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22 Cards in this Set
- Front
- Back
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21. Taxable income of a corporation |
differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting |
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22. taxable income of a corporation differs from pretax financial income because of |
Permanent Differences? - Yes Temporary Differences? - Yes |
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24. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in: |
future taxable amounts? - Yes future deductible amounts? - Yes |
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29 . A major distinction between temporary and permanent differences is: |
temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse |
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30. 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? |
product warranty liabilites |
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32. Which of the following are temporary differences would result in future taxable amounts? |
expenses or losses that are tax deductible before they are recognized in financial income |
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34. an example of a permanent difference is |
1. proceeds from a life insurance on officers 2. interest revenue on municipal bonds. 3. insurance expense for a life insurance policy on officers |
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36. A company uses the equity method to account for an investment for financial reporting purposes. This would result in what type of difference and in what type of deferred income tax? |
type of difference? - temporary deferred tax? - liability |
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38. which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates? |
- accrual for product warranty liability - subscription received in advance |
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40. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be? |
reported as an adjustment to income tax expense in the period of change |
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42. Recognition of tax benefits in the loss year due to a loss carryforward requires |
the establishment of a deferred tax asset |
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53. At the beginningof 2018, Pitman Co. purchased an asset for $1,800,000 with an estimated usefullife of 5 years and an estimated salvage value of $150,000. For financialreporting purposes the asset is being depreciated using the straight-linemethod; for tax purposes the double-declining-balance method is being used.Pitman Co.’s tax rate is 40% for 2018 and all future years. At the end of2018, which of the following deferred tax accounts and balances is reported onPitman’s balance sheet? |
Account - Deferred tax liability Balance - $156,000 |
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57. Mathis Co. at the end of 2017,its first year of operations, prepared a reconciliation between pretaxfinancial income and taxable income as follows:
The gross profit from the installment sales will berealized in the amount of $1,200,000 in each of the next two years. Theinstallment receivable are classified as $1,200,000 current and $1,200,000noncurrent. The income tax rate is 30% for all years. The deferredtax liability to be recognized is |
$720,000 |
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58 Hopkins Co. at the end of 2017, its first year ofoperations, prepared a reconciliation between pretax financial income andtaxable income as follows:
The estimatedlitigation expense of $4,000,000 will be deductible in 2018 when it is expectedto 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 allyears. |
$300,000 Explanation:Income Tax Payable = Taxableincome x Income Tax rate = $1,000,000 × 30% = $300,000 |
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59. The deferred tax asset to be recognized is |
$1,200,000 Explanation: The estimated litigation expense of $4,000,000 willbe deductible in 2018 when it is expected to be paid è Future Deductible Amount è Deferred Tax Asset. The deferred tax asset to berecognized = $4,000,000 × 30% = $1,200,000 |
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60. The amount of deferred tax liability to be recognized is |
$1,800,000 Explanation: Use of the depreciable assets will result in taxableamounts of $2,000,000 in each of the next three years è Future Taxable Amount è Deferred Tax Liability. The amount of deferred taxliability to be recognized = $6,000,000 × 30% = $1,800,000. |
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61. Eckert Corporation's partial income statement after its firstyear of operations is as follows:
Income before income taxes $3,750,000 Income tax expense
Eckert uses the straight-linemethod of depreciation for financial reporting purposes and accelerateddepreciation for tax purposes. The amount charged to depreciation expense onits books this year was $2,800,000. No other differences existed between bookincome 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 returnfor the current year? |
$3,100,000 Explanation:Temporary Difference = Depreciationfor tax reporting - Depreciation for financial reporting Deferred Tax Liability = 30% ×(Depreciation for tax reporting - Depreciation for financial reporting) =$90,000 Then, Depreciation for tax reporting- Depreciation for financial reporting = $300,000 (= $90,000 ÷ 30%) Since the amount charged todepreciation expense on its books this year was $2,800,000, Depreciation fortax reporting = Depreciation for financial reporting + $300,000 = $2,800,000 + $300,000= $3,100,000 |
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67. Mitchell Coporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2018 $1,800,000Tax exempt interest (150,000) Originating temporary difference (350,000)Taxable income $1,300,000 Thetemporary difference will reverse evenly over the next two years at an enactedtax rate of 40%. The enacted tax rate for 2018 is 35%. In Mitchell’s 2018 income statement, whatamount should be reported for total income tax expense? |
$595,000 Notes: 1. Permanent difference will not create any deferred tax accounts althoughit affects income tax payable of current period. 2. Deferred tax assets/liabilities should be determined by enacted tax ratescorresponding reversal years. |
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73. Kraft Company made the following journal entry in late 2018 for rent on property it leases to Danford Corporation.
Dr. Cash 150,000 Cr. 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 taxexpense should Kraft Company report at the end of 2018? |
$177,500 Explanation: Unearned Rent Revenue will create future deductibleamount because it is taxable when Kraft Company receives in cash but it is notrecognized in financial reporting purpose. Thus Kraft Company will pay more taxthis year and pay less taxes in the future. In other words, it should recognizeDeferred Tax Asset. Deferred tax asset = future deductible amount × taxrate 35% = $150,000 x 35% = $52,500 Dr. Income Tax Expense $177,500Dr. Deferred Tax Asset $52,500 Cr. IncomeTaxes Payable $230,000 |
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87. A reconciliation of Gentry Company's pretax accounting income with its taxable income for 2018, its first year of operations, is as follows:
Pretax accounting income $4,500,000 Excess tax depreciation (225,000) Taxable income $4,275,000 The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2018, 35% in 2019 and 2020, and 30% in 2021. The total deferred tax liability to be reported on Gentry's balance sheet at December 31, 2018, is |
$75,000 |
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91. Rodd Co.reports a taxable and pretax financialloss of $900,000 for 2018. Rodd's taxable and pretax financial income andtax rates for the last two years were:
2016 $900,000 30%2017 900,000 35% Theamount 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% in2018, is |
$270,000 Explanation:Loss carryback is applied to the income of two preceding years in reverse order, beginning with the earliest year first. Rodd Co. can request tax refund up to $900,000 of taxable income of those two preceding years. Thus it can ask a refund of the entire taxes paid in 2016, which is $270,000. |
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94. Operating income and tax rates for C.J. Company’s first three years of operations were as follows:
Income: 2017 - $400,000 2018 - ($1,000,000) 2019 - $1,680,000 Enacted tax rate: 2017 - 35% 2018 - 30% 2019 - 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 - $300,000 Deferred tax asset of liability - deferred tax liability Explanation: Since C.J. Company opts only to carryforward its 2018 NOL, total NOL, $1,000,000 will be used to create Deferred Tax Asset – NOL. Also when you determine deferred tax asset, it should use the enacted future tax rate, which is 40%. Thus, Deferred Tax Asset – NOL is $400,000 (=$1,000,000 ×40%). |
