intermediate 2 chapter 19 & 20

At the December 31, 2017 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2018, a future taxable amount will occur and

Unruh will record a decrease in a deferred tax liability in 2018.

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

Yes Yes

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

Yes Yes

The fair value of pension plan assets is used to determine the corridor and to calculate the expected return on plan assets.

Yes Yes

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

a contra-asset account.

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.

In accounting for a defined-benefit pension plan

an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.

Vested benefits

are defined by all of these answers

Deferred taxes should be presented on the balance sheet

as a noncurrent amount.

One component of pension expense is actual return on plan assets. Plan assets include

assets that a company holds to earn a reasonable return, generally at minimum risk.

Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.

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.

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. d. All of these answer choices are correct.

d. All of these answer choices are correct.

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary? a. Retirement and mortality rate. b. Interest rates. c. Benefit provisions of the plan.

d. All of these are considered.

In a defined-benefit plan, a formula is used that

defines the benefits that the employee will receive at the time of retirement.

In all pension plans, the accounting problems include all the following except

determining the level of individual premiums.

Taxable income of a corporation

differs from accounting income due to differences in inter-period allocation and permanent differences between the two methods of income determination.

The accumulated benefit obligation measures

he pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

The actual return on plan assets

includes interest, dividends, and changes in the fair value of the fund assets.

The projected benefit obligation is the measure of pension obligation that

is required to be used for reporting the service cost component of pension expense.

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.

In a defined-benefit plan, the process of funding refers to

making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

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.

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

pension asset/liability.

The relationship between the amount funded and the amount reported for pension expense is as follows:

pension expense may be greater than, equal to, or less than the amount funded.

A pension asset is reported when

pension plan assets at fair value exceed the projected benefit obligation.

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

projected benefit obligation exceeds the fair value of the plan assets.

A pension fund gain or loss that is caused by a plant closing should be

recognized immediately as a gain or loss on the plant closing.

Gains and losses that relate to the computation of pension expense should be

recorded currently and in the future by applying the corridor method which provides the amount to be amortized.

The interest on the projected benefit obligation component of pension expense

reflects the rates at which pension benefits could be effectively settled.

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.

In a defined-contribution plan, a formula is used that

requires an employer to contribute a certain sum each period based on the formula.

The computation of pension expense includes all the following except

service cost component measured using current salary levels.

A major distinction between temporary and permanent differences is

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

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.

tems II and III only

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 pension liability is reported when

the projected benefit obligation exceeds the fair value of pension plan assets.

In computing the service cost component of pension expense, the FASB concluded that

the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.

Prior service cost is amortized on a

years-of-service method or on a straight-line basis over the average remaining service life of active employees.

In 2018, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $3,600,000. The facilities were sold in March 2019 and a $3,600,000 loss was recognized for tax purposes. Also in 2018, Krause paid $150,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2018 and 2019, and that Krause paid $1,170,000 in income taxes in 2018, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2018, should be a

$1,080,000 asset.

The deferred tax asset to be recognized is

$1,200,000.

At the beginning of 2018; Elephant, Inc. had a deferred tax asset of $20,000 and a deferred tax liability of $30,000. Pre-tax accounting income for 2018 was $1,500,000 and the enacted tax rate is 40%. 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 2019 $260,000 Operating loss carryforward $190,000 Installment sales profit, will be taxed in 2019 $130,000 Prepaid rent expense, will be used in 2019 $60,000 76. What is Elephant, Inc.'s taxable income for 2018?

$1,260,000

At the beginning of 2018, 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 40% for 2018 and all future years. 52. At the end of 2018, what are the book basis and the tax basis of the asset?

$1,470,000 $1,080,000

The amount of deferred tax liability to be recognized is

$1,800,000

Horner Corporation has a deferred tax asset at December 31, 2019 of $200,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2016-2018; 35% for 2019; and 30% for 2020 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of:

$100,000

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2018 $ 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 40%. The enacted tax rate for 2018 is 35%. 66. What amount should be reported in its 2018 income statement as the deferred portion of income tax expense?

$140,000 debit

Lehman Corporation purchased a machine on January 2, 2017, for $4,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2017 $800,000 2020 $460,000 2018 1,280,000 2021 460,000 2019 768,000 2022 232,000 Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Lehman's balance sheet at December 31, 2018 be

$144,000

Kraft Company made the following journal entry in late 2018 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2019 and 2020, 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 2018, and its tax rate is 35%. 73. What amount of income tax expense should Kraft Company report at the end of 2018?

$177,500

Assuming the income taxes payable at the end of 2019 is $255,000, what amount of income tax expense would Kraft Company record for 2019?

$281,250

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 $2,800,000. 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?

$3,100,000

Hopkins Co. at the end of 2017, its first year of operations, 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 2018 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 30% for all years. Income taxes payable is

$300,000.

Based on the following information, compute 2018 taxable income for South Co. assuming that its pre-tax accounting income for the year ended December 31, 2018 is $460,000. Future taxable Temporary difference (deductible) amount Installment sales $384,000 Depreciation $120,000 Unearned rent ($400,000)

$356,000

Mathis Co. at the end of 2017, 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 2019 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 30% for all years. The income tax expense is

$360,000.

Cross Company reported the following results for the year ended December 31, 2018, its first year of operations: 2018 Income (per books before income taxes) $ 2,000,000 Taxable income 3,200,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2019. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2018, assuming that the enacted tax rates in effect are 40% in 2018 and 35% in 2019?

$420,000 deferred tax asset

Watson Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2018 $2,700,000 Tax exempt interest (150,000) Originating temporary difference (450,000) Taxable income $2,100,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2018 is 28%. What amount should be reported in its 2018 income statement as the current portion of its provision for income taxes?

$588,000

In Mitchell's 2018 income statement, what amount should be reported for total income tax expense?

$595,000

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2018 $ 1,800,000 Tax exempt interest (150,000) Originating temporary difference (350,000) Taxable income $1,300,000 In Mitchell's 2018 income statement, what amount should be reported for total income tax expense?

$595,000

Ferguson Company has the following cumulative taxable temporary differences: 12/31/19 12/31/18 $3,600,000 $2,560,000 The tax rate enacted for 2019 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2019 is $6,400,000 and there are no permanent differences. Ferguson's pretax financial income for 2019 is

$7,440,000.

68. Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture. For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%. If Ewing's December 31, 2018, balance sheet includes a deferred tax liability of $900,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of

$7,500,000.

Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture. For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%. If Ewing's December 31, 2018, balance sheet includes a deferred tax liability of $900,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of

$7,500,000.

The ending balance in Elephant, Inc's deferred tax liability at December 31, 2018 is

$76,000

Barton, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined-benefit pension plan for the year ended December 31, 2018. January 1, 2018 December 31, 2018 Fair value of pension plan assets $5,600,000 $6,000,000 Projected benefit obligation 6,400,000 6,880,000 Accumulated benefit obligation 1,120,000 1,360,000 Accumulated OCI - (Gains / Losses) -0- (120,000) The service cost component of pension expense for 2018 is $600,000 and the amortization of prior service cost due to an increase in benefits is $80,000. The settlement rate is 10% and the expected rate of return is 9%. What is the amount of pension expense for 2018?

$816,000

Lyons Company deducts insurance expense of $210,000 for tax purposes in 2018, but the expense is not yet recognized for accounting purposes. In 2019, 2020, and 2021, no insurance expense will be deducted for tax purposes, but $70,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $180,000 at the end of 2018. There were no deferred taxes at the beginning of 2018. What is the amount of the deferred tax liability at the end of 2018?

$84,000

The following information is available for Kessler Company after its first year of operations: Income before taxes $250,000 Federal income tax payable $104,000 Deferred income tax (4,000) Income tax expense 100,000 Net income $150,000 Kessler estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $95,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims?

$85,000

Mathis Co. at the end of 2017, 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 2019 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 30% for all years. The deferred tax asset to be recognized is

$900,000 noncurrent.

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 40% in 2018, its first year of operations. During 2018 the company had the following transactions: Received rent from Jane, Co. for 2019$ 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 2019 $162,000 79. For 2018, what is the amount of income taxes payable for Rowen, Inc?

$981,600

Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2019 operations are known).

(a) Deferred Tax Asset ($900,000 × 30%) 270,000 Benefit Due to Loss Carryforward 270,000 Benefit Due to Loss Carryforward 270,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 270,000 Income Tax Expense ($250,000 × 30%) 75,000 Deferred Tax Asset 75,000 Income Tax Expense ($250,000 × 30%) 75,000 Deferred Tax Asset 75,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 75,000 Benefit Due to Loss Carryforward 75,000

Kessler, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined-benefit pension plan for the year ended December 31, 2018: January 1, 2018 December 31, 2018 Projected benefit obligation $2,500,000 $2,850,000 Fair value of plan assets 1,250,000 1,600,000 Accumulated benefit obligation 1,930,000 2,620,000 Accumulated OCI - (PSC) 540,000 300,000 The service cost component for 2018 is $180,000 and the amortization of prior service cost is $240,000. The company's actual funding of the plan in 2018 amounted to $525,000. The expected return on plan assets and the settlement rate were both 8%. Instructions (a) Determine the pension expense to be reported in 2018. (b) Prepare the journal entry to record pension expense and the employers' contribution to the pension plan in 2018.

(a) Service cost $180,000 Interest on projected benefit obligations ($2,500,000 × 8%) 200,000 Expected return on plan assets ($1,250,000 × 8%) (100,000) Amortization of prior service cost 240,000 Pension expense—2018 $520,000 (b) Pension Expense 520,000 Pension Asset / Liability 245,000 Cash 525,000 Other Comprehensive Income (PSC) ............................. 240,000

Which of the following is required to adjust Elephant, Inc.'s deferred tax asset to its correct balance at December 31, 2018?

A debit of $84,000

An example of a permanent difference is

All of these answers are correct.

Differing measures of the pension obligation can be based on

All of these answers are correct.

Companies are required to disclose the total of each of the following except

All of these choices must be disclosed.

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.

At the end of 2018, which of the following deferred tax accounts and balances exist at December 31, 2018?

Deferred tax asset $38,400

At the beginning of 2018, 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 40% for 2018 and all future years. At the end of 2018, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet?

Deferred tax liability $156,000

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?

Depreciable property.

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.

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.

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 only.

The actuarial gains or losses that result from changes in the projected benefit obligation are called

No Yes

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?

No Yes

When a company adopts a pension plan, prior service costs should be charged to

Other comprehensive income (PSC).

Which of the following is recognized in the accounts and in the financial statements?

Postretirement asset / liability

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

Projected benefit obligation

Which of the following is not considered a permanent difference?

Stock-based compensation expense.

A company records an unrealized loss on trading securities. This would result in what type of difference and in what type of deferred income tax?

Temporary Asset

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

Temporary Liability

Which of the following disclosures of pension plan information would not normally be required?

The amount of prior service cost changed or credited in previous years.

Which of the following is not a characteristic of a defined-contribution pension plan?

The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan.

Tanner, Inc. incurred a financial and taxable loss for 2018. 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 2018 financial statements?

The refund claimed should be shown as a reduction of the loss in 2018.