Deck 16: Income Taxes

Question 1

Which of the following creates a permanent difference between financial income and taxable income?

A) Interest received on municipal bonds
B) Completed contract method of recognizing construction revenue
C) Unearned rent revenue
D) Accelerated cost recovery on plant and equipment

Answer 1

A

Question 2

Which of the following statements is not correct?

A) All current deferred tax liabilities and assets shall be offset and presented as a single amount on the balance sheet.
B) Deferred tax assets related to carryforwards shall be classified as current or noncurrent on the balance sheet based on their expected date of reversal.
C) All current and noncurrent deferred tax assets shall be offset and presented as a single amount on the balance sheet.
D) Deferred tax liabilities and assets shall be classified as current or noncurrent on the balance sheet based on the classification of the asset or liability giving rise to the deferred tax item.

Answer 2

C

Question 3

Alpha Company reported net incomes in 2010 and 2011 before sustaining a significant operating loss in 2012. All of the 2012 loss can be carried back against the income of 2010 and 2011 for purposes of determining the company's 2009 income tax liability. How should the carryback be presented in the company's 2012 financial statements?

A) As an extraordinary item in the income statement
B) As a revenue from operations in the income statement
C) As the correction of an error in the retained earnings statement
D) As a reduction in the operating loss on the income statement for the year 2012

Answer 3

D

Question 4

Which of the following temporary differences ordinarily results in a deferred tax liability?

A) Accrued warranty costs
B) Subscription revenue received in advance
C) Unrealized losses on marketable securities
D) Depreciation

Question 5

Which of the following situations would require interperiod income tax allocation procedures?

A) A temporary difference exists because the tax basis of capital equipment is less than its reported amount in the financial statements.
B) Proceeds from an insurance policy on capital equipment lost in a fire exceed the book value of the equipment.
C) Last period's ending inventory was understated causing both net income and income tax expense to be understated.
D) Nontaxable interest payments are received on municipal bonds.

Question 6

The result of interperiod income tax allocation is that

A) wide fluctuations in a company's tax liability payments are eliminated.
B) tax expense shown in the income statement is equal to the deferred taxes shown on the balance sheet.
C) tax liability shown in the balance sheet is equal to the deferred taxes shown on the previous year's balance sheet plus the income tax expense shown on the income statement.
D) tax expense shown on the income statement is equal to income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.

Question 7

Which of the following arguments is supportive of allocation of income taxes?

A) Future predictions of net income are enhanced when income taxes are allocated.
B) Income tax expense computed under interperiod tax allocation is a better predictor of future cash flows than income taxes actually paid.
C) Income tax is not an expense; it is a sharing of profits with government.
D) Income tax expense based on actual payments is more understandable to users than allocated income taxes.

Question 8

An example of a "deductible temporary difference" occurs when

A) the installment sales method is used for tax purposes, but the accrual method of recognizing sales revenue is used for financial reporting purposes.
B) accelerated depreciation is used for tax purposes but straight-line depreciation is used for accounting purposes.
C) warranty expenses are recognized on the accrual basis for financial reporting purposes but recognized as the warranty conditions are met for tax purposes.
D) the completed-contract method of recognizing construction revenue is used for tax purposes, but the percentage-of-completion method is used for financial reporting purposes.

Question 9

Recognizing tax benefits in a loss year due to a loss carryforward requires

A) only a footnote disclosure.
B) creating a new carryforward for the next year.
C) creating a deferred tax asset.
D) creating a deferred tax liability.

Question 10

Which of the following is the most likely item to result in a deferred tax asset?

A) Using accelerated depreciation for tax purposes but straight-line depreciation for accounting purposes
B) Using the completed-contract method of recognizing construction revenue tax purposes, but using percentage-of-completion method for financial reporting purposes
C) Prepaid expenses
D) Unearned revenues

Question 11

When enacted tax rates change, the asset and liability method of interperiod tax allocation recognizes the rate change as

A) a cumulative effect adjustment.
B) an adjustment to be netted against the current income tax expense.
C) a separate charge to the current year's net income.
D) a separate charge or benefit to income tax expense.

Question 12

Which of the following items results in a temporary difference taxable amount for a given year?

A) Premiums on officer's life insurance (company is beneficiary)
B) Premiums on officer's life insurance (officer is beneficiary)
C) Vacation pay accrual
D) Accelerated depreciation for tax purposes; straight-line for financial reporting purposes

Question 13

An item that would create a permanent difference in pretax financial and taxable incomes would be

A) using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
B) purchasing equipment previously leased with an operating lease in prior years.
C) using the percentage-of-completion method on long-term construction contracts.
D) paying fines for violation of laws.

Question 14

The purpose of an interperiod income tax allocation is to

A) allow reporting entities to fully utilize tax losses carried forward from a previous year.
B) allow reporting entities whose tax liabilities vary significantly from year to year to smooth payments to taxing agencies.
C) recognize an asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
D) amortize the deferred tax liability shown on the balance sheet.

Question 15

Which of the following creates a temporary difference between financial and taxable income?

A) Interest on municipal bonds
B) Accelerated cost recovery on plant and equipment
C) Fines from violation of law
D) Premiums paid for officer's life insurance (company is beneficiary)

Question 16

A company would most likely choose the carryforward option for a net operating loss if the company expected

A) higher tax rates in the future compared to the past.
B) lower tax rates in the future compared to the past.
C) lower earnings in the future compared to the past.
D) higher earnings in the future compared to the past.

Question 17

A deferred tax liability arising from the use of an accelerated method of depreciation for tax purposes and the straight-line method for financial reporting purposes would be classified on the balance sheet as

A) a current liability.
B) a noncurrent liability.
C) a current liability for the portion of the temporary difference reversing within a year and a noncurrent liability for the remainder.
D) an offset to the accumulated depreciation reported on the balance sheet.

Question 18

Which of the following items results in a temporary difference deductible amount for a given year?

A) Premiums on officer's life insurance (company is beneficiary)
B) Premiums on officer's life insurance (officer is beneficiary)
C) Vacation pay accrual
D) Accelerated depreciation for tax purposes; straight-line for financial reporting purposes

Question 19

Which of the following temporary differences ordinarily creates a deferred tax asset?

A) Accrued warranty costs
B) Depreciation
C) Installment sales
D) Prepaid insurance

Question 20

All of the following can result in a temporary difference between pretax financial income and taxable income except

A) payment of premiums for life insurance.
B) depreciation expense.
C) contingent liabilities.
D) product warranty costs.

Question 21

If all temporary differences entering into the determination of pretax accounting income are considered in the computation of deferred taxes and income tax expense, then the

A) no-deferral approach is being applied.
B) comprehensive recognition approach is being applied.
C) partial recognition approach is being applied.
D) net-of-tax method is being applied.

Question 22

In 2011, Eric Corporation reported $90,000 net income before income taxes. The income tax rate for 2011 was 30 percent. Eric had an unused $60,000 net operating loss carryforward arising in 2010 when the tax rate was 35 percent. The income tax expense Eric would report for 2011 would be

A) $6,000.
B) $9,000.
C) $10,500.
D) $27,000.

Question 23

Historically, the United Kingdom has recognized only those deferred tax liabilities expected to "crystallize." The term "crystallize" is most nearly synonymous with the term

A) amortized.
B) realized.
C) recognized.
D) liquidated.

Question 24

Warren Corporation began operations in 2008 and had operating losses of $400,000 in 2009 and $300,000 in 2010. For the year ended December 31, 2011, Warren had a pretax financial income of $600,000. For 2009 and 2010, assume an enacted tax rate of 30 percent, and for 2011 a 35 percent tax rate. There were no temporary differences in any of the years. In Warren's 2011 income statement, how much should be reported as income tax expense?

A) $0
B) $30,000
C) $180,000
D) $210,000

Question 25

The asset-liability method of interperiod tax allocation currently required by U.S. GAAP is an example of the

A) discounted comprehensive recognition approach.
B) no-deferral approach.
C) partial recognition approach.
D) comprehensive recognition approach.

Question 26

The Indy Company had taxable income of $12,000 during 2011. Indy used accelerated depreciation for tax purposes ($3,400) and straight-line depreciation for accounting purposes ($2,000). Assuming Indy had no other temporary differences, what would the company's pretax accounting income be for 2011?

A) $1,400
B) $6,600
C) $13,400
D) $17,400

Question 27

The following information is taken from Blackhawk Corporation's 2011 financial records:

Assume the taxable temporary difference was created entirely in 2011 and will reverse in equal net taxable amounts in each of the next three years. If tax rates are 40 percent in 2011, 35 percent in 2012, 35 percent in 2013, and 30 percent in 2014, then the total deferred tax liability Blackhawk should report on its December 31, 2011, balance sheet is

A) $13,500.
B) $15,000.
C) $15,750.
D) $18,000.

Question 28

Schaeffer Products, Inc., reported an excess of warranty expense over warranty deductions of $72,000 for the year ended December 31, 2011. This temporary difference will reverse in equal amounts over the years 2012 to 2014. The enacted tax rates are as follows:

The reporting for this temporary difference at December 31, 2011, would be a

A) deferred tax liability of $28,800.
B) deferred tax asset of $28,800.
C) current deferred tax liability of $8,400 and a noncurrent deferred tax liability of $13,200.
D) current deferred tax asset of $8,400 and a noncurrent deferred tax asset of $13,200.

Question 29

The Gayle Corporation reported a $66,000 operating loss in 2011. In the preceding three years, Gayle reported the following income before taxes and paid the indicated income taxes:

The amount of tax benefit to be reported in 2011 arising from the tax carryback provisions of the current tax code would be

A) $23,100.
B) $22,500.
C) $21,300.
D) $19,200.

Question 30

Analysis of the assets and liabilities of Marie Corp. on December 31, 2011, disclosed assets with a tax basis of $1,000,000 and a book basis of $1,300,000. There was no difference in the liability basis. The difference in asset basis arose from temporary differences that would reverse in the following years:

The enacted tax rates are 30 percent for the years 2011-2014 and 35 percent for 2015-2018. The total deferred tax liability on December 31, 2011, should be

A) $105,000.
B) $93,900.
C) $90,000.
D) $69,000.

Question 31

In 2011, The Worf Company, reported pretax financial income of $500,000. Included in that pretax financial income was $90,000 of nontaxable life insurance proceeds received as a result of the death of an officer; $120,000 of warranty expenses accrued but unpaid as of December 31, 2011; and $20,000 of life insurance premiums for a policy for an officer. Assuming that no income taxes were previously paid during the year and assuming an income tax rate of 40 percent, the amount of income taxes payable on December 31, 2011, would be

A) $180,000.
B) $200,000.
C) $212,000.
D) $220,000.

Question 32

Begal Corporation paid $20,000 in January of 2011 for premiums on a two- year life insurance policy which names the company as the beneficiary. Additionally, Begal Corporation's financial statements for the year ended December 31, 2011, revealed the company paid $105,000 in taxes during the year and also accrued estimated litigation losses of $200,000. Assuming the lawsuit was resolved in February of 2012 (at which time a $200,000 loss was recognized for tax purposes) and that Begal's tax rate is 30 percent for both 2011 and 2012, what amount should Begal report as asset for net deferred income taxes on its 2011 balance sheet?

A) $54,000
B) $57,000
C) $60,000
D) $66,000

Question 33

Eden Company had pretax accounting income of $24,000 during 2011. Eden's only temporary difference for 2008 relates to a sale made in 2009 and recognized for accounting purposes at that time. However, Eden uses the installment sales method of revenue recognition for tax purposes. During 2011 Eden collected a receivable from the 2009 sale which resulted in $6,000 of income under the installment sales method. Eden's taxable income for 2011 would be

A) $6,000.
B) $18,000.
C) $24,000.
D) $30,000.

Question 34

International accounting standards currently are moving toward the

A) no-deferral approach.
B) partial recognition approach.
C) comprehensive recognition approach.
D) discounted comprehensive recognition approach.

Question 35

The following information was taken from Buccaneer Corporation's 2011 income statement:

Buccaneers' first year of operations was 2011. The company has a 30 percent tax rate. Management decided to use accelerated depreciation for tax purpose and the straight-line method of depreciation for financial reporting purposes. The amount charged to depreciation expense in 2011 was $600,000. Assuming no other differences existed between book income and taxable income, what amount did Buccaneer deduct for depreciation on its tax return for 2011?

A) $480,000
B) $570,000
C) $600,000
D) $720,000

Question 36

For three consecutive years, 2009-2011, Twins Corporation has reported income before taxes of $100,000 for both financial reporting purposes and tax reporting purposes. During this time, Twins income tax rates were as follows:

In 2012, Twins' tax rate changed to 35 percent. Also in 2012, the company reported a loss for both financial reporting and tax reporting purposes of $100,000. Assuming the company uses the carryback provisions, the amount Twins' should report as an income tax refund receivable in 2012 is

A) $20,000.
B) $25,000.
C) $30,000.
D) $35,000.

Question 37

Viking Corporation reported depreciation of $250,000 on its 2011 tax return. However, in its 2011 income statement, Viking reported depreciation of $100,000. The difference in depreciation is a temporary difference that will reverse over time. Assuming Viking's tax rate is constant at 30 percent, what amount should be added to the deferred income tax liability in Viking's December 31, 2011, balance sheet?

A) $30,000
B) $37,500
C) $45,000
D) $75,000

Question 38

Dodger Corporation reported a loss for both financial reporting purposes and tax reporting purposes of $231,000 in 2011. For financial reporting purposes, Dodger reported income before taxes for years 2008-2010 as listed below:

Assuming Dodger's tax rate is 30 percent in all periods, and that the company uses the carryback provisions, what amount should appear in Dodger's statements for financial reporting purposes as a net loss in 2011?

A) $0
B) $69,300
C) $161,700
D) $234,300

Question 39

On the statement of cash flows using the indirect method, an increase in the deferred tax liability would be shown as

A) an addition to net income.
B) a deduction from net income.
C) an increase in investing activities.
D) an increase in financing activities.

Question 40

On December 31, 2010, Alton, Inc., reported a current deferred tax liability of $140,000 and a noncurrent deferred tax asset of $40,000. At the end of 2011, Alton reported a current deferred tax liability of $100,000, and a noncurrent deferred tax liability of $44,000. The deferred tax expense for 2011 is

A) $144,000.
B) $44,000.
C) $36,000.
D) $4,000.

Question 41

Frey Corporation's income statement for the year ended December 31, 2011, shows pretax income of $1,000,000. The following items are treated differently on the tax return and in the accounting records:

Assume that Frey's tax rate for 2011 is 30 percent. What is the amount of income tax payable for 2011?

A) $360,000
B) $320,000
C) $294,000
D) $267,000

Question 42

Inventive Corporation's income statement for the year ended December 31, 2011, shows pretax income of $300,000. The following items are treated differently on the tax return and in the accounting records:

Assume that Inventive's tax rate for 2011 is 40 percent. What is the current portion of Inventive's total income tax expense for 2011?

A) $106,200
B) $120,200
C) $130,200
D) $144,200

Question 43

Beta had taxable income of $1,500 during 2011. Beta used accelerated depreciation for tax purposes ($2,000) and straight-line depreciation for financial reporting purposes ($800). On December 30, 2011, Beta collected the January 2012 rent of $600 on a lot it rents on a month-by-month basis to Phillips. Beta's pretax accounting income for 2011 would be

A) $900.
B) $2,100.
C) $3,300.
D) $3,700.

Question 44

For the current year, Santa Fe Company reported income tax expense of $195,000. Income taxes payable at the end of the prior year were $125,000 and at the end of the current year were $130,000. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes increased from $120,000 at the beginning of the current year to $123,000 at the end of the current year. How much cash was paid for income taxes during the year?

A) $187,000
B) $197,000
C) $195,000
D) $190,000

Question 45

Which of the following is an example of a temporary difference that would result in a deferred tax liability?

A) Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
B) Rent revenue collected in advance when included in taxable income before it is included in pretax accounting income
C) Use of a shorter depreciation period for accounting purposes than is used for income tax purposes
D) Investment losses recognized earlier for accounting purposes than for tax purposes

Question 46

Which of the following represents a permanent difference?

A) Point-of-sale revenue recognition for financial reporting purposes, installment method for tax purposes
B) Carryback, carryforward option for taxes, no such option for financial reporting purposes
C) Straight-line depreciation for financial reporting purposes, accelerated depreciation for tax purposes
D) Goodwill amortization deducted on the tax return but not amortized for financial reporting purposes

Question 47

Gamma had pretax accounting income of $1,400 during 2011. Gamma used accelerated depreciation for tax purposes ($1,000) and straight-line depreciation for financial reporting purposes ($200). During 2011, Gamma accrued warranty expenses of $900 and paid cash to honor warranties of $500. Gamma's taxable income for 2011 would be

A) $200.
B) $1,000.
C) $1,800.
D) $2,600.

Question 48

The books of the Tracker Company for the year ended December 31, 2011, showed pretax income of $360,000. In computing the taxable income for federal income tax purposes, the following timing differences were taken into account:

What should Tracker record as its current federal income tax liability at December 31, 2011, assuming a corporate income tax rate of 30 percent?

A) $99,600
B) $103,200
C) $106,800
D) $108,000

Question 49

Which of the following does not help explain why income tax expense is different from the product of pretax income times the current tax rate?

A) Permanent differences
B) Temporary differences
C) The fact that future and current tax rates are different
D) A change in the valuation allowance account for the deferred tax asset.

Question 50

During a year, Great Northern Company reported income tax expense of $200,000. The amount of taxes currently payable remained unchanged from the beginning to the end of the year. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes, increased from $40,000 at the beginning of the year to $44,000 at the end of the year. How much cash was paid for income taxes during for the year?

A) $156,000
B) $160,000
C) $196,000
D) $206,000

Question 51

Cowboy Corporation reported depreciation of $450,000 on its 2011 tax return. However, in its 2011 income statement, Cowboy reported depreciation of $300,000,as well as $30,000 interest revenue on tax-free bonds. The difference in depreciation is only a temporary difference, and it will reverse equally over the next three years. Cowboy's enacted income tax rates are as follows:

What amount should be included in the deferred income tax liability in Cowboy's December 31, 2011, balance sheet?

A) $30,000
B) $37,500
C) $45,000
D) $52,500

Question 52

Which factor would most likely cause a firm to choose the carryforward option for an NOL?

A) Expectations of lower earnings in the future relative to the past
B) Expectations of higher earnings in the future relative to the past
C) Expectations of lower tax rates in the future relative to the past
D) Expectations of higher tax rates in the future relative to the past

Question 53

During 2011, Alpha Company had pretax accounting income of $420. Alpha's only temporary difference for 2011 was the collection of a receivable that resulted in $120 of income under the installment sales method of revenue recognition that Alpha uses for tax purposes. The sale was originally made in 2009 and recognized for accounting purposes at that time. Alpha's taxable income for 2011 would be

A) $300.
B) $420.
C) $460.
D) $540.

Question 54

Which of the following could never be subject to interperiod tax allocation?

A) Interest revenue on municipal bonds
B) Depreciation expense on operational assets
C) Estimated warranty expense
D) Rent revenue

Question 55

In computing the change in deferred tax accounts, which of the following tax rates is used?

A) Current tax rate
B) Estimated future tax rates
C) Enacted future tax rates
D) Past years' tax rates

Question 56

Intraperiod tax allocation

A) involves the allocation of income taxes between current and future periods.
B) associates tax effect with different items in the income statement.
C) arises because certain revenues and expenses appear in the financial statements either before or after they are included in the income tax return.
D) arises because different income statement items are taxed at different rates.

Question 57

For the current year, Northern Pacific Company reported income tax expense of $11,000. Income taxes payable at the end of the prior year were $9,000 and at the end of the current year were $10,000. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes increased from $11,000 at the beginning of the current year to $13,000 at the end of the current year. How much cash was paid for income taxes during the year?

A) $8,000
B) $10,000
C) $11,000
D) $9,000

Question 58

Which of the following is not a source of support for the realization of a deferred tax asset?

A) Future taxable temporary differences
B) Future deductible temporary differences
C) Past taxable income within the carryback period
D) Future taxable income

Question 59

Which of the following is an example of a temporary difference that could result in a deferred tax asset?

A) Gain on disposal of an asset when included in taxable income before it is included in pretax accounting income
B) Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
C) Gross margin on installment sales is recognized for accounting purposes before it is included in taxable income in the income tax return
D) Prepayments of expenses in year of payment; recognition of expense for accounting purposes occurs in a later year

Question 60

For the current year, Northern Pacific Company reported income tax expense of $45,000. Income taxes payable at the end of the prior year were $20,000 and at the end of the current year were $27,000. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes increased from $18,000 at the beginning of the current year to $23,000 at the end of the current year. How much cash was paid for income taxes during the year?

A) $33,000
B) $45,000
C) $38,000
D) $47,000

Question 61

A major conceptual issue associated with interperiod tax allocation is the issue of discounting the deferred tax amount on the balance sheet to reflect its present value. Current generally accepted accounting principles do not allow the discounting of deferred taxes. Some in the profession have suggested, however, that the FASB should reconsider its position on discounting in light of the Board's current project on present value-based measurements in accounting.
Provide arguments for and against the discounting of deferred income taxes.

Question 62

Cardinal Industries computed a pretax financial income of $118,500 for the first year of its operations ended December 31, 2011. Cardinal uses an accelerated cost recovery method on its tax return, and straight-line depreciation on its books.
The difference between the tax and book deduction for depreciation over the five-year life of the assets acquired in 2011 are as follows:

The enacted tax rates for this year and the next four years are as follows:

Use the provisions of FASB Statement No. 109 and assume that it is more likely than not that income will be sufficient in all future years to realize any deductible amounts.

Question 63

SFAS No. 109 allows the recognition of deferred tax assets for both operating loss carryforwards and temporary differences arising from normal operations. This provision of SFAS No. 109 represents a significant change from the requirements of SFAS No. 96 and APB Opinion No. 11 in which stringent limits were placed on the recognition of deferred tax assets. SFAS No. 109 does require some recognition of the uncertainty associated with deferred tax assets, however.
Required:
Explain how SFAS No. 109 addresses uncertainty associated with deferred tax assets and how the approach in SFAS No. 109 compares with the approach adopted in SFAS No. 5 regarding contingencies.

Question 64

IAS No. 12, "Income Taxes," contains the provisions relating to accounting for income taxes. The international standard is similar to U.S. GAAP in that it uses the asset and liability approach for recording deferred income taxes. There are some differences between IASB standards and U.S. GAAP relating to the asset-liability approach, recognition, measurement, disclosure criteria, and implementation, however.
Required:
Identify and discuss the differences between U.S. GAAP and IAS No. 12 and other international standards.

Question 65

The data shown below represent the complete taxable income history for Union Corporation. The tax rate was 30% throughout the entire period 2005 through 2012:

If the company always chooses the carryback, carryforward option, what is the tax liability for 2011?

A) $1,500
B) $7,500
C) $4,500
D) $0

Question 66

SFAS No. 109 rejected the approach of its predecessor SFAS No. 96 regarding the classification of deferred tax assets and liabilities on the balance sheet. SFAS No. 96 required that the deferred tax consequences of temporary differences that will result in taxable or deductible amounts during the following year or operating cycle (if longer than one year) be classified as current. SFAS No. 109 requires that deferred tax assets and liabilities be classified based on the asset or liability to which the temporary difference relates or, if no clear relationship between the temporary difference and an asset or liability can be established, based on the date on which the deferred tax item will be realized or settled.
Required:
Explain why the FASB rejected the approach in SFAS No. 96 and the basis for the method required in SFAS No. 109.

Question 67

The application of SFAS No. 109 results in the recording on the financial statements of an enterprise of deferred tax assets and liabilities. The initial identification of these deferred tax assets and liabilities raises the issue as to how these amounts should be shown on the balance sheet in terms of current and noncurrent classifications. One approach advocated by some in the profession is to classify all deferred taxes as noncurrent.
Required:
Explain the advantages and disadvantages of this approach and indicate if this approach is acceptable under SFAS No. 109.

Question 68

A major conceptual issue regarding the accounting for income taxes is the recognition of income taxes as expenses. Some would argue that income taxes are not directly related to revenues or revenue-seeking functions and should not be considered as expenses. Some view income taxes as a distribution of income similar to dividends. This view would hold that income taxes, like dividends, are paid only if income is earned. Wages and supplies, on the other hand, are paid for whether the entity earns a profit or incurs a loss.
Identify arguments that can be made for recognizing income tax as an expense on the income statement.

Question 69

The Internal Revenue Code allows a corporation to carry back or carry forward an operating loss occurring in a given year.
Required:

Question 70

SFAS No 109 takes a decidedly different approach to the treatment of operating loss carryforwards. Under APB Opinion No. 11, the presumption was that operating losses would not be realizable. As a result, the entity experiencing the loss would not provide for the effects of carryforwards in its financial statements until the benefits were in fact later realized for tax purposes. SFAS No. 96 was even more stringent in its approach in that net deferred tax debits were prohibited to the extent they exceeded amounts which would be recoverable through operating loss carrybacks as of the date of the balance sheet. SFAS No. 109 treats net operating loss carryforwards in the same manner as the tax effects of other deductible temporary differences and allow both to be recognized as deferred tax assets. The approach of SFAS No. 109 has been criticized by some, however.
Required:
Identify what you perceive to be the weaknesses in the approach promulgated by SFAS No. 109.

Question 71

Walsh Services computed pretax financial income of $220,000 for its first year of operations ended December 31, 2011. In preparing the income tax return for the year, the tax accountant determined the following differences between 2011 financial income and taxable income:

The temporary difference is expected to reverse in the following pattern:

The enacted tax rates for this year and the next three years are as follows:

Use the provisions of FASB Statement No. 109.

Question 72

Many non-accountants are confused when they hear that company has a tax refund of $2,000, but reported an income tax expense of $5,000. These individuals believe such a situation results from companies keeping two sets of books. They further believe that keeping two sets of books is illegal and should be prohibited.
Required:
1. Do companies keep two sets of books and, if they do, is this illegal?
2. How can a company have a tax refund when it also reports an income tax expense?

Question 73

SFAS No. 109 uses the term "tax-planning strategy". The meaning of this term in the pronouncement is somewhat different from its usage in ordinary business conversation. Typically, one would expect the term tax-planning strategy to connote the actions management takes to minimize the enterprise's long-run tax obligation. An enterprise may, for example, structure its credit sales activities such that these sales would qualify for treatment as installment sales for tax purposes. Such an approach would allow the deferral of taxable revenue until cash is actually received. The use of the term tax-planning strategy in SFAS No. 109 differs from the traditional use, however.
Required:
Explain the meaning of the term "tax-planning strategy" as the term is used in SFAS No. 109.

Question 74

Halverson Company reported taxable income of $60,000 for 2011, its first year of operations. This amount reflects temporary differences between financial and taxable income that are scheduled to reverse in subsequent years as shown below. As of December 31, 2011, the enacted tax rate for 2011 and future years was 40 percent.

Question 75

Pretax accounting income is $100,000 and the tax rate is 40%. Included in income is a $20,000 fine levied for pollution violations and other infractions during the year. In the reconciliation of the statutory and effective rate (beginning with the statutory rate), which one of the following amounts would appear?

A) (.08)
B) .08
C) (.20)
D) (.04)

Question 76

Radford Appliances computed a pretax financial loss of $60,000 for the first year of its operations ended December 31, 2011. Analysis of the tax and book basis of its liabilities disclosed $80,000 in accrued warranty expenses on the books that had not been deductible from taxable income in 2011, but would be deductible in future years when the warranty expenses were paid.
The future warranty payments are expected to occur in the following pattern:

The enacted tax rates for this year and the next four years are as follows:

Use the provisions of FASB Statement No. 109.

Question 77

Garrison Designs, Inc., a corporation organized on January 1, 2002, reported the following incomes (losses) for the ten-year period, 2002-2011:

Applying the carryback provisions in the tax law, compute the net amount of taxes paid (amounts paid less refunds) for the ten-year period ending December 31, 2011