Deck 17: Accounting for Income Taxes

Question 1

The amount of income that a company reports on its tax return is known as ________.

A) refundable income
B) taxable income
C) deductible income
D) net income

Answer 1

B

Question 2

Greene Co. has book income of $425,000, and a tax rate of 30%. Assuming there are no book-tax differences, what will the journal entry be to record the income tax expense?

A) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 127,500 & \\\hline \text { Income Tax Payable } & & 127,500 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 255,000 & \\\hline \text { Income Tax Payable } & & 255,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Payable } & 127,500 & \\\hline \text { Income Tax Expense } & & 127,500 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Payable } & 255,000 & \\\hline \text { Income Tax Expense } & & 255,000 \\\hline\end{array}$$

Answer 2

$$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 127,500 & \\\hline \text { Income Tax Payable } & & 127,500 \\\hline\end{array}$$

Question 3

S & C Inc.'s income tax payable is $290,000 and its tax rate is 30%. Assuming no book-tax differences, what is S & C's net income? (Round your answer to the nearest whole dollar.)

A) $676,667
B) $87,000
C) $377,000
D) $966,667

Answer 3

A

Question 4

Book income refers to the amount of income reported on a company's tax return.

Question 5

The effective tax rate is the legally imposed rate in a given taxing jurisdiction.

Question 6

________ differences between book income and taxable income result in an effective tax rate that differs from the statutory tax rate.

A) Temporary
B) Permanent
C) Short-term
D) Long-term

Question 7

The statutory tax rate is the legally imposed rate in a given taxing jurisdiction.

Question 8

Taxable income refers to the amount of income reported on a company's tax return.

Question 9

Betta Group's net income is $400,000 and its tax rate is 25%. Assuming no book-tax differences, what is Betta's taxes payable? (Round your answer to the nearest whole dollar.)

A) $100,000
B) $133,333
C) $1,600,000
D) $533,333

Question 10

Which of the following statements best describes the effective tax rate?

A) It is the legally imposed rate in a given taxing jurisdiction.
B) It can be calculated by dividing income tax expense by book income before taxes.
C) It changes annually based on provisions from Congress.
D) It is calculated as book income divided by taxable income.

Question 11

Caesar Corporation reports municipal interest income on their financial statements. What (if any) book-tax difference will result?

A) Temporary difference; book income greater than taxable income.
B) Temporary difference; taxable income greater than book income.
C) Permanent difference; book income greater than taxable income.
D) No difference; municipal interest is taxable income.

Question 12

Media Corporation incurred $25,000 in expenses associated with tax-exempt income this year. What (if any) book-tax difference will result?

A) Temporary difference; book income less than taxable income.
B) Permanent difference; book income less than taxable income.
C) Permanent difference; book income greater than taxable income.
D) Temporary difference; book income greater than taxable income.

Question 13

Dante Inc. reported fines and penalties on their income statement this year. What (if any) book-tax difference will result?

A) Temporary difference; book income less than taxable income.
B) Permanent difference; book income greater than taxable income.
C) Permanent difference; book income less than taxable income.
D) No difference; fines and penalties are tax deductible.

Question 14

TNT Corporation's income tax payable is $230,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's income before taxes? (Round your answer to the nearest whole dollar.)

A) $69,000
B) $230,000
C) $766,667
D) $328,571

Question 15

The amount of income a company reports in its financial statements is known as ________.

A) book income
B) net operable income
C) taxable income
D) revenue income

Question 16

U.S. GAAP requires companies to reconcile the federal statutory income tax rate to the effective tax rate.

Question 17

Olympics Inc. recorded a dividends received deduction on their tax return this year. What (if any) book-tax difference will result?

A) Temporary difference; book income less than taxable income.
B) Permanent difference; book income less than taxable income.
C) Permanent difference; book income greater than taxable income.
D) Temporary difference; book income greater than taxable income.

Question 18

TNT Corporation's income tax payable is $240,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's net income? (Round your answer to the nearest whole dollar.)

A) $72,000
B) $240,000
C) $800,000
D) $560,000

Question 19

Brown Inc.'s net income is $300,000 and its tax rate is 25%. Assuming no book-tax differences, what is the journal entry to record income tax expense? (Do not round intermediate calculations. Only round your final answer to the nearest whole dollar.)

A) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 75,000 & \\\hline \text { Income Tax Payable } & & 75,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 400,000 & \\\hline \text { Income Tax Payable } & & 400,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 300,000 & \\\hline \text { Income Tax Payable } & & 300,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 100,000 & \\\hline \text { Income Tax Payable } & & 100,000 \\\hline\end{array}$$

Question 20

TLR Productions has book income of $450,000, and a tax rate of 35%. Assuming there are no book-tax differences, what is TLR's income tax expense?

A) $144,000
B) $157,500
C) $189,000
D) $292,500

Question 21

Charmed Inc.'s income before taxes is $720,000 and its tax rate is 25%. Charmed included $30,000 in non-deductible life insurance premiums in the $720,000. There are no other book-tax differences. What is the journal entry to record income tax expense?

A) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 7,500 & \\\hline \text { Income Tax Payable } & & 7,500 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 172,500 & \\\hline \text { Income Tax Payable } & & 172,500 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 180,000 & \\\hline \text { Income Tax Payable } & & 180,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 187,500 & \\\hline \text { Income Tax Payable } & & 187,500 \\\hline\end{array}$$

Question 22

Gallagher Corporation's book income before taxes is $600,000 and its tax rate is 35%. Included in the income before taxes is $50,000 in fines and penalties. There are no other book-tax differences. Prepare the journal entry to record income tax expense and a reconciliation of the statutory tax rate to the effective tax rate. (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.)

Question 23

Kravitz Corporation had income before taxes of $890,000 and a tax rate of 45%. Included in the income are $40,000 in municipal bond interest and $20,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is Kravitz's effective income tax rate? (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.)

A) 44%
B) 46%
C) 45%
D) 48%

Question 24

Tom-Kat Inc.'s income before taxes is $360,000 and its tax rate is 30%. Tom-Kat included $60,000 of interest from municipal bonds in the $360,000. There are no other book-tax differences. What is the journal entry to record income tax expense?

A) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 90,000 & \\\hline \text { Income Tax Payable } & & 90,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 108,000 & \\\hline \text { Income Tax Payable } & & 108,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 126,000 & \\\hline \text { Income Tax Payable } & & 126,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Income Tax Expense } & 18,000 & \\\hline \text { Income Tax Payable } & & 18,000 \\\hline\end{array}$$

Question 25

Kravitz Corporation had income before taxes of $900,000 and a tax rate of 25%. Included in the income are $70,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is the net amount of Kravitz's book-tax difference?

A) Book income that is $60,000 greater than taxable income
B) Book income that is $70,000 greater than taxable income
C) Taxable income that is $10,000 greater than book income
D) Taxable income that is $60,000 greater than book income

Question 26

Temporary differences cause the effective income tax rate to vary from the statutory rate.

Question 27

Temporary differences between the book and tax treatment of transactions create deferred tax assets or deferred tax liabilities.

Question 28

Kravitz Corporation had income before taxes of $900,000 and a tax rate of 45%. Included in the income are $80,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is Kravitz's taxable income?

A) $910,000
B) $820,000
C) $830,000
D) $900,000

Question 29

A deferred tax asset represents a future reduction in income taxes payable.

Question 30

Danio Inc.'s income before taxes is $550,000 and its tax rate is 30%. Danio included $30,000 of interest from municipal bonds in the $550,000. There are no other book-tax differences. What is the effective tax rate for Danio Inc.? (Do not round intermediate calculations. Only round your final answer to the nearest percent.)

A) 27%
B) 28%
C) 30%
D) 32%

Question 31

Blue Company's income before taxes is $410,000 and its tax rate is 40%. Blue included $50,000 of fines and penalties in the $410,000. There are no other book-tax differences. What is the effective tax rate for Blue Company? (Do not round intermediate calculations. Only round your final answer to the nearest percent.)

A) 35%
B) 40%
C) 45%
D) 51%

Question 32

Purrfect Pet Industries' income before taxes is $810,000 and its tax rate is 50%. Purrfect Pet included $50,000 of fully deductible inter-corporate dividends received in the $810,000. There are no other book-tax differences. What is the income tax payable for Purrfect Pet?

A) $405,000
B) $430,000
C) $25,000
D) $380,000

Question 33

Piper Inc.'s income before taxes is $550,000 and its tax rate is 40%. Piper included $30,000 of interest from municipal bonds in the $550,000. There are no other book-tax differences. Prepare the journal entry to record income tax expense and a reconciliation of the statutory tax rate to the effective tax rate. (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.)

Question 34

Under U.S. GAAP, companies generally use a balance sheet approach to account for temporary differences between book and tax treatment of transactions.

Question 35

Under U.S. GAAP, companies generally use a cash flow approach to account for temporary differences between book and tax treatment of transactions.

Question 36

Lyon Group's income before taxes is $420,000 and its tax rate is 40%. Lyon included $30,000 in fines and penalties in the $420,000. There are no other book-tax differences. What is income tax payable for Lyon Group?

A) $168,000
B) $180,000
C) $156,000
D) $12,000

Question 37

Under U.S. GAAP, if a firm writes down inventory for obsolescence, which of the following is created?

A) a deferred tax asset
B) a deferred tax liability
C) a book basis of assets that is greater than the tax basis
D) a book basis of liabilities that is less than the tax basis

Question 38

A deferred tax liability is created when ________.

A) the book basis of assets is greater than the tax basis of assets
B) the book basis of liabilities is greater than the tax basis of liabilities
C) the book basis of assets is equal to the tax basis of assets
D) the book basis of assets is less than the tax basis of liabilities

Question 39

A deferred tax asset exists when ________.

A) the book basis of assets is greater than the tax basis of assets
B) the book basis of liabilities is greater than the tax basis of liabilities
C) the book basis of assets is equal to the tax basis of assets
D) the book basis of liabilities is less than the tax basis of liabilities

Question 40

Betz Corporation's income before taxes is $725,000 and its tax rate is 40%. Included in this amount is $50,000 in municipal bond interest and $15,000 in officers' life insurance. There are no other book-tax differences. Prepare the journal entry to record income tax expense and a reconciliation of the statutory tax rate to the effective tax rate. (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.)

Question 41

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $600,000. Included in this amount is $20,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $200,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is the amount of Greenville's deferred tax asset or liability?

A) $7,000 deferred tax asset
B) $7,000 deferred tax liability
C) $4,000 deferred tax asset
D) $4,000 deferred tax liability

Question 42

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $85,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $170,000 and are treated the same for book and tax purposes. Assuming a 40% tax rate, what is Greenville's income tax expense?

A) $98,000
B) $132,000
C) $166,000
D) $200,000

Question 43

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $75,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is Greenville's income tax payable?

A) $99,750
B) $126,000
C) $148,750
D) $175,000

Question 44

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 30% for both years.

2018 information:
Sales on account in the amount of $700,000
Warranty expense and associated liability in the amount of $130,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $230,000
Warranty repairs made in the amount of $61,000
No expenses incurred.

What is the amount of MK's deferred tax asset or deferred tax liability for 2018?

A) $11,700
B) $39,000
C) $91,000
D) $18,300

Question 45

Greene Co. has pretax book income for the year ended December 31, 2018 in the amount of $285,000 and has a tax rate of 40%. Depreciation for tax purposes exceeded book depreciation by $13,500. What should Greene Co. record as its federal income tax liability for 2018?

A) $114,000
B) $78,750
C) $108,600
D) $119,400

Question 46

All of the following are examples of situations that may create temporary book-tax differences except ________.

A) amortization of goodwill
B) writing off bad debt
C) installment sales
D) receipt of municipal bond interest

Question 47

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $560,000. Included in this amount is $25,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $120,000 and are treated the same for book and tax purposes. What is Greenville's tax basis in the installment sale receivable?

A) $25,000
B) $0
C) $12,500
D) $120,000

Question 48

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 30% for both years.
2018 information:
Sales on account in the amount of $650,000
Warranty expense and associated liability in the amount of $105,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $225,000
Warranty repairs made in the amount of $68,000
No expenses incurred.

What is MK's taxable income for 2018?

A) $545,000
B) $650,000
C) $755,000
D) $582,000

Question 49

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 25% for both years.

2018 information:
Sales on account in the amount of $675,000
Warranty expense and associated liability in the amount of $135,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $215,000
Warranty repairs made in the amount of $60,000
No expenses incurred.

What is MK's income tax payable for 2018?

A) $135,000
B) $168,750
C) $202,500
D) $153,750

Question 50

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $590,000. Included in this amount is $80,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $180,000 and are treated the same for book and tax purposes. What is Greenville's book basis in the installment sale receivable?

A) $80,000
B) $0
C) $40,000
D) $180,000

Question 51

All of the following are examples of facts that may create temporary book-tax differences except ________.

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

Question 52

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $540,000. Included in this amount is $15,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. What is Greenville's taxable income?

A) $385,000
B) $400,000
C) $525,000
D) $540,000

Question 53

Greene Co. has pretax book income for the year ended December 31, 2018 in the amount of $315,000 and has a tax rate of 30%. Depreciation for tax purposes exceeded book depreciation by $10,500. What should Greene Co. record as its deferred tax liability for 2018?

A) $0
B) $3,150
C) $91,350
D) $94,500

Question 54

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 20% for both years.

2018 information:
Sales on account in the amount of $675,000
Warranty expense and associated liability in the amount of $145,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $210,000
Warranty repairs made in the amount of $69,000
No expenses incurred.

What is MK's income tax expense for 2018?

A) $106,000
B) $135,000
C) $164,000
D) $121,200

Question 55

S & C Company reported $220,000 depreciation on its 2018 tax return. However, they reported $40,000 depreciation expense on their 2018 income statement. The difference in depreciation is a temporary difference that will reverse over time. Assuming S & C's tax rate is constant at 20%, what amount should be added to the deferred income tax liability in S & C's December 31, 2018, balance sheet?

A) $8,000
B) $36,000
C) $44,000
D) $52,000

Question 56

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 25% for both years.
2018 information:
Sales on account in the amount of $660,000
Warranty expense and associated liability in the amount of $110,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $205,000
Warranty repairs made in the amount of $63,000
No expenses incurred.

What is MK's book income for 2018?

A) $550,000
B) $660,000
C) $770,000
D) $597,000

Question 57

When a company pays taxes that were previously recorded as a deferred tax liability, the temporary difference ________.

A) originates
B) reverses
C) increases
D) decreases

Question 58

Inferno Inc. is embroiled in a lawsuit. In 2018, they recognize that a loss of $65,000 is probable. Given a tax rate of 40%, how will this be treated in the accounting records?

A) deferred tax asset of $26,000
B) deferred tax liability of $26,000
C) deferred tax asset of $65,000
D) deferred tax liability of $65,000

Question 59

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $580,000. Included in this amount is $60,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $100,000 and are treated the same for book and tax purposes. What is Greenville's book income?

A) $420,000
B) $480,000
C) $520,000
D) $580,000

Question 60

When a company depreciates a fixed asset at a faster rate for tax purposes than book purposes, this creates a ________.

A) deferred tax asset
B) higher tax basis than book basis of assets in the early years
C) deferred tax liability
D) lower tax basis than book basis of liabilities in the early years

Question 61

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $900,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}\underline{\text { Year} } & \underline{\text { MACRS} }(\%) \\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$

The company is subject to a 25% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}& \text { Income before}\\& \text { Taxand}\\\text { Year } & \text { Depreciation } \\\hline 1 & \$ 370,000 \\2 & 420,000 \\3 & 490,000 \\4 & 700,000 \\5 & 820,000 \\6 & 950,000\end{array}$

What is Infinity's income tax expense for year 1?

A) $220,000
B) $55,000
C) $47,500
D) $92,500

Question 62

If the valuation allowance for a deferred tax asset is decreased, there is a(n) ________ to income tax expense, which is a(n) ________ to income tax benefit.

A) decrease; increase
B) increase; increase
C) increase; decrease
D) decrease; decrease

Question 63

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $720,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}\text { Year } & \text { MACRS }(\%) \\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$
The company is subject to a 40% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}&\text { Income before}\\&\text { Tax and}\\\text { Year } & \text { Depreciation } \\1 & \$ 360,000 \\2 & 410,000 \\3 & 480,000 \\4 & 700,000 \\5 & 820,000 \\6 & 950,000\end{array}$
What is Infinity's book income for year 1?

A) $235,000
B) $240,000
C) $216,000
D) $360,000

Question 64

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $840,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}\text { Year } & \text { MACRS }(\%) \\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$


The company is subject to a 20% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}& \text { Income before}\\& \text { Taxand}\\\text { Year } & \text { Depreciation } \\\hline 1 & \$ 450,000 \\2 & 500,000 \\3 & 570,000 \\4 & 700,000 \\5 & 820,000 \\6 & 950,000\end{array}$
What is Infinity's deferred tax asset or deferred tax liability at the end of year 1?

A) $5,600 deferred tax liability
B) $28,000 deferred tax liability
C) $672,000 deferred tax asset
D) $28,000 deferred tax asset

Question 65

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $840,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}\text { Year }& \text { MACRS }(\%) \\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$
The company is subject to a 30% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}&\text {Income before}\\&\text {Tax and}\\\text { Year } & \text { Depreciation } \\\hline 1 & \$ 410,000 \\2& 460,000 \\3& 530,000 \\4 & 700,000 \\5 & 820,000 \\6& 950,000\end{array}$
What is Infinity's taxable income for year 1?

A) $265,000
B) $270,000
C) $242,000
D) $410,000

Question 66

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $720,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages.
$\begin{array}{ll}\underline{\text { Year} } &\underline{ \text { MACRS }(\%) }\\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$

The company is subject to a 40% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$$\begin{array} { | l | c | } \hline \text { Year } & \begin{array} { c } \text { Income before } \\\text { Tax and } \\\text { Depreciation }\end{array} \\ \hline 1 & \$ 400,000 \\\hline 2 & 450,000 \\\hline 3 & 520,000 \\\hline 4 & 700,000 \\\hline 5 & 820,000 \\\hline6&950\\\hline\end{array}$$
Complete the following table for Infinity Production.
$$\begin{array} { | c | c | c | c | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Book } \\\text { depreciation }\end{array} & \begin{array} { c } \text { Tax } \\\text { depreciation }\end{array} & \begin{array} { c } \text { Book } \\\text { income } \\\text { before tax }\end{array} & \begin{array} { c } \text { Taxable } \\\text { income } \\\text { before tax }\end{array} & \begin{array} { c } \text { Income tax } \\\text { expense }\end{array} & \begin{array} { c } \text { Deferred }\\\text { tax liability } \\\text { balance }\end{array} \\\hline 1 & & & & & & \\\hline 2 & & & & & & \\\hline 3 & & & & & & \\\hline 4 & & & & & & \\\hline 5 & & & & & & \\\hline 6 & & & & & & \\\hline\end{array}$$

Question 67

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $780,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}\underline{\text { Year} } & \underline{\text { MACRS} }(\%) \\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$


The company is subject to a 25% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}& \text { Income before}\\& \text { Taxand}\\\text { Year } & \text { Depreciation } \\\hline 1 & \$ 390,000 \\2 &440,000 \\3 & 510,000 \\4 & 700,000 \\5 & 820,000 \\6 & 950,000\end{array}$

What is Infinity's income tax payable for year 1?

A) $234,000
B) $65,000
C) $58,500
D) $97,500

Question 68

Under U.S. GAAP, when a firm determines that all or a portion of a deferred tax asset is not realizable, they will use a valuation allowance to reduce the balance.

Question 69

Gustav, Inc. uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $75,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $150,000 and are treated the same for book and tax purposes.
Complete the following:
a. What is the book basis of the installment sales receivable?
b. What is the tax basis of the installment sales receivable?
c. Assuming a 30% tax rate, compute income tax expense, the deferred tax provision, and income tax payable for 2018.
d. Prepare the journal entry to record the 2018 income tax expense.

Question 70

Discuss the relationship between temporary differences, and the statutory and effective tax rates.

Question 71

The contra-asset to the Deferred Tax Asset account is called ________.

A) Income Tax Benefit
B) Valuation Allowance for Deferred Tax Asset
C) Deferred Tax Liability
D) Allowance for Doubtful Accounts

Question 72

Bach. Co. presents the following information for 2018 and 2019.

2018 information:
Sales on account in the amount of $645,000
Warranty expense and associated liability in the amount of $125,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $225,000
Warranty payments made in the amount of $65,000
No expenses incurred.

Prepare the journal entries for 2018 and 2019 to record the sales, warranty, and income tax transactions, assume a 40% tax rate.

Question 73

When assessing realizability of deferred tax assets, management must consider positive and negative evidence. All of the following would be considered positive evidence except ________.

A) taxable income in prior carryback year(s) if carryback is permitted under the tax law
B) future reversals of existing taxable temporary differences
C) unsettled circumstances that could adversely affect future operations
D) an excess of appreciated asset value over the tax basis of the entity's net assets

Question 74

There are questions as to whether or not deferred tax assets and liabilities should be recorded. Based on your understanding of the concepts and accounting terminology, are deferred tax assets and tax liabilities real assets and liabilities?

Question 75

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $900,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}\underline{\text { Year} } & \underline{\text { MACRS} }(\%) \\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$
The company is subject to a 20% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}& \text { Income before}\\& \text { Taxand}\\\text { Year } & \text { Depreciation } \\\hline 1 & \$ 450,000 \\2 & 500,000 \\3 & 570,000 \\4 & 700,000 \\5 & 820,000 \\6 & 950,000\end{array}$

What is Infinity's deferred tax asset or deferred tax liability at the end of year 3?

A) $2,760 deferred tax liability
B) $38,160 deferred tax liability
C) $38,160 deferred tax asset
D) $2,760 deferred tax asset

Question 76

When defining the portion of a deferred tax asset that a firm will not realize, IFRS uses the term ________.

A) likely
B) possible
C) more likely than not
D) probable

Question 77

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $600,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}\underline{\text { Year} } & \underline{\text { MACRS} }(\%) \\1 & 20.00 \% \\2 & 32.00 \\3 & 19.20 \\4 & 11.52 \\5 & 11.52 \\6 & 5.76\end{array}$

The company is subject to a 20% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}& \text { Income before}\\& \text { Taxand}\\\text { Year } & \text { Depreciation } \\\hline 1 & \$ 430,000 \\2 &480,000 \\3 & 550,000 \\4 & 700,000 \\5 & 820,000 \\6 & 950,000\end{array}$

What is the increase or decrease in the deferred tax liability for year 3?

A) $3,040 increase
B) $25,440 increase
C) $14,560 decrease
D) $37,600 increase

Question 78

IFRS uses a two-step process in recording the realizability of deferred tax assets.

Question 79

When assessing realizability of deferred tax assets, management must consider positive and negative evidence. Which of the following would be considered negative evidence?

A) existing contracts or firm sales backlog
B) a carryback or carryforward period that is so brief it could limit realization of tax benefits
C) taxable income in prior carryback year(s) if carryback is permitted under the tax law
D) a strong earnings history exclusive of the loss that created the future deductible amount

Question 80

Violet, Inc. recorded a deferred tax asset of $43,000 due to a book-tax difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 45% of the deferred tax asset. What is the necessary journal entry to record the valuation allowance?

A) $$\begin{array} { | l | r | r | } \hline \text { Income Tax Expense } & 19,350 & \\\hline \text { Valuation Allowance for Deferred Tax Asset } & & 19,350 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Deferred Tax Asset } & 19,350 & \\\hline \text { Valuation Allowance for Deferred Tax Asset } & & 19,350 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Income Tax Expense } & 43,000 & \\\hline \text { Valuation Allowance for Deferred Tax Asset } & & 43,000 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Deferred Tax Asset } & 43,000 & \\\hline \text { Valuation Allowance for Deferred Tax Asset } & & 43,000 \\\hline\end{array}$$