Chapter 19 Quiz

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 $1,800,000. 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? A) $1,500,000 B) $1,125,000 C) $1,800,000 D) $2,100,000

$2,100,000

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2022 $ 900,000 Tax exempt interest $(75,000) Originating temporary difference $(125,000) Taxable income $700,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2022 is 35%. In Mitchell's 2022 income statement, what amount should be reported for total income tax expense? A) $325,000 B) $315,000 C) $295,000 D) $245,000

$295,000

ABC Company reported the following results for the year ended December 31, 2022, its first year of operations: 2022 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 2023. What should ABC record as a net deferred tax asset or liability for the year ended December 31, 2022, assuming that the enacted tax rates in effect are 40% in 2022 and 35% in 2023? A) $480,000 deferred tax liability B) $420,000 deferred tax asset C) $480,000 deferred tax asset D) $420,000 deferred tax liability

$420,000 deferred tax asset.

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2022 $ 900,000 Tax exempt interest $(75,000) Originating temporary difference $(125,000) Taxable income $700,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2022 is 35%. What amount should be reported in its 2022 income statement as the deferred portion of income tax expense? A) $50,000 debit (addition) B) $90,000 debit (addition) C) $50,000 credit (subtraction) D) $70,000 credit (subtraction)

$50,000 debit (addition)

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 income 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 after the date of the change.

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

Taxable income of a corporation differs from pretax financial income because of: Permanent Temporary Differences Differences A) No No B) No Yes C) Yes Yes D) Yes No

Yes, Yes.

Hopkins Co. at the end of 2022, 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 2023 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 asset to be recognized is: A) $300,000 B) $450,000 C) $600,000 D) $900,000

$600,000

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.

A fine resulting from violations of OSHA regulations.

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.

I and II only.

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.

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