Chapter 19

Grey Corporation prepared the following reconciliation for 2012, its first year of operations: Pretax financial income for 2012 $1,030,000 Tax exempt interest (175,000) Originating temporary difference (345,000) Taxable income 820,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 35%. The enacted tax rate for 2012 is 30%. What amount should Grey report in its 2012 income statement as the deferred portion of the provision for income taxes? $61,250 credit $103,500 credit $59,500 debit $120,750 debit

$120,750 debit $345,000 X 35%, or $120,750 as a debit value.

Larsen Corporation reported $100,000 in revenues in its 2010 financial statements, of which $44,000 will not be included in the tax return until 2011. The enacted tax rate is 40% for 2010 and 35% for 2011. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2010? $22,400 $19,600 $15,400 $17,600

$15,400 $44,000 X .35 = $15,400.

Gautreaux Company reported the following results for the year ended December 31, 2011, its first year of operations: Income (per books before income taxes) $1,650,000 Taxable income 2,225,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2012. What should Gautreaux record as a net deferred tax asset or liability for the year ended December 31, 2011, assuming that the enacted tax rates in effect are 35% in 2011 and 30% in 2012? $172,500 deferred tax asset $201,250 deferred tax asset $172,500 deferred tax liability $201,250 deferred tax liability

$172,500 deferred tax asset ($2,225,000 less $1,650,000) * 30% results in $172,500 deferred tax asset.

In its 2012income statement,Baker Inc.reported depreciation of $2,220,000 andnontaxable municipal bondinterest revenue of $420,000.Bakerreported depreciation of $3,300,000 on its 2012income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years.Baker's enacted income tax rates are 35% for 2012, 30% for 2013, and 25% for 2014and 2015. What deferred income tax liabilitywill be reportedinBaker's December 31, 2012balance sheet? $288,000 $450,000 $525,000 $372,000

$288,000

Collier Corporation has income before income taxes of $532,000 in 2011. The current provision for income taxes is $105,000 and the provision for deferred income taxes is $82,500. Collier's net income for 2011 is $449,500. $427,000. $509,500. $344,500.

$344,500. Net income is [$532,000 - ($105,000 + $82,500)] $344,500.

Mast, Inc. reports a taxable and financial loss of $650,000 for 2011. Its pretax financial income for the last two years was as follows: 2009 $300,000 2010 320,000 The amount that Mast, Inc. reports as a net loss for financial reporting purposes in 2011, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is $464,000 loss. $650,000 loss. $ -0-. $195,000 loss.

$464,000 loss. $650,000 loss less the tax benefit of ([$300,000 * 30%] plus [$320,000 * 30%]) results in a net loss of $464,000.

Ranger, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 35% in 2011, its first year of operations. During 2011 the company had the following transactions: Received rent from Jennings Co. for 2012 $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 2012 108,000 For 2011, what is the amount of income taxes payable for Ranger, Inc? $572,600 $648,200 $628,600 $603,400

$572,600

Weasley Corp.'s 2011 income statement showed pretax accounting income of $1,020,000. To compute the federal income tax liability, the following 2011 data are provided: Income from exempt municipal bonds $55,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 72,000 Estimated federal income tax payments made 165,000 Enacted corporate income tax rate 28% What amount of current federal income tax liability should be included in Weasley's December 31, 2011 balance sheet? $100,440 $85,040 $212,240 $250,040

$85,040 [($1,020,000 - $55,000 - $72,000) X 28%] minus $165,000 equals $85,040.

Mergenthaler Corp.'s 2011 income statement showed pretax accounting income of $1,035,000. To compute the federal income tax liability, the following 2011 data are provided: Income from exempt municipal bonds $41,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 97,000 Estimated federal income tax payments made 159,500 Enacted corporate income tax rate 27.5% What amount of current federal income tax liability should be included inMergenthaler's December 31, 2011 balance sheet? $109,275 $163,075 $87,175 $132,578

$87,175

When accounting for income taxes, the differences between IFRS and U.S. GAAP involve: All of these options are differences in the accounting for income taxes. differences in implementation guidance. a few exceptions to the asset-liability approach. some minor differences in the recognition, measurement, and disclosure criteria.

All of these options are differences in the accounting for income taxes.

Which of the following is a permanent difference? Deductible pension funding exceeding expense. Product warranty liabilities. Interest received on state and municipal obligations. Installment sales accounted for on an accrual basis.

Interest received on state and municipal obligations.

Which of the following are temporary differences that are normally classified as expenses or losses and are deductible after they are recognized in financial income? Product warranty liabilities. Fines and expenses resulting from a violation of law. Depreciable property. Advance rental receipts.

Product warranty liabilities. Product warranty liabilities are temporary differences normally classified as an expense or loss that are deductible after they are recognized in financial income.

Which of the following statements related to loss carrybacks and carryforwards is correct? The benefit due to a loss carryback can be reported in both the loss year and future years. The benefit due to a loss carryforword is reported only in the loss year. The benefit due to a loss carryforward can be reported in both the loss year and future years. The benefit due to a loss carryback is reported only in the second year preceding the loss year.

The benefit due to a loss carryforward can be reported in both the loss year and future years.

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 No Yes Yes Yes No No Yes No

Yes Yes

A deferred tax valuation allowance account is used to recognize a reduction in: a deferred tax liability only. a deferred tax asset only. income tax expense. both a deferred tax asset and deferred tax liability.

a deferred tax asset only.

A deferred tax valuation allowance account is used to recognize a reduction in income tax expense. a deferred tax liability only. a deferred tax asset only. both a deferred tax asset and a deferred tax liability.

a deferred tax asset only. A valuation allowance account is established to recognize the reduction in a deferred tax asset.

Broker 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 Broker would be a fine resulting from violations of OSHA regulations. making installment sales during the year. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. a balance in the Unearned Rent account at year end.

a fine resulting from violations of OSHA regulations. An item that would create a permanent difference in accounting and taxable incomes would be a fine resulting from violations of OSHA regulations.

The FASB believes that the most consistent method for accounting for income taxes is the: asset-liability method. benefit-obligation method. temporary-permanent method. carryback-carryforward method.

asset-liability method.

The FASB believes that the most consistent method for accounting for income taxes is the temporary-permanent method. benefit-obligation method. carryback-carryforward method. asset-liability method.

asset-liability method. The FASB believes the asset-liability model to be the most consistent method for accounting for income taxes.

In computing deferred income taxes for which graduated tax rates are a significant factor, companies are required to use the: graduated rates. average rates. actual rates. incremental rates.

average rates.

On December 31, 2011, Mayfield Inc. has determined that it is more likely than not that $120,000 of a $300,000 deferred tax asset will not be realized. The journal entry to record this reduction in asset value will include a credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $120,000. debit to Income Tax Payable of $120,000. credit to Income Tax Expense for $180,000. debit to Income Tax Expense for $180,000.

credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $120,000. A company reduces a deferred tax asset by a valuation account if it is more likely than not that it will not realize some portion or all of the deferred asset.

A deferred income tax asset or liability is usually classified as a current or noncurrent based on the classification of the related asset (liability) for financial reporting purposes. current asset. noncurrent asset or liability. current or noncurrent according to the expected reversal date of the temporary difference.

current or noncurrent based on the classification of the related asset (liability) for financial reporting purposes. The classification of a deferred asset or liability depends on the classification of the related asset or liability for financial reporting purposes.

All of the following are examples of temporary differences that result in tax deductions in future years, except: estimated liabilities related to discontinued operations. depreciable property. product warranty liabilities. litigation accruals.

depreciable property.

All of the following are possible sources of taxable income available to realize a tax benefit for deductible temporary differences except: future taxable income exclusive of reversing temporary differences. taxable income in prior carryback years if carryback is permitted. tax planning strategies that would accelerate taxable amounts to utilize expiring carryforwards. future reversals of existing deductible temporary differences.

future reversals of existing deductible temporary differences.

Deferred income taxes are based on the: current tax rate in all cases. future tax rates in all cases. future tax rates if they have been enacted into law. current tax rate or future tax rates, depending on when the temporary difference will reverse.

future tax rates if they have been enacted into law.

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

in two amounts: one for the net current amount and one for the net noncurrent amount. Deferred taxes should be reported on the balance sheet in two amounts: one for the net current amount and one for the net noncurrent amount.

Deferred tax expense is the: increase in a deferred tax liability. increase in a deferred tax asset. decrease in a deferred tax liability. None of the above.

increase in a deferred tax liability.

Deferred tax expense is the: decrease in a deferred tax liability. None of the above. increase in a deferred tax liability. increase in a deferred tax asset.

increase in a deferred tax liability. Deferred tax expense is the increase in a deferred tax liability.

The deferred tax expense is the increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability

increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.

A deferred tax liability represents the: decrease in taxes payable in future years as a result of taxable temporary differences. decrease in taxes saved in future years as a result of deductible temporary differences. increase in taxes saved in future years as a result of deductible temporary differences. increase in taxes payable in future years as a result of taxable temporary differences.

increase in taxes payable in future years as a result of taxable temporary differences.

A deferred tax liability represents the increase in taxes saved in future years as a result of deductible temporary differences. decrease in taxes saved in future years as a result of deductible temporary differences. decrease in taxes payable in future years as a result of taxable temporary differences. increase in taxes payable in future years as a result of taxable temporary differences.

increase in taxes payable in future years as a result of taxable temporary differences. A deferred tax liability is the increase in future taxes payable due to temporary taxable differences.

A deferred tax asset represents the: decrease in taxes saved in future years as a result of deductible temporary differences. decrease in taxes payable in future years as a result of deductible temporary differences. increase in taxes payable in future years as a result of deductible temporary differences. increase in taxes saved in future years as a result of deductible temporary differences.

increase in taxes saved in future years as a result of deductible temporary differences.

A deferred tax asset represents the decrease in taxes payable in future years as a result of deductible temporary differences. decrease in taxes saved in future years as a result of deductible temporary differences. increase in taxes saved in future years as a result of deductible temporary differences. increase in taxes payable in future years as a result of deductible temporary differences.

increase in taxes saved in future years as a result of deductible temporary differences. A deferred tax asset is the increase in taxes saved in future years due to a temporary deductible difference.

A net operating loss: must always be carried forward 20 years. may be carried back 2 years or carried forward up to 20 years. must always be carried back 2 years. occurs when a company reports a net loss in their income statement

may be carried back 2 years or carried forward up to 20 years.

Income tax expense is computed as income tax payable: plus or minus the change in deferred income taxes. less an increase in a deferred tax liability. less a decrease in a deferred tax asset. plus or minus the change in provision for income taxes.

plus or minus the change in deferred income taxes.

Income tax expense is based on: pretax income. income from continuing operations. operating income. taxable income.

pretax income.

Income tax expense is based on taxable income. income from continuing operations. pretax income. operating income.

pretax income. Income tax expense is based on pretax income.

A valuation account is used to: reduce a deferred tax asset. increase a deferred tax liability. increase a deferred tax asset. reduce a deferred tax liability.

reduce a deferred tax asset.

The last procedure (step) in the computation of deferred income taxes is to: reduce deferred tax assets by a valuation allowance if necessary. measure the total deferred tax asset (liability) using the appropriate tax rate. measure deferred tax assets for each type of tax credit carryforward. identify the types and amounts of existing temporary differences.

reduce deferred tax assets by a valuation allowance if necessary.

The last step (procedure) in the computation of deferred income taxes is to identify the types and amounts of existing temporary differences. measure the total deferred tax asset (liability) using the appropriate tax rate. reduce deferred tax assets by a valuation allowance if necessary. measure deferred tax assets for each type of tax credit carryforward.

reduce deferred tax assets by a valuation allowance if necessary. The last step in the computation of deferred income taxes is to reduce deferred tax assets by a valuation allowance if necessary.

Taxable amounts are temporary differences that: decrease taxable income in future years. increase pretax financial income in future years. require the recording of a deferred tax liability. require the recording of a deferred tax asset.

require the recording of a deferred tax liability.

All of the following are examples of temporary differences that result in taxable amounts in future years except: investments accounted for under the equity method. long-term construction contracts. subscriptions received in advance. installment sales.

subscriptions received in advance.

Income tax payable is based (computed) on: taxable income. income before taxes. pretax financial income. income for book purposes.

taxable income.

Recognition of tax benefits in the loss year due to a loss carryforward requires the establishment of a deferred tax liability. the establishment of a deferred tax asset. the establishment of an income tax refund receivable. only a note to the financial statements.

the establishment of a deferred tax asset. Recognition of tax benefits in the loss year due to a loss carryforward requires the establishment of a deferred tax asset.

Practice Question 17 Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if it appears likely that a future tax rate will be greater than the current tax rate. the future tax rates have been enacted into law. it appears likely that a future tax rate will be less than the current tax rate. it is probable that a future tax rate change will occur.

the future tax rates have been enacted into law. 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.

Future deductible amounts will cause: taxable income to be more than pretax financial income in the future. the recording of a deferred tax liability. a decrease in pretax financial income in future years. the recording of a deferred tax asset.

the recording of a deferred tax asset.

Income tax expense should be allocated to all of the following except: continuing operations. prior period adjustments. discontinued operations. unusual or infrequent items.

unusual or infrequent items.