CH 18 MCQs

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.

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 answers are correct as they are all examples of permanent differences

D.

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

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 carry forward. The enacted tax rates are as follows: 30% for 2023-2025; 25% for 2026; and 20% for 2027 and thereafter. 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.

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.

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 20% in 2025, its first year of operations. In 2025, the company had the following transactions: Received rent from Jane, Co. for 2026 $ 96,000Municipal bond income 120,000 Depreciation for tax purposes in excess of book depreciation 60,000 Installment sales profit to be taxed in 2026 162,000 Which of the following deferred tax accounts and balances would Rowen report at December 31, 2025? Account: Balance a. Deferred Tax Asset $19,200 b. Deferred Tax Liability $19,200 c. Deferred Tax Asset $31,200 d. Deferred Tax Liability $31,200

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.

At the end of 2024, its first year of operations, Hopkins Company prepared are conciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000Extra depreciation for taxes (6,000,000) Taxable income $1,000,000The estimated litigation expense of $4,000,000 will be deductible in 2025 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 20% for all years.Income taxes payable is a. $0. b. $200,000. c. $600,000. d. $900,000.

B

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 20% in 2025, its first year of operations. In 2025, the company had the following transactions: Received rent from Jane, Co. for 2026 $ 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 2026 162,000What is the amount of income taxes payable for Rowen for 2025? a. $452,400 b. $490,800 c. $514,800 d. $579,600

B

4. At the beginning of 2025, 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's tax rate is 20% for 2025 and all future years.At the end of 2025, which of the following deferred tax accounts and balances isreported on Pitman's balance sheet? Account - Balance a. Deferred Tax Asset $78,000 b. Deferred Tax Liability $78,000 c. Deferred Tax Asset $117,000 d. Deferred Tax Liability $117,000

B.

Recognition of tax benefits in the loss year due to a loss carry forward 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.

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 carry back provision, what income (loss) is reported in 2025? a. $(2,700,000) b. $(1,890,000) c. $ -0- d. $(2,640,000)

B.

At the beginning of 2025, Pitman Co. purchased an asset for $1,800,000 with anestimated 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's tax rate is 20% for 2025 and all future years. At the end of 2025, 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 c. $1,470,000 $1,080,000 d. $1,320,000 $1,080,000

C.

At the end of 2024, its first year of operations, Hopkins Company 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 $1,000,000The estimated litigation expense of $4,000,000 will be deductible in 2025 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 20% for all years.The amount of deferred tax liability to be recognized is a. $800,000. b. $600,000. c. $1,200,000. d. $1,000,000.

C.

Operating income and tax rates for C.J. Company's first three years of operations were as follows: Income: Enacted tax rate 2024 $400,000 25% 2025 ($1,000,000) 20% 2026 $1,680,000 30% Assuming that C.J. Company opts to carry forward its 2025 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2025 balance sheet? Amount:Deferred tax asset or liability a. $200,000 Deferred tax liability b. $300,000 Deferred tax liability c. $300,000 Deferred tax asset d. $200,000 Deferred tax asset

C.

A major distinction between temporary and permanent differences is a. permanent differences are not representative of acceptable accounting practice. b. temporary differences occur frequently, where as 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.

At the end of 2024, its first year of operations, Hopkins Company 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 2025 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 20% for all years. The deferred tax asset to be recognized is a. $200,000. b. $400,000 .c. $600,000. d. $800,000.

D.

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 20% in 2025, its first year of operations. In 2025, the company had the following transactions:Received rent from Jane, Co. for 2026 $ 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 2026 162,000 Which of the following deferred tax accounts and balances would Rowen report atDecember 31, 2025? Account: Balance a. Deferred Tax Asset $24,000 b. Deferred Tax Liability $24,000 c. Deferred Tax Asset $44,400 d. Deferred Tax Liability $44,400

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.