Chapter 17 Practice Problems

At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $ 60,000 Accrued warranty costs, estimated to be paid in 2016 $130,000 Operating loss carryforward $ 95,000 Installment sales revenue, will be collected in 2016 $ 65,000 Prepaid rent expense, will be used in 2016 $ 30,000 What is Elephant, Inc.'s taxable income for 2015?

$ 630,000

Hopkins Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $1,500,000 Estimated litigation expense 2,000,000 Extra depreciation for taxes (3,000,000) Taxable income $ 500,000 The estimated litigation expense of $2,000,000 will be deductible in 2015 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years. The deferred tax liability to be recognized is

$0 $900,000

Khan, Inc. reports a taxable and financial loss of $1,950,000 for 2015. Its pretax financial income for the last two years was as follows: 2013 $900,000 2014 1,200,000 The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2015, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is

$1,365,000 loss.

Foltz Corp.'s 2014 income statement had pretax financial income of $250,000 in its first year of operations. Foltz uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2014, and the enacted tax rates for 2014 to 2018 are as follows: Book Over (Under) Tax Tax Rates 2014 $(50,000) 35% 2015 (65,000) 30% 2016 (15,000) 30% 2017 60,000 30% 2018 70,000 30% There are no other temporary differences. In Foltz's December 31, 2014 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be

$15,000 $70,000

Lyons Company deducts insurance expense of $126,000 for tax purposes in 2014, but the expense is not yet recognized for accounting purposes. In 2015, 2016, and 2017, no insurance expense will be deducted for tax purposes, but $42,000 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 $108,000 at the end of 2014. There were no deferred taxes at the beginning of 2014. What is the amount of income tax expense for 2014?

$158,400

Munoz Corp.'s books showed pretax financial income of $2,700,000 for the year ended December 31, 2015. In the computation of federal income taxes, the following data were considered: Gain on an involuntary conversion $1,170,000 (Munoz has elected to replace the property within the statutory period using total proceeds.) Depreciation deducted for tax purposes in excess of depreciation deducted for book purposes 180,000 Federal estimated tax payments, 2015 225,000 Enacted federal tax rate, 2015 30% What amount should Munoz report as its current federal income tax liability on its December 31, 2015 balance sheet?

$180,000

Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 800,000 Estimated litigation expense 2,000,000 Installment sales (1,600,000) Taxable income $ 1,200,000 The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years. The income tax expense is

$240,000.

Cross Company reported the following results for the year ended December 31, 2014, its first year of operations: 2014 Income (per books before income taxes) $ 1,500,000 Taxable income 2,400,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2015. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2014, assuming that the enacted tax rates in effect are 40% in 2014 and 35% in 2015?

$315,000 deferred tax asset

Operating income and tax rates for C.J. Company's first three years of operations were as follows: Income _ Enacted tax rate 2014 $300,000 35% 2015 ($750,000) 30% 2016 $1,260,000 40% Assuming that C.J. Company opts to carryback its 2015 NOL, what is the amount of income taxes payable at December 31, 2016?

$324,000

On January 1, 2015, Gore, Inc. purchased a machine for $1,350,000 which will be depreciated $135,000 per year for financial statement reporting purposes. For income tax reporting, Gore elected to expense $150,000 and to use straight-line depreciation which will allow a cost recovery deduction of $120,000 for 2015. Assume a present and future enacted income tax rate of 30%. What amount should be added to Gore's deferred income tax liability for this temporary difference at December 31, 2015?

$40,500

Wright Co., organized on January 2, 2014, had pretax accounting income of $640,000 and taxable income of $2,080,000 for the year ended December 31, 2014 The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2015 $480,000 2016 240,000 2017 240,000 2018 480,000 The enacted income tax rates are 35% for 2014, 30% for 2015 through 2017, and 25% for 2018. If Wright expects taxable income in future years, the deferred tax asset in Wright's December 31, 2014 balance sheet should be

$408,000.

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, 2015, balance sheet includes a deferred tax liability of $600,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of

$5,000,000.

A reconciliation of Gentry Company's pretax accounting income with its taxable income for 2014, its first year of operations, is as follows: Pretax accounting income $3,000,000 Excess tax depreciation (150,000) Taxable income $2,850,000 The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2014, 35% in 2015 and 2016, and 30% in 2017. The total deferred tax liability to be reported on Gentry's balance sheet at December 31, 2014, is

$50,000.

Rowen, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 40% in 2015, its first year of operations. During 2015 the company had the following transactions: Received rent from Jane, Co. for 2016 $64,000 Municipal bond income $80,000 Depreciation for tax purposes in excess of book depreciation $40,000 Installment sales revenue to be collected in 2016 $108,000 For 2015, what is the amount of income taxes payable for Rowen, Inc.?

$654,400

In 2014, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $2,400,000. The facilities were sold in March 2015 and a $2,400,000 loss was recognized for tax purposes. Also in 2014, Krause paid $100,000 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 2014 and 2015, and that Krause paid $780,000 in income taxes in 2014, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2014, should be a

$720,000 asset.

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 $85,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims?

$75,000

TLR Productions reported income before taxes of $ 195 comma 000$195,000 for the years​ 2016, 2017, and 2018. In 2019 they experienced a loss of $ 500 comma 000$500,000. TLR had a tax rate of 2525​% in 2016 and​ 2017, and a rate of 3535​% in 2018 and 2019. Assuming the company uses the carryback provisions for the net operating​ loss, what amount should be reported as Income Tax Refund Receivable in​ 2019?

117000

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 $655,000 Warranty expense and associated liability in the amount of $145,000 what is the amount of MK's deffered tax asset or liability for 2018?

145,000*.30=43500

TLR Productions reported income before taxes of $185,000 for the years​ 2016, 2017, and 2018. In 2019 they experienced a loss of $400,000. TLR had a tax rate of 35​% in 2016 and​ 2017, and a rate of 45​% in 2018 and 2019. Assuming the company uses the carryback provisions for the net operating​ loss, what amount should be reported as Income Tax Refund Receivable in​ 2019?

148000

TLR Productions reported income before taxes of $ 205 comma 000$205,000 for the years​ 2016, 2017, and 2018. In 2019 they experienced a loss of $ 500 comma 000$500,000. TLR had a tax rate of 3535​% in 2016 and​ 2017, and a rate of 4545​% in 2018 and 2019. Assuming the company uses the carryback provisions for the net operating​ loss, what amount should be reported as Income Tax Refund Receivable in​ 2019?

164000

Greene Co. has pretax book income for the year ended December​ 31, 2018 in the amount of $305,000 and has a tax rate of 30​%. Depreciation for tax purposes exceeded book depreciation by $16,500. deferred tax liability

16500*.30 = 4950

Danio​ Inc.'s income before taxes is $450,000 and its tax rate is 20​%. Danio included $40,000 of interest from municipal bonds in the $450,000. There are no other book−tax differences. What is the effective tax rate for Danio​ Inc.?

18%

Caesar Corporation reported income before taxes of $210,000 for the years​ 2016, 2017, and 2018. In 2019 they experienced a loss of $210,000. The company had a tax rate of 25​% in 2016 and​ 2017, and a rate of 35​% in 2018 and 2019. Assuming Caesar uses the carryback provisions for the net operating​ loss, by what amount will the income tax benefit reduce the net loss in​ 2019?

210000*.25=52500

Danio​ Inc.'s income before taxes is $150,000 and its tax rate is 30​%. Danio included $$30,000 of interest from municipal bonds in the $150,000. There are no other bookminus−tax differences. What is the effective tax rate for Danio​ Inc.?

24%

Danio​ Inc.'s income before taxes is $450,000 and its tax rate is 3030​%. Danio included $20,000 of interest from municipal bonds in the $450,000. There are no other bookminus−tax differences. What is the effective tax rate for Danio​ Inc.?

29%

A company may carry back a tax loss for​ ________ years and carry forward a tax loss for​ ________ years.

2;20

The following information applies to the operations of MK Inc. for 2018 and 2019.Assume a tax rate of 20​% for both years. 2018​ information: Sales on account in the amount of $695,000 Warranty expense and associated liability in the amount of $ 125,000 MK's book income?

695000-125000=570000

Caesar Corporation reported income before taxes of $ 230 comma 000$230,000 for the years​ 2016, 2017, and 2018. In 2019 they experienced a loss of $ 230 comma 000$230,000. The company had a tax rate of 3535​% in 2016 and​ 2017, and a rate of 4545​% in 2018 and 2019. Assuming Caesar uses the carryback provisions for the net operating​ loss, by what amount will the income tax benefit reduce the net loss in​ 2019

80500

At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $ 60,000 Accrued warranty costs, estimated to be paid in 2016 $130,000 Operating loss carryforward $ 95,000 Installment sales revenue, will be collected in 2016 $ 65,000 Prepaid rent expense, will be used in 2016 $ 30,000 Which of the following is required to adjust Elephant, Inc.'s deferred tax asset to its correct balance at December 31, 2015?

A debit of $42,000

Rowen, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 40% in 2015, its first year of operations. During 2015 the company had the following transactions: Received rent from Jane, Co. for 2016 $64,000 Municipal bond income $80,000 Depreciation for tax purposes in excess of book depreciation $40,000 Installment sales revenue to be collected in 2016 $108,000 At the end of 2015, which of the following deferred tax accounts and balances is reported on Rowen, Inc.'s balance sheet?

Deferred tax asset $25,600

Greene Co. has book income of $ 435,000 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 Exp 130500 Inc tax Pay 130500

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.

Dante Inc. reported fines and penalties on their income statement this year. What​ (if any)​ book-tax difference will​ result?

Permanent​ difference; book income less than 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.

Tanner, Inc. incurred a financial and taxable loss for 2015. 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 2015 financial statements?

The refund claimed should be shown as a reduction of the loss in 2015.

At the December 31, 2014 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2015, a future taxable amount will occur and

Unruh will record a decrease in a deferred tax liability in 2015.

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.

37. 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. I and II only.

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? a. Advance rental receipts. b. Product warranty liabilities. c. Depreciable property. d. Fines and expenses resulting from a violation of law.

b. Product warranty liabilities.

At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2011, a future taxable amount will occur and a. pretax financial income will exceed taxable income in 2011. b. Unruh will record a decrease in a deferred tax liability in 2011. c. total income tax expense for 2011 will exceed current tax expense for 2011. d. Unruh will record an increase in a deferred tax asset in 2011.

b. Unruh will record a decrease in a deferred tax liability in 2011.

47. Deferred taxes should be presented on the balance sheet a. as one net debit or credit amount. b. in two amounts: one for the net current amount and one for the net noncurrent amount. c. in two amounts: one for the net debit amount and one for the net credit amount. d. as reductions of the related asset or liability accounts.

b. in two amounts: one for the net current amount and one for the net noncurrent amount.

The amount of income a company reports in its financial statements is known as​ ________.

book income

32. 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.

S50. A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be a. the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year. b. totally eliminated from the financial statements if the amount is related to a noncurrent asset. c. based on the classification of the related asset or liability for financial reporting purposes. d. the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

c. based on the classification of the related asset or liability for financial reporting purposes.

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. a. item II only b. items I and II only c. items II and III only d. items I and IV only

c. items II and III only

51. All of the following are procedures for the computation of deferred income taxes except to a. identify the types and amounts of existing temporary differences. b. measure the total deferred tax liability for taxable temporary differences. c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks. d. All of these are procedures in computing deferred income taxes.

c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks.

S39. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be a. handled retroactively in accordance with the guidance related to changes in accounting principles. b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. c. reported as an adjustment to tax expense in the period of change. d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

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

40. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if a. it is probable that a future tax rate change will occur. b. it appears likely that a future tax rate will be greater than the current tax rate. c. the future tax rates have been enacted into law. d. it appears likely that a future tax rate will be less than the current tax rate.

c. the future tax rates have been enacted into law.

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.

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

49. Tanner, Inc. incurred a financial and taxable loss for 2010. 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 2010 financial statements? a. The reduction of the loss should be reported as a prior period adjustment. b. The refund claimed should be reported as a deferred charge and amortized over five years. c. The refund claimed should be reported as revenue in the current year. d. The refund claimed should be shown as a reduction of the loss in 2010.

d. The refund claimed should be shown as a reduction of the loss in 2010.

33. 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.

S28. A major distinction between temporary and permanent differences is a. permanent differences are not representative of acceptable accounting practice. b. temporary differences occur frequently, whereas 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. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

Inferno Inc. is embroiled in a lawsuit. In​ 2018, they recognize that a loss of $75,000 is probable. Given a tax rate of 30​%, how will this be treated in the accounting​ records?

deferred tax asset of $ 22 500

Inferno Inc. is embroiled in a lawsuit. In​ 2018, they recognize that a loss of $75,000 is probable. Given a tax rate of 20​%, how will this be treated in the accounting​ records?

deffered tax asset of $15000

Deferred taxes should be presented on the balance sheet

in two amounts: one for the net current amount and one for the net noncurrent amount.

Greene Co. has book income of $445,000​, 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?

inc tax exp 133500 inc tax pay 133500

Piper, Inc. reported a net deferred tax asset balance of $168,350 resulting from an estimated warranty expense accrual for book purposes. The total bookminus−tax difference related to the bases of the estimated warranty liability is $455,000. The enacted statutory tax rate related to this balance changed from 37​% to 32​%, effective immediately. What journal entry will Piper need to make to adjust for this change in tax​ rates?

inc tax exp 22750 deff tax asset 22750

​Piper, Inc. reported a net deferred tax asset balance of $172,050 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 37​% to 32​%, effective immediately. What journal entry will Piper need to make to adjust for this change in tax​ rates?

inc tax exp 23250 deff tax asset 23250 465,000*.32= 148800 172050-148800=23250

Charmed​ Inc.'s income before taxes is $690,000 and its tax rate is 45​%. Charmed included $20,000 in nonminus−deductible life insurance premiums in the $690,000. There are no other bookminus−tax differences. What is the journal entry to record income tax​ expense?

inc tax exp 319500 inc tax pay 319500

Charmed​ Inc.'s income before taxes is $700,000 and its tax rate is 45​%. Charmed included $60,000 in non−deductible life insurance premiums in the $700,000. There are no other book−tax differences. What is the journal entry to record income tax​ expense?

inc tax exp 342000 inc tax pay 342000

Charmed​ Inc.'s income before taxes is $ 720 comma 000$720,000 and its tax rate is 4545​%. Charmed included $ 50 comma 000$50,000 in nonminus−deductible life insurance premiums in the $ 720 comma 000$720,000. There are no other bookminus−tax differences. What is the journal entry to record income tax​ expense?

inc tax exp 346500 inc tax pay 346500

Greene Co. has book income of $415,000​, and a tax rate of 20​%. Assuming there are no book−tax ​differences, what will the journal entry be to record the income tax​ expense?

inc tax exp 83000 inc tax pay 83000

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.

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

taxable income

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.