​; decrease by $10,000

If the valuation allowance for a deferred tax asset is​ decreased, there is​ a(n) ________ to income tax​ expense, which is​ a(n) ________ to income tax benefit.

decrease; increase

Assuming a tax rate of​ 40% for​ 2018-2021 and a rate of​ 45% for​ 2022-2023, what should Big Bear report on its balance sheet on December​31, 2018?

deferred tax asset of​ $207,900

When defining the portion of a deferred tax asset that a firm will not​ realize, IFRS uses the term​ ________.

probable

All of the following are examples of situations that may create temporary​ book-tax differences except​ ________.

receipt of municipal bond interest

Accounting for uncertain tax positions under U.S. GAAP involves a​ two-step approach:​ ________.

recognition and measurement

When assessing realizability of deferred tax​ assets, management must consider positive and negative evidence. All of the following would be considered positive evidence except​ ________.

unsettled circumstances that could adversely affect future operations

TLR Productions has book income of​ $450,000, and a tax rate of​ 35%. Assuming there are no​ book-tax differences, what is​ TLR's income tax​ expense?

​$157,500

S​ & C​ Company's income before taxes is $360,000​, and income tax expense is $135,000. S​ & C has a deferred tax asset of​ $100,000 and records a valuation allowance of $35,000. What is S​ & C's effective tax rate before and after recording the valuation​ allowance?

​38% and 47​% respectively