intermediate 3 chapter 19

A temporary difference arises when a revenue item is reported for tax purposes in a period After it is reported Before it is reported in financial income in financial income a. Yes Yes b. Yes No c. No Yes d. No No

a

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 $1,500,000 will be collected in the following years when the enacted tax rates are: Collection of Income Enacted Tax Rates 2012 $150,000 35% 2013 300,000 30% 2014 450,000 30% 2015 600,000 25% 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, 2012 balance sheet? a. $375,000 b. $427,500 c. $472,500 d. $525,000

a

Horner Corporation has a deferred tax asset at December 31, 2013 of $120,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2010-2012; 35% for 2013; and 30% for 2014 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. $60,000 b. $24,000 c. $21,000 d. $18,000

a

In its 2012 income statement, Cohen Corp. reported depreciation of $1,480,000 and interest revenue on municipal obligations of $280,000. Cohen reported depreciation of $2,200,000 on its 2012 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2012, 30% for 2013, and 25% for 2014 and 2015. What amount should be included in the deferred income tax liability in Hertz's December 31, 2012 balance sheet? a. $192,000 b. $248,000 c. $300,000 d. $350,000

a

Nickerson Corporation began operations in 2011. There have been no permanent or temporary differences to account for since the inception of the business. The following data are available: Year 2011 2012 2013 2014 Enacted Tax Rate 45% 40% 35% 30% Taxable Income $1,250,000 1,500,000 Taxes Paid $562,500 600,000 In 2013, Nickerson had an operating loss of $1,550,000. What amount of income tax benefits should be reported on the 2013 income statement due to this loss? a. $682,500 b. $622,500 c. $620,000 d. $465,000

a

Rodd Co. reports a taxable and pretax financial loss of $600,000 for 2013. Rodd's taxable and pretax financial income and tax rates for the last two years were: 2011 $600,000 30% 2012 600,000 35% The amount that Rodd should report as an income tax refund receivable in 2013, assuming that it uses the carryback provisions and that the tax rate is 40% in 2013, is a. $180,000. b. $210,000. c. $240,000. d. $270,000.

a

Watson Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2013 $1,400,000 Tax exempt interest (100,000) Originating temporary difference (300,000) Taxable income $1,000,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2013 is 28%. What amount should be reported in its 2013 income statement as the current portion of its provision for income taxes? a. $280,000 b. $400,000 c. $392,000 d. $560,000

a

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

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2013 $ 900,000 Tax exempt interest (75,000) Originating temporary difference (125,000) Taxable income $700,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2013 is 35%. 66. What amount should be reported in its 2013 income statement as the deferred portion of income tax expense? a. $50,000 debit b. $90,000 debit c. $50,000 credit d. $70,000 credit 67. In Mitchell's 2013 income statement, what amount should be reported for total income tax expense? a. $325,000 b. $315,000 c. $295,000 d. $245,000

a,c

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax a. Temporary Liability b. Temporary Asset c. Permanent Liability d. Permanent Asset

b

Based on the following information, compute 2013 taxable income for South Co. assuming that its pre-tax accounting income for the year ended December 31, 2013 is $460,000. Future taxable Temporary difference (deductible) amount Installment sales $384,000 Depreciation $120,000 Unearned rent ($400,000) a. $564,000 b. $356,000 c. $964,000 d. $444,000

b

Cross Company reported the following results for the year ended December 31, 2012, its first year of operations: 2012 Income (per books before income taxes) $ 1,250,000 Taxable income 2,000,000 The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2013. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2012, assuming that the enacted tax rates in effect are 40% in 2012 and 35% in 2013? a. $300,000 deferred tax liability b. $262,500 deferred tax asset c. $300,000 deferred tax asset d. $262,500 deferred tax liability

b

Didde Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, 2013: Book income before income taxes $1,500,000 Add temporary difference Construction contract revenue which will reverse in 2014 160,000 Deduct temporary difference Depreciation expense which will reverse in equal amounts in each of the next four years (640,000) Taxable income $1,020,000 Didde's effective income tax rate is 34% for 2013. What amount should Didde report in its 2013 income statement as the current provision for income taxes? a. $54,400 b. $346,800 c. $510,000 d. $564,400

b

Ferguson Company has the following cumulative taxable temporary differences: 12/31/13 12/31/12 $1,800,000 $1,280,000 The tax rate enacted for 2013 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2013 is $3,200,000 and there are no permanent differences. Ferguson's pretax financial income for 2013 is a. $5,000,000. b. $3,720,000. c. $2,680,000. d. $1,400,000.

b

Fleming Company has the following cumulative taxable temporary differences: 12/31/13 12/31/12 $960,000 $1,350,000 The tax rate enacted for 2013 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2013 is $2,400,000 and there are no permanent differences. Fleming's pretax financial income for 2013 is: a. $1,440,000 b. $2,010,000 c. $2,595,000 d. $3,360,000

b

Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2012 related to $800,000 of excess depreciation. In December of 2012, a new income tax act is signed into law that lowers the corporate rate from 40% to 35%, effective January 1, 2014. If taxable amounts related to the temporary difference are scheduled to be reversed by $400,000 for both 2013 and 2014, Palmer should increase or decrease deferred tax liability by what amount? a. Decrease by $40,000 b. Decrease by $20,000 c. Increase by $20,000 d. Increase by $40,000

b

Taxable income of a corporation a. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. b. differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. c. is based on generally accepted accounting principles. d. is reported on the corporation's income statement.

b

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

b

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be a. the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year. b. totally eliminated from the financial statements if the amount is related to a noncurrent asset. c. based on the classification of the related asset or liability for financial reporting purposes. d. the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

c

All of the following are procedures for the computation of deferred income taxes except to a. identify the types and amounts of existing temporary differences. b. measure the total deferred tax liability for taxable temporary differences. c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks. d. All of these are procedures in computing deferred income taxes.

c

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 $900,000 recognized for books in 2012 will be collected in the following years: Collection of Profits 2013 $150,000 2014 $300,000 2015 $450,000 The enacted tax rates are: 40% for 2012, 35% for 2013, and 30% for 2014 and 2015. Taxable income is expected in all future years. What amount should be included in the December 31, 2012, balance sheet for the deferred tax liability related to the above temporary difference? a. $ 52,500 b. $225,000 c. $277,500 d. $360,000

c

For calendar year 2012, Kane Corp. reported depreciation of $1,200,000 in its income statement. On its 2012 income tax return, Kane reported depreciation of $1,800,000. Kane's income statement also included $225,000 accrued warranty expense that will be deducted for tax purposes when paid. Kane's enacted tax rates are 30% for 2012 and 2013, and 24% for 2014 and 2015. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense 2013 $240,000 $ 45,000 2014 210,000 75,000 2015 150,000 105,000 $600,000 $225,000 These were Kane's only temporary differences. In Kane's 2012 income statement, the deferred portion of its provision for income taxes should be a. $200,700. b. $112,500. c. $101,700. d. $109,800.

c

On January 1, 2013, Gore, Inc. purchased a machine for $900,000 which will be depreciated $90,000 per year for financial statement reporting purposes. For income tax reporting, Gore elected to expense $100,000 and to use straight-line depreciation which will allow a cost recovery deduction of $80,000 for 2013. Assume a present and future enacted income tax rate of 30%. What amount should be added to Gore's deferred income tax liability for this temporary difference at December 31, 2013? a. $54,000 b. $30,000 c. $27,000 d. $24,000

c

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

c

Taxable income of a corporation differs from pretax financial income because of Permanent Temporary Differences Differences a. No No b. No Yes c. Yes Yes d. Yes No

c

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be a. handled retroactively in accordance with the guidance related to changes in accounting principles. b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. c. reported as an adjustment to tax expense in the period of change. d. 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.

c

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. Prepaid royalty received in advance. c. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes. d. Interest received on a municipal obligation.

c

Wright Co., organized on January 2, 2012, had pretax accounting income of $640,000 and taxable income of $1,600,000 for the year ended December 31, 2012 The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2013 $320,000 2014 160,000 2015 160,000 2016 320,000 The enacted income tax rates are 35% for 2012, 30% for 2013 through 2015, and 25% for 2016. If Wright expects taxable income in future years, the deferred tax asset in Wright's December 31, 2012 balance sheet should be a. $192,000. b. $224,000. c. $272,000. d. $336,000.

c

A company uses the equity method to account for an investment. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax a. Permanent Asset b. Permanent Liability c. Temporary Asset d. Temporary Liability

d

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

d

At December 31, 2012 Raymond Corporation reported a deferred tax liability of $150,000 which was attributable to a taxable type temporary difference of $500,000. The temporary difference is scheduled to reverse in 2016. During 2013, a new tax law increased the corporate tax rate from 30% to 40%. Raymond should record this change by debiting a. Retained Earnings for $50,000. b. Retained Earnings for $15,000. c. Income Tax Expense for $15,000. d. Income Tax Expense for $50,000.

d

Foltz Corp.'s 2012 income statement had pretax financial income of $250,000 in its first year of operations. Foltz uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2012, and the enacted tax rates for 2012 to 2016 are as follows: Book Over (Under) Tax Tax Rates 2012 $(50,000) 35% 2013 (65,000) 30% 2014 (15,000) 30% 2015 60,000 30% 2016 70,000 30% There are no other temporary differences. In Foltz's December 31, 2012 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be Noncurrent Deferred Income Taxes Income Tax Liability Currently Payable a. $39,000 $50,000 b. $39,000 $70,000 c. $15,000 $60,000 d. $15,000 $70,000

d

In 2012, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $1,800,000. The facilities were sold in March 2013 and a $1,800,000 loss was recognized for tax purposes. Also in 2012, Krause paid $100,000 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 2012 and 2013, and that Krause paid $780,000 in income taxes in 2012, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2012, should be a a. $510,000 asset. b. $270,000 asset. c. $270,000 liability. d. $540,000 asset.

d

Khan, Inc. reports a taxable and financial loss of $1,300,000 for 2013. Its pretax financial income for the last two years was as follows: 2011 $600,000 2012 800,000 The amount that Khan, 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 a. $1,300,000 loss. b. $ -0-. c. $390,000 loss. d. $910,000 loss.

d

On January 1, 2013, Piper Corp. purchased 40% of the voting common stock of Betz, Inc. and appropriately accounts for its investment by the equity method. During 2013, Betz reported earnings of $540,000 and paid dividends of $180,000. Piper assumes that all of Betz's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for this temporary difference is a. $108,000. b. $90,000. c. $64,800. d. $43,200.

d

Tanner, Inc. incurred a financial and taxable loss for 2013. 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 2013 financial statements? a. The reduction of the loss should be reported as a prior period adjustment. b. The refund claimed should be reported as a deferred charge and amortized over five years. c. The refund claimed should be reported as revenue in the current year. d. The refund claimed should be shown as a reduction of the loss in 2013.

d

Which of the following will not result in a temporary difference? a. Product warranty liabilities b. Advance rental receipts c. Installment sales d. All of these will result in a temporary difference.

d

There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2012 and 2013, and 40% for 2014. 89. Assuming that Wilcox elects to use the carryback provision, what income (loss) is reported in 2013? (Assume that any deferred tax asset recognized is more likely than not to be realized.) a. $(1,350,000) b. $ -0- c. $(1,305,000) d. $ (825,000) 90. Assuming that Wilcox elects to use the carryforward provision and not the carryback provision, what income (loss) is reported in 2013? a. $(1,350,000) b. $(810,000) c. $ -0- d. $(1,305,000)

d,b

A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.

f

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

f

Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities. The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

f

Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.

f

Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.

f

Pretax financial income is the amount used to compute income tax payable.

f

Taxable income is a tax accounting term and is also referred to as income before taxes

f

The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

f

Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.

f

When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.

f

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.

t

A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

t

A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.

t

An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.

t

Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.

t

Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.

t

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

t

Taxable amounts increase taxable income in future years.

t

Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered. t

t

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

t