Intermediate 2 (Ch. 19)

In 2018, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $3,600,000. The facilities were sold in March 2019 and a $3,600,000 loss was recognized for tax purposes. Also in 2018, Krause paid $150,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2018 and 2019, and that Krause paid $1,170,000 in income taxes in 2018, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2018, should be a

$1,080,000 asset.

Hopkins Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $ 100,000 The estimated litigation expense of $4,000,000 will be deductible in 2018 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 30% for all years. The deferred tax asset to be recognized is

$1,200,000

Hopkins Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $ 100,000 The estimated litigation expense of $4,000,000 will be deductible in 2018 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 30% for all years. The deferred tax liability to be recognized is

$1,800,000

Horner Corporation has a deferred tax asset at December 31, 2019 of $200,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2016-2018; 35% for 2019; and 30% for 2020 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:

$100,000

Kraft Company made the following journal entry in late 2018 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2019 and 2020, 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 2018, and its tax rate is 35%. What amount of income tax expense should Kraft Company report at the end of 2018?

$177,500

Larsen Corporation reported $200,000 in revenues in its 2018 financial statements, of which $66,000 will not be included in the tax return until 2019. The enacted tax rate is 40% for 2018 and 35% for 2019. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2018?

$23,100

Rodd Co. reports a taxable and pretax financial loss of $900,000 for 2018. Rodd's taxable and pretax financial income and tax rates for the last two years were: 2016 $900,000 30% 2017 $900,000 35% The amount that Rodd should report as an income tax refund receivable in 2018, assuming that it uses the carryback provisions and that the tax rate is 40% in 2018, is

$270,000

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 $2,800,000. 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?

$3,100,000

Hopkins Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $ 1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2018 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 30% for all years. Income taxes payable is

$300,000

Mathis Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 30% for all years. The income tax expense is

$360,000

Duncan Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Profits of $1,200,000 recognized for books in 2017 will be collected in the following years: Collection of Profits 2018 $200,000 2019 $400,000 2020 $600,000 The enacted tax rates are: 40% for 2017, 35% for 2018, and 30% for 2019 and 2020. Taxable income is expected in all future years. What amount should be included in the December 31, 2017, balance sheet for the deferred tax liability related to the above temporary difference?

$370,000

Operating income and tax rates for C.J. Company's first three years of operations were as follows: Income Enacted tax rate 2017 $400,000 35% 2018 ($1,000,000) 30% 2019 $1,680,000 40% Assuming that C.J. Company opts only to carryforward its 2018 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2018 balance sheet? Amount/Deferred Tax Assessment or Liability

$400,000/Deferred tax asset

Cross Company reported the following results for the year ended December 31, 2018, its first year of operations: 2018 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 2019. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2018, assuming that the enacted tax rates in effect are 40% in 2018 and 35% in 2019?

$420,000 deferred tax asset

Operating income and tax rates for C.J. Company's first three years of operations were as follows: Income Enacted tax rate 2017 $400,000 35% 2018 ($1,000,000) 30% 2019 $1,680,000 40% Assuming that C.J. Company opts to carryback its 2018 NOL, what is the amount of income taxes payable at December 31, 2019?

$432,000

Mathis Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 30% for all years. The deferred tax liability to be recognized is

$720,000

Mathis Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2019 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 30% for all years. The deferred tax asset to be recognized is

$900,000 Concurrent

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 40% in 2018, its first year of operations. During 2018 the company had the following transactions: Received rent from Jane, Co. for 2019 $ 96,000 Municipal bond income $120,000 Depreciation for tax purposes in excess of book depreciation $ 60,000 Installment sales revenue to be collected in 2019 $162,000 For 2018, what is the amount of income taxes payable for Rowen, Inc?

$981,600

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.

A. I and II only.

Tanner, Inc. incurred a financial and taxable loss for 2018. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2018 financial statements? A. The refund claimed should be shown as a benefit due to loss carryforward in 2018. B. The reduction of the loss should be reported as a prior period adjustment. C. The refund claimed should be reported as a deferred charge and amortized over five years. D. The refund claimed should be reported as revenue in the current year.

A. The refund claimed should be shown as a benefit due to loss carryforward in 2018.

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be A. reported as an adjustment to income tax expense in the period of change. B. handled retroactively in accordance with the guidance related to changes in accounting principles. C. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change. D. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.

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

A major distinction between temporary and permanent differences is A. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. B. permanent differences are not representative of acceptable accounting practice. 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 occur frequently, whereas permanent differences occur only once.

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

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

A. the future tax rates have been enacted into law.

Which of the following will not result in a temporary difference? A. Installment sales B. Interest received on municipal obligations. C. Product warranty liabilities D. Advance rental receipts

B. Interest received on municipal obligations.

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

B. a fine resulting from violations of OSHA regulations.

A temporary difference arises when a revenue item is reported for tax purposes in a period: After its reported/Before its reported\ A. No No B. No Yes C. Yes Yes D. Yes No

C. Yes/Yes

Companies are permitted to offset any balances in income taxes payable against A. income tax expense. B. deferred tax liabilities balances. C. related income tax refund receivable or prepaid income taxes balances. D. deferred tax assets balances.

C. related income tax refund receivable or prepaid income taxes balances.

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income? A. Subscriptions received in advance. B. Interest received on a municipal obligation. C. Prepaid royalty received in advance. D. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.

D. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.

Which of the following differences would result in future taxable amounts? A. Revenues or gains that are taxable before they are recognized in financial income. B. Revenues or gains that are recognized in financial income but are never included in taxable income. C. Expenses or losses that are tax deductible after they are recognized in financial income. D. Expenses or losses that are tax deductible before they are recognized in financial income.

D. Expenses or losses that are tax deductible before they are recognized in financial income.

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income? A. Fines and expenses resulting from a violation of law. B. Depreciable property. C. Prepaid expenses that are deducted on the tax return in the period paid. D. Product warranty liabilities.

D. Product warranty liabilities.

Which of the following is not considered a permanent difference? A. Fines resulting from violating the law. B. Premiums paid for life insurance on a company's CEO when the company is the beneficiary. C. Interest received on municipal bonds. D. Stock-based compensation expense.

D. Stock-based compensation expense.

An example of a permanent difference is A. proceeds from life insurance on officers. B. interest expense on money borrowed to invest in municipal bonds. C. insurance expense for a life insurance policy on officers. D. all of these answers are correct as they are all examples of permanent differences.

D. all of these answers are correct as they are all examples of permanent differences.

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.

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

D. the establishment of a deferred tax asset.

Rowen, Inc. had pre-tax accounting income of $2,700,000 and a tax rate of 40% in 2018, its first year of operations. During 2018 the company had the following transactions: Received rent from Jane, Co. for 2019 $ 96,000 Municipal bond income $120,000 Depreciation for tax purposes in excess of book depreciation $ 60,000 Installment sales revenue to be collected in 2019 $162,000 At the end of 2018, which of the following deferred tax accounts and balances exist at December 31, 2018? Account/Balance

Deferred tax asset/$38,400