Chp 19 - Conceptual

Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pre tax 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 2020 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

$1,200,000

Kraft Company made the following journal entry in late 2021 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2022 and 2023, 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 2021, and its tax rate for the next two years is 25%. ~What amount of income tax expense should Kraft Company report at the end of 2021?

$192,500

Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pre tax 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 2020 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

$200,000

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 $2,400,000. 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?

$3,250,000

Operating income and tax rates for C.J company's first three years of operations were as follows: Income Enacted Tax rate 2020 $400,000 25% 2021 ($1,000,000) 20% 2022 $1,680,000 30% Assuming that C.J company opts only to carryforward its 2021 NOL, what is the amount deferred tax assets or liability that C.J company would report on its Dec 31, 2021 balance sheet?

$300,000 Deferred tax asset

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2021 $ 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 20%. The enacted tax rate for 2021 is 30%. ~In Mitchell's 2021 income statement, what amount should be reported for total income tax expense?

$460,000

Mathis Co. at the end of 2020, 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 2022 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 20% for all years. ~The deferred tax asset to be recognized is

$480,000

A reconciliation of Gentry Company's pretax accounting income with its taxable income for 2021, its first year of operations, is as follows Pre tax 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 30% in 2021, 25% in 2022 and 2023, and 20% in 2024. The total deferred tax liability to be reported on Gentry's balance sheet at Dec 31, 2021, is

$52,500

Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pre tax 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 2020 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

$800,000

At the beginning of 2021, 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 20% for 2021 and all future years At the end of 2021, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet

Deferred tax liability - $78,000

Which of the following differences would result in future taxable amounts ?

Expenses or losses that are tax deductible before they are recognized in financial income

Taxable income is a tax accounting term and is also referred to as income before taxes.

False

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in

Future taxable amounts - yes Future deductible amounts - yes

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

Uncertain tax positions I. Are positions for which the tax authorities may disallow a deduction in whole or in part. II. Include instances in which the tax law is clear and in which the company believes an audit is likely. III. Give rise to tax expense by increasing payables or increasing a deferred tax liability.

I. Are positions for which the tax authorities may disallow a deduction in whole or in part.

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

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.

Which of the following will not result in a temporary difference?

Interest received on municipal obligations.

Which of the following is not considered a permanent difference?

Stock-based compensation expense

Tanner, Inc. incurred a financial and taxable loss for 2021. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2021 financial statements?

The refund claimed should be shown as a reduction of income tax expense in 2021

A company uses the equity method to account for an investment. This would result in what type of difference and in what type of deferred income tax?

Type of difference - temporary Deferred tax - Liability

At the December 31, 2020 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2021, a future taxable amount will occur and

Unruh will record a decrease in a deferred tax liability in 2021.

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 fine resulting from violations of OSHA regulations.

Accounting for income taxes can result in the reporting of deferred taxes as

a non current liability

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 (all must be disclosed)

Major reasons for disclosure of deferred income tax information is (are)

a. better assessment of quality of earnings. b. better predictions of future cash flows. c. predicting future cash flows for operating loss carryforwards. (all are correct)

A temporary difference arises when a revenue item is reported for tax purposes in a period

after its reported in financial income - yes before its reported in financial income - yes

Deferred taxes should be presented on the balance sheet

as a noncurrent amount

Recognizing a valuation allowance for a deferred tax asset requires that a company

consider all positive and negative information in determining the need for a valuation allowance

Taxable income of a corporation

differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting.

A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset

false

A company should add a decrease in a deferred tax liability to income taxes payable in computing income tax expense

false

Companies should classify deferred tax accounts on the balance sheet as current assets or current liabilities.

false

Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences

false

Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts

false

Pretax financial income is the amount used to compute income taxes payable

false

The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes

false

Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year

false

When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change

false

The deferred tax expense is the

increase in balance of deferred liability from the beginning to the end of the accounting period

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

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

All of the following are procedures for the computation of deferred income taxes except to

measure the total deferred tax liability for deductible temporary differences.

taxable income of a corporation differs from pretax financial income because of

permanent differences - Yes Temp differences - Yes

An example of a permanent difference is

proceeds from life insurance on officers interest revenue on municipal bonds insurance expense for a life insurance policy on officers ( all of the above are correct)

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income

product warranty liabilities

Companies are permitted to offset any balances in income taxes payable against

related income tax refund receivable or prepaid income taxes balances

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

reported as an adjustment to income tax expense in the period of change

A major distinction between temporary and permanent differences is

temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

Recognition of tax benefits in the loss year due to a loss carryforward requires

the establishment of a deferred tax asset

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

the future tax rates have been enacted into law

A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year

true

A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

true

A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences

true

Companies are permitted to offset any balances in income taxes payable against related income tax refund receivable or prepaid income taxes balances

true

Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences

true

Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset

true

Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period

true

Permanent differences do not give rise to future taxable or deductible amounts

true

Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered

true

The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset

true