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13 Cards in this Set
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $165,000 in each year. The income reported for 2011 includes $46,500 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $23,250 per year. The enacted tax rate is 30% for 2011 – 2013. What is the total amount of income tax expense reported on the income statement for Holmes Builders for the year ending December 31, 2011?
A) $63,450 B) $13,950 C) $77,400 D) $49,500 |
D) $49,500
Taxable income for 2011 is pretax accounting income plus the warranty expense that was subtracted but which won't be paid until future years. Taxable income is computed as follows: Pretax accounting income $165,000 Add: Warranty expense not yet paid 46,500 ------------------------------------ Taxable income $ 211,500 × Tax rate 30% ---------------------------------- Tax payable currently $ 63,450 Future deductible amounts $ 46,500 × Tax rate 30% ----------------------------------- Deferred tax asset $ 13,950 Total tax expense $ 49,500 |
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $160,000 in each year. The income reported for 2011 includes $46,000 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $23,000 per year. The enacted tax rate is 40% for 2011 – 2013. What amount will Holmes Builders report for a deferred tax asset on its December 31, 2011 balance sheet?
A) $82,800 B) $64,400 C) $18,400 D) $46,000 |
C) $18,400
The deferred tax asset is computed as follows: Future deductible amounts $ 46,000 × Tax rate 40% -------------------------------------------- Deferred tax asset $ 18,400 |
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The controller for Cara Company has just completed recording the company's tax expense and deferred taxes for the year ending December 31, 2011, the company's first year of operations. As a result of multiple future deductible temporary differences, Cara Company's balance sheet currently shows a $4,325,000 deferred tax asset. After consultation with the CEO and other executives, the controller determined that it is more likely than not that 30% of the deferred tax asset will not be realized. Without considering this situation, total income tax expense is $2,390,000. What amount of income tax expense will be reported on Cara Company's income statement for the year ending December 31, 2011?
B) $5,417,500 C) $3,687,500 C) $2,390,000 D) $1,092,500 |
C) $3,687,500
A valuation allowance is needed if future taxable income is anticipated to be insufficient to realize the tax benefit. The deferred tax asset is reduced by creating a valuation allowance, the effect of which is to increase income tax expense. Total tax expense is computed as follows: Tax expense prior to valuation allowance $ 2,390,000 Add: Adjustment to establish valuation allowance 1,297,500 ---------------------------------- Tax expense $ 3,687,500 ---------------------------------------------Deferred tax asset $ 4,325,000 × % More likely than not to be realized 30% ---------------------------------- Valuation allowance needed $ 1,297,500 |
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The controller for Cara Company has just completed recording the company's tax expense and deferred taxes for the year ending December 31, 2011, the company's first year of operations. As a result of multiple future deductible temporary differences, Cara Company's balance sheet currently shows a $4,325,000 deferred tax asset. After consultation with the CEO and other executives, the controller determined that it is more likely than not that 30% of the deferred tax asset will not be realized. What net amount will be reported for the deferred tax asset on Cara Company's balance sheet at December 31, 2011?
A) $1,297,500 B) $5,622,500 C) $4,325,000 D) $3,027,500 |
D) $3,027,500
In the 2011 balance sheet, the deferred tax asset would be reported at its estimated net realizable value, and in this case a valuation allowance is needed since future taxable income is anticipated to be insufficient to realize the tax benefit. The estimated NRV of the deferred tax asset is computed as follows: Deferred tax asset $ 4,325,000 × % More likely than not to be realized 30% ----------------------------------- Valuation allowance needed $ 1,297,500 ----------------------------------- Deferred tax asset $ 4,325,000 Less: Valuation allowance (1,297,500) ----------------------------------- $3,027,500 |
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $185,000 in each year. The income reported for 2011 includes $5,700 interest from investments in municipal bonds. The enacted tax rate is 35% for 2011 – 2013. What is the total amount of income tax expense reported on the income statement for Holmes Builders for the year ending December 31, 2011?
A) $64,750 B) $63,715 C) $62,755 D) $66,745 |
C) $62,755
Permanent differences are excluded from taxable income. Total tax expense is computed as follows: Pretax accounting income $ 185,000 Less: Interest on municipal bonds (5,700) ----------------------------------- Taxable income $179,300 × Tax rate 35% ---------------------------------- Tax payable currently $ 62,755 Future taxable/deductible amounts $ 0 ---------------------------------- Total tax expense $ 62,755 |
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $140,000 in each year. The income reported for 2011 includes $44,000 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $22,000 per year. The enacted tax rate is 35% for 2011, and 40% for 2012 – 2013. What is the total amount of income tax expense reported on the income statement for Holmes Builders for the year ending December 31, 2011?
A) $82,000 B) $64,400 C) $17,600 D) $44,000 |
A) $82,000
Taxable income for 2011 is pretax accounting income plus the warranty expense that was subtracted but which won't be paid until future years. Taxable income is computed as follows: Pretax accounting income $ 140,000 Add: Warranty expense not yet paid 44,000 ----------------------------------- Taxable income $ 184,000 × Tax rate 35% ----------------------------------- Tax payable currently $ 64,400 Future deductible amounts $ 44,000 × Tax rate 40% ----------------------------------- Deferred tax asset $ 17,600 Total tax expense $ 82,000 |
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $200,000 in each year. The income reported for 2011 includes $50,000 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $25,000 per year. The enacted tax rate is 35% for 2011, and 40% for 2012 – 2013. What amount will Holmes Builders report for a deferred tax asset on its December 31, 2011 balance sheet?
A) $20,000 B) $17,500 C) $50,000 D) $30,000 |
A) $20,000
The deferred tax asset is the future deductible amount multiplied by the enacted tax rate in effect in the year of reversal. Future deductible amounts $ 50,000 × Tax rate 40% ----------------------------------- Deferred tax asset $ 20,000 |
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $100,000 in each year. The income reported for 2011 includes $40,000 from installment sales of property that will be reported on the tax return when it's collected, in 2012 ($10,000) and 2013 ($30,000). Additionally, the income reported for 2011 includes $50,000 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $25,000 per year. Finally, the income reported for 2011 includes $4,000 interest from investments in municipal bonds. The enacted tax rate is 40% for 2011, and 30% for 2012 – 2013. What amount of taxable income will Holmes Builders report for the year ended December 31, 2011?
A) $94,000 B) $106,000 C)$86,000 D) $6,000 |
B) $106,000
Taxable income excludes the permanent different, municipal bond interest revenue. Additionally, the temporary differences are added or subtracted depending on their future expected reversal. Taxable income is computed as follows: Pretax accounting income $ 100,000 Add: Warranty expense not yet paid 50,000 Less: Municipal bond interest revenue (4,000) Less: installment sales not yet collected (40,000) ---------------------------------------------Taxable income $ 106,000 |
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $185,000 in each year. The income reported for 2011 includes $48,500 from installment sales of property that will be reported on the tax return when it's collected, in 2012 ($11,700) and 2013 ($36,800). Additionally, the income reported for 2011 includes $58,500 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $29,250 per year. Finally, the income reported for 2011 includes $5,700 interest from investments in municipal bonds. The enacted tax rate is 35% for 2011, and 40% for 2012 – 2013. What amount of income tax expense will Holmes Builders report for the year ended December 31, 2011?
A) $62,255 B) $109,055 C) $63,855 D) $70,255 |
A) $62,255
Taxable income excludes the permanent different, municipal bond interest revenue. Additionally, the temporary differences are added or subtracted depending on their future expected reversal. The income tax expense is based on taxable income, the deferred tax liability, and the deferred tax asset, computed as follows: Pretax accounting income $ 185,000 Add: Warranty expense not yet paid 58,500 Less: Municipal bond interest revenue (5,700) Less: installment sales not yet collected (48,500) ----------------------------------- Taxable income $ 189,300 × Tax rate 35% ----------------------------------- Tax payable currently $ 66,255 Future taxable amounts $ 48,500 × Tax rate 40% ---------------------------------- Deferred tax liability $ 19,400 Future deductible amounts $ 58,500 × Tax rate 40% ---------------------------------- Deferred tax liability $ 23,400 Total tax expense $ 62,255 |
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Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $135,000 in each year. The income reported for 2011 includes $43,500 from installment sales of property that will be reported on the tax return when it's collected, in 2012 ($10,700) and 2013 ($32,800). Additionally, the income reported for 2011 includes $53,500 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $26,750 per year. Finally, the income reported for 2011 includes $4,700 interest from investments in municipal bonds. The enacted tax rate is 30% for 2011, and 35% for 2012 – 2013. What amount of deferred tax liability will Holmes Builders report on its December 31, 2011 balance sheet?
A) $18,725 B) $3,500 C) $33,950 D) $15,225 |
D) $15,225
The deferred tax liability is based on amounts that will be taxable in future periods, and the enacted tax rate during the period of reversal. The deferred tax liability is computed as follows: Future taxable amounts $ 43,500 × Tax rate 35% ---------------------------------- Deferred tax liability $ 15,225 |
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During 2011, its first year of operations, Ashley Cosmetics Company reported an operating loss of $255,000 for financial reporting and tax purposes. The enacted tax rate is 30%. What amount of deferred tax asset will Ashley Cosmetics Company report on its December 31, 2011 balance sheet?
A) $178,500 B) $76,500 C) $255,000 D)$331,500 |
B) $76,500
The tax benefit of being able to deduct amounts in the future represents a deferred tax asset. In this case, the benefit of the future deductible amount is $255,000 × 30% = $76,500. |
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Cabinet Company manufactures and installs high-end cabinetry in homes and businesses. Cabinet Company's controller, Jack Mack is a very experienced tax accountant. Jack Mack believes that a particular deduction it recorded in the tax return is legitimate and that the position will save the company $808,000 in 2011 income taxes. However, Jack Mack knows that, historically, the IRS has challenged many deductions of this type. Since tax returns usually aren't examined for one, two, or more years, uncertainty exists. Jack Mack believes the more-likely-than-not criterion is not met; that is, it is not "more likely than not" that the company will be able to sustain the tax return position on its technical merits. Cabinet Company's income tax payable is $2,480,000 after being reduced by the full $808,000 tax benefit. How much income tax expense will Cabinet Company recognize in its income statement for the year ending December 31, 2011?
A) $1,616,000 B) $2,480,000 C) $808,000 D) $3,288,000 |
D) $3,288,000
If there's a 50% chance or less of the company's position being sustained on examination, the tax expense can't reflect the tax benefit. So, the company would record (a) tax expense as if there is no deduction (because that's the actual position taken), (b) income tax payable that reflects the benefit of the deduction, and (c) a liability that represents the potential obligation to pay the additional taxes if the deduction is not ultimately upheld. The entry would be as follows: (DR)Income tax expense (without the $808,000 benefit) 3,288,000 (CR) Income tax payable (with the $808,000 benefit) 2,480,000 (CR) Liability – potential additional tax 808,000 |
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Cabinet Company manufactures and installs high-end cabinetry in homes and businesses. Cabinet Company's controller, Jack Mack is a very experienced tax accountant. Jack Mack believes that a particular deduction it recorded in the tax return is legitimate and that the position will save the company $806,000 in 2011 income taxes. However, Jack Mack knows that, historically, the IRS has challenged many deductions of this type. Since tax returns usually aren't examined for one, two, or more years, uncertainty exists. Jack Mack believes the more-likely-than-not criterion is not met; that is, it is not "more likely than not" that the company will be able to sustain the tax return position on its technical merits. Cabinet Company's income tax payable is $2,460,000 after being reduced by the full $806,000 tax benefit. What amount, if any, of a liability related to the potential additional tax will Cabinet Company recognize in its balance sheet at December 31, 2011?
A) $806,000 B) $1,612,000 C) $2,460,000 D) $0 |
A) $806,000
If there's a 50% chance or less of the company's position being sustained on examination, the tax expense can't reflect the tax benefit. So, the company would record (a) tax expense as if there is no deduction (because that's the actual position taken), (b) income tax payable that reflects the benefit of the deduction, and (c) a liability that represents the potential obligation to pay the additional taxes if the deduction is not ultimately upheld. The entry would be as follows: (DR) Income tax expense (without the $806,000 benefit) 3,266,000 (CR) Income tax payable (with the $806,000 benefit) 2,460,000 (CR) Liability – potential additional tax 806,000 |
