Ch 7

Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Installment income of $3,000,000 will be collected in the following years when the enacted tax rates are: Collection of Income Enacted Tax Rates 2020 300,000 25% 2021 600,000 20% 2022 900,000 20% 2023 1,200,000 15% The installment income is Dunn's only temporary difference. What amount should be included in the deferred income tax liability in Dunn's December 31, 2020 balance sheet? A. $675,000 B. $750,000 C. $480,000 D. $555,000

C. $480,000

A company should add a decrease in a deferred tax liability to income taxes payable in computing income tax expense. True False

False

Companies should classify deferred tax accounts on the balance sheet as current assets or current liabilities. True False

False

A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year. True False

True

Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period. True False

True

Permanent differences do not give rise to future taxable or deductible amounts. True False

True

The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset. True False

True

Horner Corporation has a deferred tax asset at December 31, 2022 of $200,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 30% for 2019-2021; 25% for 2022; and 20% for 2023 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: A. $100,000 B. $30,000 C. $40,000 D. $35,000

A. $100,000

Lyons Company deducts insurance expense of $210,000 for tax purposes in 2021, but the expense is not yet recognized for accounting purposes. In 2022, 2023, and 2024, 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 20% and income taxes payable of $180,000 at the end of 2021. There were no deferred taxes at the beginning of 2021. Assuming that income taxes payable for 2022 is $240,000, the income tax expense for 2022 would be what amount? A. $226,000 B. $282,000 C. $254,000 D. $240,000

A. $226,000

Kraft Company made the following journal entry in late 2021 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2022 and 2023, 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 2021, and its tax rate is 25%. Assuming the income taxes payable at the end of 2022 is $255,000, what amount of income tax expense would Kraft Company record for 2022? A. $273,750 B. $236,250 C. $292,500 D. $217,500

A. $273,750

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when A. it is more likely than not that the tax position will be sustained upon audit. B. Any of these choices exist. C. it is probable and can be reasonably estimated. D. there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities.

A. it is more likely than not that the tax position will be sustained upon audit.

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

A. the establishment of a deferred tax asset.

Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2020 related to $1,500,000 of excess depreciation. In December of 2020, a new income tax act is signed into law that lowers the corporate rate from 30% to 25%, effective January 1, 2022. If taxable amounts related to the temporary difference are scheduled to be reversed by $750,000 for both 2021 and 2022, Palmer should increase or decrease deferred tax liability by what amount? A. Decrease by $75,000 B. Increase by $75,000 C. Decrease by $37,500 D. Increase by $37,500

C. Decrease by $37,500

Recognizing a valuation allowance for a deferred tax asset requires that a company A. pass a recognition threshold, after assuming that it will be audited by taxing authorities. B. consider only the positive information in determining the need for a valuation allowance. C. consider all positive and negative information in determining the need for a valuation allowance. D. take an aggressive approach in its tax planning.

C. consider all positive and negative information in determining the need for a valuation allowance.

Kraft Company made the following journal entry in late 2021 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2022 and 2023, 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 2021, and its tax rate is 25%. What amount of income tax expense should Kraft Company report at the end of 2021? A. $267,500 B. $117,500 C. $211,250 D. $192,500

D. $192,500

Lyons Company deducts insurance expense of $210,000 for tax purposes in 2021, but the expense is not yet recognized for accounting purposes. In 2022, 2023, and 2024, 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 20% and income taxes payable of $180,000 at the end of 2021. There were no deferred taxes at the beginning of 2021. What is the amount of income tax expense for 2021? A. $180,000 B. $234,000 C. $210,000 D. $222,000

D. $222,000

Lyons Company deducts insurance expense of $210,000 for tax purposes in 2021, but the expense is not yet recognized for accounting purposes. In 2022, 2023, and 2024, 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 20% and income taxes payable of $180,000 at the end of 2021. There were no deferred taxes at the beginning of 2021. What is the amount of the deferred tax liability at the end of 2021? A. $15,000 B. $0 C. $36,000 D. $42,000

D. $42,000

Taxable income of a corporation A. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. B. is reported on the corporation's income statement. C. is based on generally accepted accounting principles. D. differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting.

D. differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting.

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. items I and IV only B. item II only C. items I and II only D. items II and III only

D. items II and III only

Pretax financial income is the amount used to compute income taxes payable. True False

False