Intermediate Accounting II - Chapter 18

At the beginning of 2025, Elephant, Inc. had a deferred tax asset of $20,000 and a deferred tax liability of $30,000. Pre-tax accounting income for 2025 was $1,500,000 and the enacted tax rate is 20%. 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 2026 $260,000 Operating loss carryforward $190,000 Installment sales profit will be taxed in 2026 at $130,000 Prepaid rent expense, will be used in 2026 $60,000 What is Elephant's taxable income for 2025? a. $1,500,000 b. $1,260,000 c. $1,740,000 d. $2,260,000 1,260,000 = 1,500,000 - 120,000 + 260,000 - 190,000 - 130,000 - 60,000

b. $1,260,000

At the beginning of 2025, Blossom Co. purchased an asset for $1,150,000 with an estimated useful life of 5 years and an estimated salvage value of $137,000. 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. Blossoms tax rate is 20% for 2025 and all future years. At the end of 2025, which of the following deferred tax accounts and balances is reported on Blossoms balance sheet? Account Balance a. Deferred tax asset $51, 480 b. Deferred tax liability $51,480 c. Deferred tax asset $67,340 d. Deferred tax liability $67,340 (947,400 - 690,000) * 20% = 51,480

b. Deferred tax liability $51,480

For calendar year 2025, Kane Corp. reported depreciation expense of $1,600,000 in its income statement. On its 2025 income tax return, Kane reported depreciation expense of $2,400,000. Kane's income statement also included $300,000 accrued warranty expense that will be deducted for tax purposes when paid. Kane's enacted tax rates are 20% for 2025 and 2026, and 15% for 2027 and 2028. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense 2026 $320,000 $ 60,000 2027 280,000 100,000 2028 200,000 140,000 $800,000 $300,000 These were Kane's only temporary differences. In Kane's 2025 income statement, the deferred portion of its provision for income taxes should be a. $267,600. b. $100,000. c. $88,000. d. $75,000

c. $88,000 2026) 320,000 - 60,000 = 260,000 260,000 * 20% = 52,000 2027) 280,000 - 100,000 = 180,000 180,000 * 15% = 27,000 2028) 200,000 - 140,000 = 60,000 60,000 * 15% = 9,000 52,000 + 27,000 + 9,000 = 88,000

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

I and II only

Horner Corporation has a deferred tax asset at December 31, 2026 of $200,000 due to the recognition of potential tax benefits of an operating loss carryforward. Assuming that management expects that only 50% of the related benefits will be realized, a valuation account should be established in the amount of a. $100,000. b. $40,000. c. $35,000. d. $30,000. $100,000 = 200,000 * 50%

a. $100,000

At the beginning of 2025, Ivanhoe, Inc. had a deferred tax asset of $15,000 and a deferred tax liability of $25,000. Pre-tax accounting income for 2025 was $1,400,000 and the enacted tax rate is 20%. The following items are included in Ivanhoe's pre-tax income Interest income from municipal bonds $110,000 Accrued warranty costs, estimated to be paid in 2026 $250,000 Operating loss carryforward $180,000 Installment sales profit, will be taxed in 2026 $120,000 Prepaid rent expense, will be used in 2026 $55,000 What is Ivanhoe's taxable income for 2026? a. 1,185,000 b. 1,400,000 c. 2,115,000 d. 1,615,000 1,400,000 - 110,000 + 250,000 - 180,000 - 120,000 - 55,000 = 1,185,000

a. 1,185,000

Ivanhoe Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2025 $2,200,000 Tax-exempt interest (140,000) Originating temporary difference (430,000) Taxable income $1,630,000 The temporary difference will reverse evenly over the next 2 years at an enacted tax rate of 30%. The enacted tax rate for 2025 is 20%. What amount should be reported in its 2025 income statement as the current portion of its provisions for income taxes? a. 326,000 b. 660,000 c. 489,000 d. 440,000 1,630,000 * 20% = 326,000

a. 326,000

Sheridan Co. at the end of 2024, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $1,350,000 Estimated litigation expense $3,250,000 Installment Sales $(2,620,000) Taxable Income $1,980,000 The estimated litigation expense of $3,250,000 will be deductible in 2026 when it is expected to be paid. Gross profit of $1,310,000 from its installment sales will be realized in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,310,000 current and $1,310,000 noncurrent. The income tax rate is 20% for all years. The deferred tax asset to be recognized at the end of 2024 is a. 650,000 b. 0 c. 1,625,000 d. 126,000 3,250,000 * 20% = 650,000

a. 650,000

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

a. Yes, Yes

Which of the following is not considered a permanent difference? a. stock-based compensation expense b. premiums paid for life insurance on a company's CEO when the company is the beneficiary c. interest received on municipal bonds d. fines resulting from violating the law

a. stock-based compensation expense

Wilcox Corporation reported the following results for its first three years of operation: 2024 income (before income taxes) $ 300,000 2025 loss (before income taxes) (2,700,000) 2026 income (before income taxes) 3,000,000 There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 20% for 2024 and 2025, and 30% for 2026. Assuming that Wilcox elects to use the carryforward provision and not the carryback provision, what income (loss) is reported in 2025? a. $(2,700,000) b. $(1,890,000) c. $ -0- d. $(2,640,000) Income Tax Refundable = (2,700,000) * 30% Income Tax Refundable = $810,000 (1,890,000) = (2,700,000) + 810,000

b. $(1,890,000)

In 2025, Cullumber Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $3,720,000. The facilities were sold in March 2026 and a $3,720,000 loss was recognized for tax purposes. Also in 2025, Cullumber paid $164,400 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 20% in both 2025 and 2026 and that Cullumber paid $1,290,000 in income taxes in 2025, the amount reported as net deferred income taxes on Cullumber's balance sheet at December 31, 2025, should be a. 372,000 asset b. 744,000 asset c. 711,120 asset d. 372,000 liability 3,720,000 * 20% = 744,000

b. 744,000 asset

Deferred taxes should be presented on the balance sheet a. as either noncurrent or current. b. as a noncurrent amount. c. as a current amount. d. as reductions of the related asset or liability accounts.

b. as a noncurrent amount

Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2024 related to $1,500,000 of excess depreciation. In December of 2024, a new income tax act is signed into law that lowers the corporate rate from 30% to 25%, effective January 1, 2026. If taxable amounts related to the temporary difference are scheduled to be reversed by $750,000 for both 2025 and 2026, 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 37,500 = (750,000 * 0.30) - (750,000 * 0.25) since the percentages are decreasing you would decrease ig

b. decrease by $37,500

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

b. expenses or losses that are tax deductible before they are recognized in financial income

Wildhorse Co, organized on January 2, 2025 and had a pretax accounting income of $930,000 and taxable income of $2,970,000 for the year ended December 31, 2025. The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2026 $714,000 2027 $306,000 2028 $306,000 2029 $714,000 The enacted income tax rates are 25% for 2025, 20% for 2026 through 2028, and 15% for 2029. If Wildhorse expects taxable income in future years, the deferred tax asset reported on Wildhorse's December 31, 2025 balance sheet should be a. 265,200 b. 510,000 c. 372,300 d. 331,500 (714,000 +306,000+306,000)* 20% = 265,200 714,000 * 15% = 107,100 265,200 + 107,100 = 372,300

c. 372,300

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 these choices exist.

c. it is more likely than not that the tax position will be sustained upon audit

A reconciliation of Carla Vista Company's pretax accounting income with its taxable income for 2025, its first year of operations, is as follows pretax accounting income $5,200,000 excess tax depreciation $(267,000) taxable income $4,933,000 The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 30% in 2025, 25% in 2026 and 2027, and 20% in 2028. The total deferred tax liability to be reported on Carla Vista's balance sheet at December 31, 2025 is a.66,750 b. 53,400 c. 80,100 d. 62,300 (89,000 * 25%) + (89,000 * 25%) + (89,000 * 20%) = 62,300

d. 62,300

Companies are required to disclose the total of each of the following except a. all deferred tax assets b. all deferred tax liabilities c. the total valuation allowance d. all of the choices must be disclosed

d. all of the choices must be disclosed

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. all of these

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.

Items II and III only

Blossom corporation prepared the following reconciliation for its first year of operations pretax financial income for 2025 $1,700,000 tax-exempt interest (148,000) originating temporary difference (346,000) taxable income $1,206,000 The temporary difference will reverse evenly over the next 2 years at an enacted tax rate of 30%. The enacted tax rate for 2025 is 25%. In Blossoms 2025 income statement, what amount should be reported for total income tax expense? a. 448,300 b. 301,500 c. 405,300 d. 425,000 (1,206,000 * 25%) + (346,000 * 30%) = 405,300

c. 405,300

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. a fine resulting from violations of OSHA regulations