Chapter 19 Accounting for Income Tax

Hawkins Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 35% in 2013, its first year of operations. During 2013 the company had the following transactions: Received rent from Barrett Co. for 2014 $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 2014 $108,000 For 2013, what is the amount of income taxes payable for Hawkins Inc.? $603,400 $572,600 $628,600 $648,200

$1,800,000 + $64,000 - $80,000 - $40,000 - $108,000 = $1,636,000; $1,636,000 × .35 = $572,600.

White Inc. reports a taxable and financial loss of $650,000 for 2013. Its pretax financial income for the last two years was as follows: 2011 $300,000 2012 400,000 The amount that White Inc. reports as a net loss for financial reporting purposes in 2013, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is $455,000 loss. $650,000 loss. $ -0-. $195,000 loss.

$650,000 loss less the tax benefit of $195,000 ([$300,000 * 30%] plus [$350,000 * 30%]) results in a net loss of $455,000.

Parker Corporation prepared the following reconciliation for 2014, its first year of operations: Pretax financial income for 2014 $ 2,060,000 Tax exempt interest (350,000) Originating temporary difference (690,000) Taxable income $ 1,020,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 35%. The enacted tax rate for 2014 is 30%. What amount should Grey report in its 2014 income statement as the deferred portion of the provision for income taxes? $119,000 debit $122,500 credit $241,500 debit $207,000 credit

$690,000 X 35%, or $241,500 as a debit value.

Pringle Corporation reported $200,000 in revenues in its 2012 financial statements, of which $88,000 will not be included in the tax return until 2013. The enacted tax rate is 40% for 2012 and 35% for 2013. What amount should Pringle report for deferred income tax liability in its balance sheet at December 31, 2012? $35,200 $39,200 $44,800 $30,800

$88,000 ×.35 = $30,800.

Hopkins Corp.'s 2013 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 in Hopkins' December 31, 2013 balance sheet? $163,075 $132,578 $87,175 $109,275

($1,035,000 - $41,000 - $97,000) × 27.5% = $246,675; $246,675 - $159,500 = $87,175.

Weatherly Company reported the following results for the year ended December 31, 2013, its first year of operations: Income (per books before income taxes) $3,300,000 Taxable income 4,450,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2014. What should Weatherly record as a net deferred tax asset or liability for the year ended December 31, 2013, assuming that the enacted tax rates in effect are 35% in 2013 and 30% in 2014? $402,500 deferred tax liability $345,000 deferred tax liability $345,000 deferred tax asset $402,500 deferred tax asset

($4,450,000 less $3,300,000) * 30% results in $345,000 deferred tax asset

IFRS on income taxes is based on the different principles than U.S. GAAP. True False

False

Permanent differences result in deferred tax consequences. True False

False

Taxable temporary differences give rise to recording deferred tax assets. True False

False

Under GAAP, companies should classify all deferred taxes as noncurrent. True False

False

Under the asset-liability method, the measurement of current and deferred tax liabilities and assets is based on provisions of the anticipated future tax law. True False

False

A deferred tax liability represents the decrease in taxes payable in future years as a result of a taxable temporary difference. True False

False, It is the increase in taxes payable

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

Interest received on state and municipal obligations.

Howe Corporation has income before income taxes of $1,064,000 in 2013. The current provision for income taxes is $210,000 and the provision for deferred income taxes is $165,000. Howe's net income for 2013 is $1,019,000. $854,000. $689,000. $899,000.

Net income is [$1,064,000 - ($210,000 + $165,000)]= $689,000.

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

Product warranty liabilities.

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

Multiple categories of deferred taxes should be classified into a net current amount and a net noncurrent amount. True False

True

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 Yes, No No, Yes No, No Yes, Yes

Yes, Yes

Vasquez Corp.'s 2013 income statement showed pretax accounting income of $2,040,000. To compute the federal income tax liability, the following 2011 data are provided: Income from exempt municipal bonds $ 110,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 144,000 Estimated federal income tax payments made 330,000 Enacted corporate income tax rate 30% What amount of current federal income tax liability should be included in Vasquez's December 31, 2013 balance sheet? $249,000 $271,800 $205,800 $282,000

[($2,040,000 - $110,000 - $144,000) X 30%] minus $330,000 equals $205,800.

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

a deferred tax asset only.

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

a deferred tax asset only.

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

a fine resulting from violations of OSHA regulations.

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

all of these answer choices are correct.

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

asset-liability method.

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

average rates.

On December 31, 2013, Winston Inc. has determined that it is more likely than not that $240,000 of a $600,000 deferred tax asset will not be realized. The journal entry to record this reduction in asset value will include a debit to Income Tax Expense for $360,000. credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000. credit to Income Tax Expense for $360,000. debit to Income Tax Payable of $240,000.

credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000.

Deferred taxes should be presented on the balance sheet as reductions of the related asset or liability accounts. 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.

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 asset. increase in a deferred tax liability. the amount of income taxes payable for the period. decrease in a deferred tax liability

increase in a deferred tax liability.

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

A deferred tax liability represents the: increase 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. 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.

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

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.

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

pretax income.

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

reduce a deferred tax asset.

The last procedure (step) in the computation of deferred income taxes is to: 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. identify the types and amounts of existing temporary differences.

reduce deferred tax assets by a valuation allowance if necessary.

Taxable amounts are temporary differences that: pretax financial income in future years. decrease taxable 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.

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

taxable income.

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

the establishment of a deferred tax asset.

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. it appears likely that a future tax rate will be less than the current tax rate. the future tax rates have been enacted into law. it is probable that a future tax rate change will occur.

the future tax rates have been enacted into law.

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

unusual or infrequent items.