FAR II - CH 16

Smith Company receives $500,000 of subscription revenue in advance during 20X1. The subscription revenue is not included on the income statement, but is reported for tax purposes in 20X1. $250,000 will be recognized in 20X2 and $250,000 in 20X3. Smith Company is subject to a 40% tax rate. What is the amount of the deferred tax asset at the end of 20X2?

$100,000

Little Corporation has pretax accounting income of $100,000. Little has interest on municipal bonds of $9,000. Depreciation for tax purposes is $4,000 greater than depreciation for financial reporting purposes. Little paid life insurance on executive officers of $5,000. Warranty expense was $10,000, and warranties paid for tax purposes was $8,000. Calculate taxable income.

$100,000 - $9,000 municipal bond interest - $4,000 additional depreciation expense + $5,000 insurance on executive officers + 2,000 warranty expense = $94,000

Bryce Corporation has pretax accounting income of $100,000. Bryce has interest on municipal bonds of $7,000. Depreciation for tax purposes is $5,000 greater than depreciation for financial reporting purposes. Bad debt expense was $3,000, and bad debts for tax purposes was $1,000. Calculate taxable income.

$100,000 - 7,000 municipal bond income - 5,000 depreciation + 2,000 temporary difference for bad debts 90,000

Mueller Corp. determines that it is more likely than not that $100,000 of its $500,000 deferred tax asset will not be realized in future years. Mueller should record a journal entry that includes a ________ to _________.

$100,000 debit; income tax expense

Garrett has a deferred tax asset of $20,000. At the end of the year, Garrett has determined that it is more likely than not that $4,000 of the deferred tax asset will not be realized. The deferred tax asset should be reported in the balance sheet at

$16,000.

Smith Company receives $500,000 of subscription revenue in advance during 20X1. The subscription revenue is not included on the income statement, but is reported for tax purposes in 20X1. $250,000 will be recognized in 20X2 and $250,000 in 20X3. Smith Company is subject to a 40% tax rate. What is the amount of the deferred tax asset at the end of 20X1?

$200,000

Manning Insurance is a property and casualty insurance company in its fifth year of operations. The income tax rate is 40%. Manning had taxable income (loss) as follows: Year 1 $10,000 Year 2 $40,000 Year 3 $30,000 Year 4 $20,000 Year 5 ($300,000) The operating loss for financial reporting purposes is $300,000 in year 5. Assuming Manning is allowed to carryback its NOLs for two years, calculate the net loss after taxes for financial reporting income.

$300,000 less the tax benefits from NOL carryback ($20,000 [($30,000+$20,000)x40%] and carryforward $100,000[$300,000-50,000)x40%]) = $180,000

Smith Company reports $5 million of pretax income that includes a $500,000 gain on disposal of a discontinued operation. Smith Company is subject to a 40% tax rate. What is the amount Smith Company should report on the income statement for the gain?

$500,000 less 40% tax expense = $300,000

Which of the following are true about income tax expense?

-Income tax expense results from the combination of current taxes payable and changes in deferred taxes. -Income tax expense includes both current and deferred portions.

For tax years beginning before January 1, 2018, a net operating loss carryback can be applied to reduce previously reported taxable income in the _____ prior year(s).

2

How frequently is the valuation allowance for deferred tax assets reevaluated?

At the end of each reporting period.

What numbers are combined to determine income tax expense? (Select all that apply.)

Changes in deferred tax assets and liabilities Change in valuation allowance for deferred tax assets Change in liability for uncertain tax positions Income tax payable

A permanent difference is

Difference between taxable income and pretax income

Which of the following statements are true with respect to permanent differences?

Differences between taxable income and pretax accounting income. Caused by transactions that will never affect taxable income. Affect the effective tax rate.

Which of the following describes the proper treatment of discontinued operations on the income statement.

Discontinued operations are a separate line item reported net of tax.

What is another name for negative taxable income?

Net operating loss

Baskin's pretax accounting income in 20X2 is $100,000. Baskin receives cash rental payments in advance for $20,000 in 20X1 and $30,000 in 20X2, which are taxed in the year of receipt. It is expected the rent will be recognized for financial reporting purposes as $25,000 in 20X3 and $25,000 in 20X4. The income tax rate is 40%. What is the amount in the deferred tax asset account at the end of 20X3?

The timing difference of $25,000 will turn around in 20X3. Therefore, the end balance in deferred taxes in 20X1 should be $25,000 x 40% = $10,000.

Which of the following are benefits of a net operating loss carryforward? (Select all that apply.)

They make an unprofitable company an attractive target for acquisition. The potential tax benefit can provide cash savings for the company in the future.

True or false: A deferred tax asset valuation allowance is up to managerial judgment.

True

True or false: Most companies' tax returns will include many tax positions that are subject to multiple interpretations.

True

A deferred tax _______ occurs when there is a future deductible amount. (Enter only one word.)

asset

Which items on the income statement require separate income tax allocation? (Select all that apply.)

discontinued operations income from continuing operations

NOL carryforwards produce cash savings because they _________ future taxable income.

offset

Consider the following estimated tax benefits relating to an uncertain tax position: Benefit of $10 with 20% likelihood; benefit of $8 with 30% likelihood; benefit of $7 with 20% likelihood; benefit of $6 with likelihood of 30%. The amount of the benefit by which income tax expense should be reduced is:

the largest amount that has a cumulative-greater-than-50% chance of being realized (20%+30%+20%) $7

Brindle Corp. is a merchandiser in its first year of operations and has a net loss of $100,000. Brindle expects to be profitable within the next 2 years. The enacted income tax rate is 40%. The income tax benefit from Brindle's NOL is

$40,000.

Persimmon Corp. is a property and casualty insurance company in its fourth year of operation. Persimmon had taxable income of $20,000 in year 1, $30,000 in year 2, and $50,000 in year 3. In year 4, Persimmon incurred a $400,000 net operating loss. Persimmon is allowed to carry its NOLs back two years. Assuming the tax rate is 40% and Persimmon's pretax accounting loss was $400,000, the net loss for financial reporting purposes in year 4 is

$400,000 less NOL carryback (40% x 80,000) less NOL carryforward (40% x 320,000) = $240,000

Peachtree Corp. is a merchandiser in its fourth year of operations. Peachtree had taxable income of $20,000 in year 1, $30,000 in year 2, and $50,000 in year 3. In year 4, Peachtree incurred a $400,000 net operating loss for tax purposes. The NOL carryforward is

$400,000.

Liberty Corp. receives rent in advance of $100,000 in 20X1. The timing difference is expected to reverse $40,000 in 20X2 and $60,000 in 20X3. The enacted tax rates are 20% in 20X1, 25% in 20X2, and 30% in 20X3. What is the amount in the deferred tax asset account at December 31, 20X1?

(25% x 40,000) + (30% x 60,000) = $28,000

Rocky Corp. receives rent in advance of $100,000 in 20X1. The timing difference is expected to reverse $30,000 in 20X2 and $70,000 in 20X3. The enacted tax rates are 30% in 20X1 and 20X2, and 40% in 20X3. What is the amount in the deferred tax asset account at December 31, 20X1?

(30% x 30,000) + (40% x 70,000) = $37,000.

In year 1, Kelley estimates bad debt expense of $10,000 for financial reporting purposes. The amount of bad debts deductible on the tax return was $2,000. The difference will be deducted on the tax return in the following year. The income tax rate is 40%. What is the balance in the deferred tax asset account at the end of year 1?

40% x (10,000 - 2,000) = $3,200

In year 1, Ling estimates warranty expense of $60,000 for financial reporting purposes. The amount of warranties deducted on the tax return was $40,000. The difference will be deducted on the tax return in the following year. The income tax rate is 40%. What is the balance in the deferred tax asset account at the end of year 1?

40% x (60,000 - 40,000) = $8,000

Which of the following is interperiod tax allocation?

Allocating income taxes between two or more reporting periods.

When a company takes an uncertain tax position and it is uncertain when the position will be resolved, where should liability for potential additional tax be reported on the financial statements?

As a long-term liability.

Loran's pretax accounting income in 20X1 is $100,000. Loran had bad debt expense for financial reporting purposes of $14,000 in 20X1. In 20X1, Loran deducted $4,000 in bad debts. Loran expects the temporary difference to reverse $3,000 in 20X2 and $7,000 in 20X3. The income tax rate is 40%. What is the amount in the deferred tax asset account at the end of 20X2?

At the end of 20X2, the amount which has not yet reversed is $7,000. Therefore, the deferred tax asset is valued at $7,000 x 40% = $2,800.

Olaf Corp. is in its third year of operations. Olaf had taxable income (loss) as follows: Year 1 $10,000 Year 2 $(50,000) Year 3 $20,000 The NOL carryforward at the end of Year 3 is

Carryforward = $50,000 less the amount used in Year 3 of $16,000. Companies are limited to offsetting a maximum of 80% of taxable income in any given year. Year 3 is $20,000 x 80% = $16,000. $50,000 - $16,000 = $34,000.

Regina Corp. is a property and casualty insurance company in its third year of operations and has a net loss of $100,000. Regina had taxable income of $10,000 and $30,000 in its first and second year of operations, respectively. Regina expects to be profitable within the next year. Regina is allowed to carry back the net operating loss to previous years. The enacted income tax rate is 40%. The income tax benefit from the NOL carryforward shown on Regina's income statement in the year of the loss is

Carryforward of $60,000 x 40% = $24,000

Which of the following are included in the journal entry for deferred taxes? (Select all that apply.)

Change in deferred tax asset or liability Income tax expense or benefit Income tax payable

Loran's pretax accounting income in 20X1 is $100,000. Loran had bad debt expense for financial reporting purposes of $14,000 in 20X1. In 20X1, Loran deducted $4,000 in bad debts. Loran expects the timing difference to reverse $3,000 in 20X2 and $7,000 in 20X3. The income tax rate is 40%. Which of the following entries would be included for the deferred tax entry required at the end of 20X2?

Credit deferred tax asset $1,200.

Rosa's pretax accounting income in Year 2 is $3,000. Rosa deducts depreciation for tax purposes in excess of accounting depreciation of $300 in Year 1 and $700 in Year 2. It is expected the depreciation deduction will reverse by $500 in Year 3 and $500 in Year 4. The income tax rate is 40%. Which of the following entries is included in the journal entry to record deferred taxes for Year 2?

Credit deferred tax liability $280.

Parson's pretax accounting income in Year 2 is $100,000. Parson deducts depreciation for tax purposes in excess of accounting depreciation of $5,000 in Year 1 and $10,000 in Year 2. It is expected the depreciation deduction will reverse $7,000 in Year 3 and $8,000 in Year 4. The income tax rate is 40%. Which of the following entries is included in the journal entry to record deferred taxes at the end of Year 2?

Credit deferred tax liability $4,000.

Brindle Corp. is in its first year of operations and has a net operating loss for tax purposes of $100,000. Brindle expects to be profitable within the next 2 years. The enacted income tax rate is 40%. Which of the following entries are included to record the NOL carryforward?

Credit income tax benefit $40,000. Debit deferred tax asset $40,000.

Regina Corp. is in its first year of operations and has a net loss of $50,000. Regina expects to be profitable within the next three years. The enacted income tax rate is 21%. Which of the following entries is included in the journal entry to record the NOL carryforward?

Debit deferred tax asset $10,500.

Baskin's pretax accounting income in 20X2 is $100,000. Baskin receives cash rental payments in advance for $20,000 in 20X1 and $30,000 in 20X2, which are taxed in the year of receipt. It is expected the rent will be recognized for financial reporting purposes as $25,000 in 20X3 and $25,000 in 20X4. The income tax rate is 40%. Which of the following entries is included in the journal entry to record deferred taxes at the end of 20X2?

Debit deferred tax asset $12,000.

Items related to which of the following make up other comprehensive income? (Select all that apply.)

Derivatives Investments Postretirement benefit plans Foreign currency translations

True or false: A company having multiple temporary differences must show them individually in the financial statements.

False

True or false: Items in other comprehensive income are reported without the respective income tax effects.

False

True or false: Only the current portion of the tax expense or benefit of a company is a required disclosure.

False

Why should outside analysts and investors consider how effectively management has managed the company's tax exposures?

Income taxes represent one of the largest expenditures incurred by a company. Unexpected additional tax expenditures can diminish the prospective rate of return.

What is the balance sheet effect of a net operating loss carryback that is allowed for a property and casualty insurance company?

It creates a tax receivable.

Which of the following are effects of a valuation allowance account for deferred taxes? (Select all that apply.)

It reduces the deferred tax asset account. It increases tax expense.

Which of the following can indicate a tax shelter?

Net operating loss carryforward

When can the benefit of future deductible amounts be realized?

Only if future income is at least equal to the deferred deduction amount.

Payne Corporation has a permanent difference of $20,000 for life insurance premiums on corporate executives. What effect does this have on the effective tax rate?

The effective tax rate is higher than the statutory rate.

What are the two steps used for reporting uncertain tax positions?

The tax benefit is measured as the largest amount of benefit that is greater than 50% likely to be realized. It is more likely than not that the position will be sustained.

If it is determined that it is more likely than not that a tax benefit will not be realized, the company would record the following:

an additional tax liability for the benefit that may not be upheld. a current income tax payable that reflects the benefit of the deduction.

What approach does the FASB use in accounting for deferred taxes?

balance sheet approach

A permanent difference is a difference

between pretax accounting income and taxable income that never reverses

A net operating loss _____ must be applied to the earlier year first and then brought forward to the next year.

carryback

Gross recognized a tax benefit of $7 relating to an uncertain tax position of $10. If subsequently, the entire position is allowed, Gross should

credit tax expense for $3

Gregory recognized a tax benefit of $6 relating to an uncertain tax position of $10. When uncertainty is resolved and, subsequently, the entire position is disallowed, Gregory should

debit tax expense for $6

Klein recognized a tax benefit of $7 relating to an uncertain tax position of $10. If subsequently, the entire position is disallowed, Klein should

debit tax expense for $7

Which of the following items are disclosures for income tax expense in the notes to the financial statements? (Select all that apply.)

deferred portion of income tax expense current portion of income tax expense

Deferred tax liabilities should be netted against

deferred tax assets.

In year 1, Casa Corp. has depreciation expense for income statement purposes of $20,000. The depreciation deduction on the tax return was $30,000. The enacted tax rate is 40%. If this is the only difference between pretax income and taxable income, Casa would record a

deferred tax liability of $4,000.

Which of the following are required disclosures for deferred tax assets and liabilities in the notes to the financial statements? (Select all that apply.)

effect of each type of temporary difference total of all deferred tax assets total valuation allowance for deferred tax assets

The tax rate used to measure deferred tax assets and liabilities is the _______ tax rate in the year(s) the temporary difference reverses.

enacted

What is the tax rate used to measure deferred tax assets and liabilities?

enacted rate in the year the differences reverse

If a company's entire uncertain tax position is subsequently upheld, it will record a reduction to income tax to reflect that it owes no additional tax.

expense

If a company believes it is not "more likely than not" that it will be able to sustain a tax position on its merits, which of the following is true? (Select all that apply)

income tax expense is recorded at the same amount as if the tax deduction was not taken. None of the tax benefit is realized.

Recognizing deferred tax assets and liabilities is referred to as ______ tax allocation.

interperiod

Allocating income taxes among financial statement components in a specific reporting period is known as ______ tax allocation.

intraperiod

A valuation allowance is needed if _____ that some portion or all of a deferred tax asset will not be realized.

it is more likely than not

Munten Company's management derives four estimates relating to the possible tax benefit of its tax position. The amount that Munten should recognize relating to this potential tax benefit is the

largest amount that has a cumulative greater-than-50% chance of realizability

Which of the following items are permanent differences? (Select all that apply.)

life insurance proceeds on an insured executive interest on municipal bonds

Which of the following items are permanent differences? (Select all that apply.)

life insurance proceeds on the death of insured executive interest on municipal bonds premiums paid for life insurance on key officers

Uncertainty in income tax expenses results from

management taking a tax position that might differ from the IRS position.

When managers make decisions, they consider tax effects because their goal is to (Select all that apply.)

minimize taxes. delay payment of taxes.

A company may recognize tax benefits from the position it takes only if it is

more likely than not that the position will be sustained.

When other comprehensive income items are reported in the statement of comprehensive income, they are reported of their respective income tax effects.

net

A difference between financial accounting income and taxable income that never reverses is called a(n) ________ difference.

permanent

A net operating loss carryforward

reduces taxable income in future years.

Adjustments to the valuation allowance are based on the amount of the deferred tax asset that will not be realized due to insufficient ______ _______ in future years.

taxable income

If a company believes there is a 40% chance of their uncertain tax position being upheld,

the expected tax benefit cannot be recognized as a reduction of tax expense.

When a phased-in change in tax rates is scheduled to occur,

the tax rate of each future year is multiplied by the amounts reversing in each of those years.

A valuation account for a deferred tax asset would likely be necessary if

there is not sufficient estimated taxable income in the future to use future deductible amounts.

Which of the following are required disclosures for deferred tax assets and liabilities in the notes to the financial statements? (Select all that apply.)

total of all deferred tax assets effect of each type of temporary difference total valuation allowance for deferred tax assets

If it is more likely than not that all or a portion of a deferred tax asset will not be realized, then the amount of the deferred tax asset reported on the balance sheet should be reduced by a _______ _______

valuation allowance