Blooms: Analyze Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a company's income tax provision.. Level of Difficulty: 2 Medium
Trang 1Chapter 17 Accounting for Income Taxes
True / False Questions
1 ASC 740 governs how a company accounts for all taxes it incurs
5 The Emerging Issues Task Force assists the FASB by providing guidance on the
implementation of ASC 740 and other accounting pronouncements
Trang 210 The tax effects of permanent differences always show up in a company's
computation of its effective tax rate
15 Congress reduces the corporate tax rate from 35 percent to 25 percent effective in
2015 The tax rate change will affect only deferred tax assets and liabilities that arise
19 A cumulative financial accounting (book) loss over three years likely would be
considered significant negative evidence in a valuation allowance analysis
True False
Trang 320 ASC 740 applies a two-step process in determining if an uncertain tax benefit should
be recognized
True False
21 Potential interest and penalties that would be assessed on a disallowed unrecognizedtax benefit must be recorded in a company's income tax expense under ASC 740 True False
22 Once determined, an unrecognized tax benefit under ASC 740 is not readjusted for
25 A corporation's effective tax rate as computed in its income tax note is the
company's cash tax rate for the year
True False
Multiple Choice Questions
26 Which of the following taxes would not be accounted for under ASC 740?
A Income taxes paid to the German government
B Income taxes paid to the U.S government
C Value-added taxes paid to the Swiss government
D Income taxes paid to the City of New York
27 Which of the following organizations does not issue rules that apply to accounting for income taxes?
A
B
C
Trang 428 Which of the following statements best describes the objective(s) of ASC 740?
A To compute a corporation's current income tax liability or benefit
B To recognize deferred tax liabilities and assets
C To report permanent differences in the balance sheet
D To compute a corporation's current income tax liability or benefit and to recognize deferred tax liabilities and assets
29 Which of the following items does not result in a permanent difference?
A Accelerated tax depreciation in excess of straight-line book depreciation
B Interest income from a tax-exempt municipal bond
C Dividend received deduction on the income tax return
D Domestic manufacturing deduction on the income tax return
30 Which of the following temporary differences creates a deferred tax asset in the year
in which it originates?
A Accelerated tax depreciation in excess of straight-line book depreciation
B Prepayment income reported on the tax return prior to being reported on the income statement
C Gain reported on the income statement prior to being reported on the tax return
D Prepayment deduction reported on the tax return prior to being reported on the income statement
31 Which of the following statements is true?
A Another name for a taxable temporary difference is an unfavorable difference
B Another name for a taxable temporary difference is a favorable difference
C Another name for a deductible temporary difference is a favorable difference
D Another name for a deductible temporary difference is a permanent difference
32 Which of the following best describes the focus of ASC 740?
A ASC 740 takes an "asset and liability approach" that focuses on the balance sheet
B ASC 740 takes an "income and expense approach" that focuses on the income statement
C ASC 740 takes a "taxes paid or refunded approach" that focuses on the statement of cash flows
D ASC 740 takes a "permanent differences approach" that focuses on the effective tax rate reported in the income tax note to the financial statements
33 Grand River Corporation reported pretax book income of $500,000 Included in the
computation were favorable temporary differences of $100,000, unfavorable
temporary differences of $10,000, and favorable permanent differences of $90,000
Assuming a tax rate of 34%, the Corporation's current income tax expense or benefit
would be:
A
B
C
Trang 534 Packard Corporation reported pretax book income of $500,000 Included in the
computation were favorable temporary differences of $10,000, unfavorable
temporary differences of $100,000, and unfavorable permanent differences of
$90,000 Assuming a tax rate of 34%, the Corporation's current income tax expense
or benefit would be:
exempt life insurance proceeds from the death of one of its officers Using a tax rate
of 34%, Abbot's current income tax expense or benefit would be:
of 34%, Costello's deferred income tax expense or benefit would be:
37 Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference
in the allowance for bad debts account This basis difference is characterized as:
Trang 638 Which of the following items is not a temporary difference?
A Vacation pay accrued for tax purposes in a prior period is deducted in the current period
B Tax depreciation for the period exceeds book depreciation
C A goodwill impairment expense is recorded on the income statement; the goodwill did not have a tax basis when it was created
D Bad debts charged off in the current period exceed the bad debts accrued in the current period
39 Smith Company reported pretax book income of $400,000 Included in the
computation were favorable temporary differences of $50,000, unfavorable
temporary differences of $20,000, and favorable permanent differences of $40,000
Using a tax rate of 34%, Smith's deferred income tax expense or benefit would be:
40 Which of the following book-tax basis differences results in a deductible temporary
difference?
A Book basis of an employee post-retirement benefits liability exceeds its tax basis
B Book basis of a building exceeds the tax basis of the building
C Book basis of an acquired intangible exceeds the tax basis of the intangible
D Tax basis of a prepaid liability exceeds the book basis of the liability
41 Which of the following items is not a permanent book/tax difference?
B Non-deductible meals and entertainment expense
C Accrued vacation pay liability not paid within the first 2½ months of the next tax year
42 Marlin Corporation reported pretax book income of $1,000,000 During the current
year, the net reserve for warranties increased by $25,000 In addition, book
depreciation exceeded tax depreciation by $100,000 Finally, Marlin subtracted a
dividends received deduction of $15,000 in computing its current year taxable
income Using a tax rate of 34%, Marlin's current income tax expense or benefit
Trang 743 Swordfish Corporation reported pretax book income of $1,000,000 During the
current year, the net reserve for warranties increased by $25,000 In addition, book
depreciation exceeded tax depreciation by $100,000 In prior years, tax depreciation
exceeded book depreciation by a cumulative amount of $500,000 Finally, Swordfish
subtracted a dividends received deduction of $15,000 in computing its current year
taxable income Using a tax rate of 34%, Swordfish's deferred income tax expense or
benefit would be:
44 Kedzie Company determined that the book basis of its liability for "other
post-retirement benefits" (OPEB) exceeded the tax basis of this account by $10,000,000
This basis difference is characterized as:
45 Which of the following statements is true?
A ASC 740 focuses on the income tax expense or benefit on the income statement
B ASC 740 focuses on the balances in the deferred tax assets and liabilities on the balance sheet
C ASC 740 focuses on the income taxes paid or refunded in the Statement of Cash Flows
D ASC 740 focuses on the computation of a company's effective tax rate in the income tax note to the financial statements
46 Bruin Company received a $100,000 insurance payment on the death of its company
president The company annually paid $1,000 of non-deductible insurance premiums
on the policy Bruin reported the insurance receipt as income and deducted the
premium payments on its books For ASC 740 purposes, the income and deduction
are characterized as:
B Both are deductible temporary differences
C The insurance receipt is a favorable permanent difference and the premium payment is an unfavorable permanent difference
D The insurance receipt is a taxable temporary difference and the premium payment is an unfavorable permanent difference
47 Which of the following statements is true?
A A change in capitalized inventory costs under §263A always produces an increase in a deferred tax asset
B A change in capitalized inventory costs under §263A always produces a decrease in a deferred tax asset
Trang 848 Robinson Company had a net deferred tax liability of $34,000 at the beginning of the
year, representing a net taxable temporary difference of $100,000 During the year,
Robinson reported pretax book income of $400,000 Included in the computation
were favorable temporary differences of $50,000 and unfavorable temporary
differences of $20,000 During the year, the company's tax rate increased from 34%
to 35% Robinson's deferred income tax expense or benefit for the current year would
be:
49 Which of the following statements is true?
A In determining if a valuation allowance is needed, positive evidence is considered more persuasive than negative evidence
B In determining if a valuation allowance is needed, negative evidence is considered more persuasive than positive evidence
C In determining if a valuation allowance is needed, negative and positive evidence must be evaluated equally
D In determining if a valuation allowance is needed, only negative evidence is evaluated
50 Which of the following statements best describes a valuation allowance as it relates
to accounting for income taxes?
A A valuation allowance is a contra account to deferred tax assets only
B A valuation allowance is a contra account to deferred tax liabilities only
C A valuation allowance is a contra account to deferred tax assets and liabilities
D A valuation allowance is a contra account to noncurrent deferred tax assets only
51 A valuation allowance is recorded against a deferred tax asset when:
A It is probable that the deferred tax asset will not be realized in the future
B It is more likely than not that the deferred tax asset will not be realized in the future
C It is highly likely the deferred tax asset will not be realized in the future
D It is remote the deferred tax asset will not be realized in the future
52 Knollcrest Corporation has a cumulative book loss over the past 36 months Which of
the following statements best describes how this fact enters into the valuation
allowance analysis?
A The book loss is considered sufficient negative evidence that a valuation must be recorded
B The book loss is considered negative evidence that must be evaluated along with other evidence as to whether a valuation allowance should be recorded
C The book loss is not considered negative evidence because it relates to book income and not taxable income
D A cumulative book loss is considered negative evidence only after a period of 60 months
Trang 953 Which of the following items is not considered evidence in determining if a valuation
allowance is necessary?
A A cumulative book loss over some period of time
B Management projects future taxable income based on a backlog of signed contracts
C A net operating loss expired unused in the current year
D Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company
54 Which of the following statements best describes "book equivalent of taxable
income" (BETI)?
A BETI is book income adjusted for all permanent and temporary differences
B BETI is book income adjusted for all temporary differences
C BETI is book income adjusted for all permanent differences
D BETI is book income before adjustment for all permanent and temporary differences
55 Jones Company reported pretax book income of $400,000 Included in the
computation were favorable temporary differences of $50,000, unfavorable
temporary differences of $20,000, and favorable permanent differences of $40,000
Book equivalent of taxable income is:
A
B
C
D
56 Tuna Corporation reported pretax book income of $1,000,000 During the current
year, the net reserve for warranties increased by $25,000 In addition, book
depreciation exceeded tax depreciation by $100,000 Finally, Tuna subtracted a
dividends received deduction of $15,000 in computing its current year taxable
income Book equivalent of taxable income is:
A
B
C
D
Trang 1057 Weaver Company had a net deferred tax liability of $34,000 at the beginning of the
year, representing a net taxable temporary difference of $100,000 During the year,
Weaver reported pretax book income of $400,000 Included in the computation were
favorable temporary differences of $50,000 and unfavorable temporary differences of
$20,000 During the year, the company's tax rate decreased from 34% to 30%
Weaver's deferred income tax expense or benefit for the current year would be:
58 Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year,
representing a net taxable temporary difference of $200,000 During the year, Lynch
reported pretax book income of $800,000 Included in the computation were
favorable temporary differences of $20,000 and unfavorable temporary differences of
$50,000 During the year, the company's tax rate decreased from 34% to 30%
Lynch's deferred income tax expense or benefit for the current year would be:
59 Which of the following statements about ASC 740 as it relates to uncertain tax
positions is true?
A ASC 740 deals with all tax benefits involving income and non-income taxes
B ASC 740 deals with whether a recognized income tax benefit will be realized
C ASC 740 deals with recognized tax benefits related to income tax positions claimed on a filed tax return
D ASC 740 deals with recognized tax benefits related to income tax positions regardless of whether the item is taken on a filed tax return
60 Which of the following statements best describes the ASC 740 process for evaluating
a company's uncertain tax positions?
A ASC 740 requires a company to complete a two-step analysis every time it evaluates its uncertain tax positions
B ASC 740 requires a company to complete step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more-likely-than-not that that its tax position will be sustained on its merits (recognition)
C ASC 740 allows a company to take into account the probability of audit by a tax authority in step 1 (measurement) in its evaluation of its uncertain tax positions
D ASC 740 allows a company to record a tax benefit from an uncertain tax position only if it is probable the benefit will be sustained on audit by a tax authority
Trang 1161 As part of its uncertain tax position assessment, Madison Corporation records interest
and penalties related to its unrecognized tax benefits of $1,000,000 Which of the
following statements about recording this amount is most correct?
A Madison must record the expense separate from its income tax provision
B Madison can elect to include the expense as part of its income tax provision or record the expense separate from its income tax provision, provided the company discloses which option it chose
C Madison must record the expense in its income tax provision
D Madison does not record the expense until it is paid
62 What confidence level must management have that a tax position will be sustained
on audit before it can recognize any portion of the related deferred tax asset under
63 Which of the following statements about uncertain tax position disclosures is false?
A ASC 740 requires a company to disclose the amount of unrecognized tax benefits for each country in which it files a tax return
B ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits, separated between U.S., state and local, and international tax positions
C ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits without separation between U.S., state and local, and international tax positions
64 Which of the following statements is true with respect to a company's effective tax
rate reconciliation?
A The hypothetical tax expense is the tax that would be due if the company's statutory tax rate was applied to the company's net income from continuing operations
B The hypothetical tax expense is the tax that would be due if the company's statutory tax rate was applied to the company's taxable income
C The hypothetical tax expense is the tax that would be due if the company's statutory tax rate was applied to the company's book equivalent of taxable income
D The hypothetical tax expense is another name for the company's effective tax rate
65 A company's effective tax rate can best be described as:
A The company's cash taxes paid divided by taxable income
B The company's cash taxes paid divided by net income from continuing operations
C The company's financial statement income tax provision divided by taxable income
D The company's financial statement income tax provision divided by net income from continuing operations
66 Which of the following statements best describes the disclosure of a company's
deferred tax assets and liabilities?
A All four categories of deferred tax accounts (current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities) must be separately disclosed in the balance sheet
Trang 1267 Which of the following statements concerning the classification of deferred tax assets
and liabilities is false?
A A deferred tax asset is classified as noncurrent if the company expects the future tax benefit to be received more than 12 months from the balance sheet date
B A deferred tax asset related to a bad debt reserve is classified as noncurrent if the company expects the bad debt to be charged off more than 12 months from the balance sheet date
C A deferred tax asset related to a bad debt reserve is classified as current if the related accounts receivable is classified as a current asset
D A deferred tax asset related to inventory capitalization is classified as noncurrent if the company uses a FIFO accounting method and the inventory to which the deferred tax asset relates will not be treated as sold within 12 months from the balance sheet date
68 ASC 740 requires a publicly traded company to disclose the components of its
deferred tax assets and liabilities only if the amounts are considered to be:
A
B
C
D
69 Which of the following temporary differences creates a current deferred tax liability?
B Accumulated amortization on a customer list (intangible with a five-year life)
C Unearned revenue expected to be collected in the next 12 months
D Deferred compensation expected to be paid in the next 12 months
70 Which of the following items is not a reconciling item in the income tax footnote?
A Compensation deduction related to incentive stock options
B Compensation deduction related to nonqualified stock options that were expensed for financial accounting purposes
71 Angel Corporation reported pretax book income of $1,000,000 During the current
year, the net reserve for warranties increased by $25,000 In addition, tax
depreciation exceeded book depreciation by $100,000 Finally, Angel subtracted a
dividends received deduction of $25,000 in computing its current year taxable
income Using a tax rate of 34%, Angel's hypothetical tax expense in its reconciliation
of its income tax expense is:
A
B
C
D
Trang 1372 TarHeel Corporation reported pretax book income of $1,000,000 During the current
year, the net reserve for warranties increased by $25,000 In addition, tax
depreciation exceeded book depreciation by $100,000 Finally, TarHeel subtracted a
dividends received deduction of $25,000 in computing its current year taxable
income Assume a tax rate of 34% TarHeel's accounting effective tax rate is:
A
B
C
D
73 Green Corporation reported pretax book income of $1,000,000 During the current
year, the net reserve for warranties increased by $25,000 In addition, tax
depreciation exceeded book depreciation by $100,000 Finally, Green subtracted a
dividends received deduction of $25,000 in computing its current year taxable
income Using a tax rate of 34%, Green's cash tax rate is:
A
B
C
D
74 Which of the following items would likely not be included in the computation of a
company's structural effective tax rate?
A Tax effects of international operations
B Tax effects of state and local operations
C Tax effects from the domestic production activities deduction
75 Which of the following statements best describes the ASC 740 rules related to the
disclosure of the components of deferred tax assets and liabilities in the company's
income tax note?
A A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements
B A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements
C A privately-held company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements
D A privately-held company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements
Essay Questions
Trang 1476 Gull Corporation reported pretax book income of $2,000,000 Included in the
computation were favorable temporary differences of $300,000, unfavorable
temporary differences of $200,000, and favorable permanent differences of $50,000 Assuming a tax rate of 34%, compute Gull's current income tax expense or benefit
77 Heron Corporation reported pretax book income of $4,000,000 Included in the computation were favorable temporary differences of $500,000, unfavorable
temporary differences of $700,000, and unfavorable permanent differences of
$200,000 Using a tax rate of 34%, compute Heron's current income tax expense or benefit
78 Sparrow Corporation reported pretax book income of $5,000,000 During the current year, the reserve for warranties increased by $300,000 In addition, tax depreciation exceeded book depreciation by $400,000 Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds Using a tax rate of 34%, compute Sparrow's current income tax expense or benefit
Trang 1579 Cardinal Corporation reported pretax book income of $3,000,000 During the current year, the reserve for bad debts increased by $200,000 In addition, book depreciationexceeded tax depreciation by $100,000 Cardinal sold a fixed asset and reported a book gain of $60,000 and a tax gain of $80,000 Finally, Cardinal deducted $50,000
of domestic production activities deduction on its tax return Using a tax rate of 34%, compute Cardinal's current income tax expense or benefit
80 Purple Rose Corporation reported pretax book income of $500,000 Tax depreciation exceeded book depreciation by $300,000 In addition, the company received
$250,000 of tax-exempt life insurance proceeds The prior year tax return showed taxable income of $100,000 Using a tax rate of 34%, compute Purple Rose's current income tax expense or benefit
81 Yellow Rose Corporation reported pretax book income of $1,000,000 Tax depreciationexceeded book depreciation by $100,000 During the year Yellow Rose capitalized
$50,000 into ending inventory under §263A Capitalized inventory costs of $75,000 inbeginning inventory were deducted as part of cost of goods sold on the tax return Using a tax rate of 34%, compute Yellow Rose's taxes payable or refundable
Trang 1682 Milton Corporation reported pretax book income of $2,500,000 Included in the computation were favorable temporary differences of $400,000, unfavorable
temporary differences of $150,000, and favorable permanent differences of
$100,000 Using a tax rate of 34%, compute Milton's deferred income tax expense or benefit
83 Frost Corporation reported pretax book income of $3,000,000 Included in the
computation were favorable temporary differences of $200,000, unfavorable
temporary differences of $350,000, and unfavorable permanent differences of
$50,000 Using a tax rate of 34%, compute Frost's deferred income tax expense or benefit
84 Potter, Inc reported pretax book income of $5,000,000 During the current year, the reserve for bad debts increased by $100,000 In addition, tax depreciation exceeded book depreciation by $300,000 Potter sold a fixed asset and reported book gain of
$60,000 and tax gain of $80,000 Finally, the company received $50,000 of exempt municipal bond interest Using a tax rate of 34%, compute Potter's deferred income tax expense or benefit
Trang 17tax-85 Whitman Corporation reported pretax book income of $400,000 in 2014 Book
depreciation exceeded tax depreciation by $100,000 In addition, the Company accrued vacation pay of $50,000 that was not deductible until paid in 2015 Whitmanhas a net operating loss carryforward of $200,000 from 2013 Assuming a tax rate of 34%, compute the Company's deferred income tax expense or benefit for 2014
86 Farm Corporation reported pretax book loss of $500,000 in 2014 Tax depreciation exceeded book depreciation by $100,000 In addition, Farm received prepaid income
of $50,000, which was included on its tax return but was not included in the book loss Farm had $0 taxable income in 2013 and 2012 Assuming a tax rate of 34%, compute the Company's deferred income tax expense or benefit for 2014
87 Price Corporation reported pretax book income of $600,000 in 2014 Tax depreciationexceeded book depreciation by $100,000 In addition, the reserve for warranties increased by $40,000 Price had a net deferred tax liability of $34,000 at the
beginning of the year, representing a net taxable temporary difference of $100,000 During the year, the company's tax rate decreased from 34% to 30% Compute the Company's current and deferred income tax expense or benefit for 2014
Trang 1888 Stone Corporation reported pretax book income of $1,000,000 in 2014 Tax
depreciation exceeded book depreciation by $300,000 In addition, the reserve for bad debts decreased by $50,000 Stone had a net deferred tax asset of $29,000 at the beginning of the year, representing a net deductible temporary difference of
$100,000 During the year, the company's tax rate increased from 29% to 30% Compute the Company's current and deferred income tax expense or benefit for
2014
89 Identify the following items as creating a temporary difference, permanent difference,
or no difference
Trang 19
90 Irish Corporation reported pretax book income of $1,000,000 in 2014 Included in the computation were favorable temporary differences of $300,000, unfavorable
temporary differences of $100,000, and favorable permanent differences of
$200,000 Compute Irish's book equivalent of taxable income Use this number to compute the company's total income tax provision or benefit for 2014, assuming a tax rate of 34%
91 Weber Corporation reported pretax book income of $400,000 Included in the
computation were favorable temporary differences of $100,000, unfavorable
temporary differences of $300,000, and unfavorable permanent differences of
$200,000 Compute the Company's book equivalent of taxable income Use this number to compute the Company's total income tax provision or benefit, assuming a tax rate of 34%
92 DeWitt Corporation reported pretax book income of $800,000 Tax depreciation exceeded book depreciation by $400,000 In addition, the company received
$100,000 of tax-exempt municipal bond interest DeWitt used a net operating loss carryover of $200,000 to offset taxable income in the current year Compute DeWitt'sbook equivalent of taxable income Use this number to compute DeWitt's total
income tax provision or benefit for the current year, assuming a tax rate of 34%
Trang 2093 MAC, Inc completed its first year of operations with a pretax loss of $300,000 The tax return showed a net operating loss of $500,000, which MAC will carry forward The $200,000 book-tax difference results from excess tax depreciation over book depreciation Management has determined that they should record a valuation allowance equal to the net deferred tax asset Assuming a tax rate of 34%, prepare the journal entries to record the deferred tax provision and the valuation allowance
94 Lafayette, Inc completed its first year of operations with a pretax loss of $800,000 The tax return showed a net operating loss of $750,000, which the company will carry forward The $50,000 book-tax difference results from a disallowed deduction for meals and entertainment Management has determined that they should record a valuation allowance equal to the net deferred tax asset Assuming a tax rate of 34%, prepare the journal entries to record the deferred tax provision and the valuation allowance
Trang 2195 Morgan Corporation determined that $2,000,000 of its domestic production activities deduction on its current year tax return was uncertain, but that it was more likely than not to be sustained on audit Management made the following assessment of the company's potential tax benefit from the deduction and its probability of
occurring
Under ASC 740, what amount of the tax benefit related to the domestic production activities deduction can Morgan recognize in calculating its income tax provision in the current year?
Trang 2296 Acai Corporation determined that $5,000,000 of its R&D credit on its current year tax return was uncertain Acai determined that there was a 40 percent chance of the credit being sustained on audit Management made the following assessment of the company's potential tax benefit from the R&D credit and its probability of occurring.
Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai recognize in calculating its income tax provision in the current year?
97 Moody Corporation recorded the following deferred tax assets and liabilities:
All of the deferred tax accounts relate to temporary differences that result from the company's U.S operations Moody wants to minimize the number of deferred tax accounts it reports on the balance sheet What is the minimum number of deferred tax accounts Moody can report on its balance sheet and what are the names and dollar amounts in each account?
Trang 2398 Manchester Corporation recorded the following deferred tax assets and liabilities:
The current deferred tax accounts and the non-current deferred tax liabilities result from temporary differences that relate to the company's U.S operations The non-current deferred tax asset relates to the company's German operations Manchester wants to minimize the number of deferred tax accounts it reports on the balance sheet What is the minimum number of deferred tax accounts Manchester can report
on its balance sheet and what are the names and dollar amounts in each account?
99 Oriole Company reported pretax net income from continuing operations of
$1,000,000 and taxable income of $1,200,000 The unfavorable book-tax difference
of $200,000 was due to a $200,000 favorable temporary difference relating to
depreciation, an unfavorable temporary difference of $300,000 due to an increase in the reserve for bad debts, and a $100,000 unfavorable permanent difference from the disallowance of compensation expense related to the exercise of incentive stock options Oriole Company's applicable tax rate is 34%
a Compute Oriole Company's current income tax expense
b Compute Oriole Company's deferred income tax expense or benefit
c Compute Oriole Company's effective tax rate
d Provide a reconciliation of Oriole Company's effective tax rate with its hypothetical tax rate of 34%
Trang 24
Izzo Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $800,000 The favorable book-tax difference of $200,000 was due to a $100,000 favorable temporary difference relating to depreciation, an
unfavorable temporary difference of $50,000 due to accrued vacation pay, and a
$150,000 favorable permanent difference from the domestic manufacturing
deduction Izzo Company's applicable tax rate is 34%
a Compute Izzo Company's current income tax expense
b Compute Izzo Company's deferred income tax expense or benefit
c Compute Izzo Company's effective tax rate
d Provide a reconciliation of Izzo Company's effective tax rate with its hypothetical tax rate of 34%
Trang 25Chapter 17 Accounting for Income Taxes Answer Key
True / False Questions
1 ASC 740 governs how a company accounts for all taxes it incurs
FALSE
ASC 740 applies only to income taxes
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
2 ASC 740 is the sole source of rules related to accounting for income taxes
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
3 Temporary differences create either a deferred tax asset or a deferred tax liability
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
4 Publicly-traded companies usually file their financial statements before they file their federal income tax returns
Trang 26AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
5 The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
6 ASC 740 applies to accounting for state and local and international income taxes
as well as federal income taxes
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
7 The "current income tax expense or benefit" always represents the taxes paid or refunded in the current year
Blooms: Analyze Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 2 Medium Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
tax provision
Trang 278 The focus of ASC 740 is the income statement
FALSE
The focus of ASC 740 is the balance sheet
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 2 Medium Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
Blooms: Remember Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 1 Easy Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
tax provision
10 The tax effects of permanent differences always show up in a company's
computation of its effective tax rate
FALSE
Some permanent differences (excess windfall benefits from NQO deductions) show
up in shareholders' equity
AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Blooms: Apply Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 3 Hard Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
tax provision
11 In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet
TRUE
Trang 28Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 1 Easy Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
Blooms: Analyze Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 2 Medium Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
Blooms: Apply Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 2 Medium Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
Blooms: Remember Learning Objective: 17-04 Explain how a company accounts for its uncertain income tax positions under FASB
ASC Topic 740 Level of Difficulty: 1 Easy Topic: Accounting for uncertainty in income tax positions
Trang 2915 Congress reduces the corporate tax rate from 35 percent to 25 percent effective in
2015 The tax rate change will affect only deferred tax assets and liabilities that arise in 2015 and thereafter
FALSE
A corporation must adjust its existing deferred tax accounts as well
AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Apply Learning Objective: 17-02 Calculate the current and deferred income tax expense or benefit components of a
company's income tax provision Level of Difficulty: 3 Hard Topic: Calculating the current and deferred income tax expense or benefit components of a company's income
tax provision
16 A valuation allowance can reduce both a deferred tax asset and a deferred tax liability
FALSE
Only deferred tax assets
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 17-03 Recall what a valuation allowance represents and describe the process by which it is
determined Level of Difficulty: 2 Medium Topic: Determining whether a valuation allowance is needed
17 A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 17-03 Recall what a valuation allowance represents and describe the process by which it is
determined Level of Difficulty: 2 Medium Topic: Determining whether a valuation allowance is needed
Trang 3018 A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet
FALSE
Valuation allowances relate to the likelihood of realization of a deferred tax asset
AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Blooms: Apply Learning Objective: 17-03 Recall what a valuation allowance represents and describe the process by which it is
determined Level of Difficulty: 3 Hard Topic: Determining whether a valuation allowance is needed
19 A cumulative financial accounting (book) loss over three years likely would be considered significant negative evidence in a valuation allowance analysis
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 17-03 Recall what a valuation allowance represents and describe the process by which it is
determined Level of Difficulty: 2 Medium Topic: Determining whether a valuation allowance is needed
20 ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized
TRUE
Recognition and measurement
AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Blooms: Apply Learning Objective: 17-04 Explain how a company accounts for its uncertain income tax positions under FASB
ASC Topic 740 Level of Difficulty: 3 Hard Topic: Accounting for uncertainty in income tax positions
Trang 3121 Potential interest and penalties that would be assessed on a disallowed
unrecognized tax benefit must be recorded in a company's income tax expense under ASC 740
FALSE
Election to treat as a deduction in computing net income before income taxes
AACSB: Analytic AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Blooms: Apply Learning Objective: 17-04 Explain how a company accounts for its uncertain income tax positions under FASB
ASC Topic 740 Level of Difficulty: 3 Hard Topic: Accounting for uncertainty in income tax positions
22 Once determined, an unrecognized tax benefit under ASC 740 is not readjusted for
Blooms: Analyze Learning Objective: 17-04 Explain how a company accounts for its uncertain income tax positions under FASB
ASC Topic 740 Level of Difficulty: 2 Medium Topic: Accounting for uncertainty in income tax positions
23 ASC 740 permits a corporation to net its current and long-term deferred tax
Blooms: Analyze Learning Objective: 17-05 Recognize the different components of a company's disclosure of its income tax accounts in the financial statements and footnotes and comprehend how a company computes and discloses
the components of its "effective tax rate."
Level of Difficulty: 2 Medium
Trang 3224 The classification of a deferred tax asset as current or long-term usually depends
on the balance sheet classification of the asset or liability to which it relates
TRUE
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Learning Objective: 17-05 Recognize the different components of a company's disclosure of its income tax accounts in the financial statements and footnotes and comprehend how a company computes and discloses
the components of its "effective tax rate."
Level of Difficulty: 2 Medium Topic: Financial statement disclosure and the computation of a corporation's effective tax rate
25 A corporation's effective tax rate as computed in its income tax note is the
company's cash tax rate for the year
Blooms: Analyze Learning Objective: 17-05 Recognize the different components of a company's disclosure of its income tax accounts in the financial statements and footnotes and comprehend how a company computes and discloses
the components of its "effective tax rate."
Level of Difficulty: 2 Medium Topic: Financial statement disclosure and the computation of a corporation's effective tax rate
Multiple Choice Questions
Trang 3326 Which of the following taxes would not be accounted for under ASC 740?
Trang 34A value-added tax is not an income tax.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
Trang 3527 Which of the following organizations does not issue rules that apply to accounting for income taxes?
The IRS issues rules that apply to the computation of a corporation's income tax
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process
Trang 3728 Which of the following statements best describes the objective(s) of ASC 740?
Trang 40AICPA: BB Critical Thinking Accessibility: Keyboard Navigation
Blooms: Remember Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process Level of Difficulty: 1 Easy Topic: Objectives of accounting for income taxes and the income tax provision process