Deck 19: Accounting for Income Taxes

Question 1

Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period.

Answer 1

True

Question 2

Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities.

Answer 2

False

Question 3

Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered.

Answer 3

True

Question 4

Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.

Question 5

The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.

Question 6

A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.

Question 7

A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

Question 8

A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.

Question 9

Pretax financial income is the amount used to compute income taxes payable.

Question 10

Taxable income is a tax accounting term and is also referred to as income before taxes.

Question 11

A company should add a decrease in a deferred tax liability to income taxes payable in computing income tax expense.

Question 12

Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.

Question 13

Permanent differences do not give rise to future taxable or deductible amounts.

Question 14

Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.

Question 15

When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.

Question 16

An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.

Question 17

The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

Question 18

A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.

Question 19

Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.

Question 20

Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.

Question 21

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?

Question 22

Taxable income of a corporation

A) differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.
B) differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.
C) is based on generally accepted accounting principles.
D) is reported on the corporation's income statement.

Question 23

A major distinction between temporary and permanent differences is

A) permanent differences are not representative of acceptable accounting practice.
B) temporary differences occur frequently, whereas permanent differences occur only once.
C) once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.
D) temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

Question 24

26. At the December 31, 2014 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2015, a future taxable amount will occur and

A) pretax financial income will exceed taxable income in 2015.
B) Unruh will record a decrease in a deferred tax liability in 2015.
C) total income tax expense for 2015 will exceed current tax expense for 2015.
D) Unruh will record an increase in a deferred tax asset in 2015.

Question 25

A temporary difference arises when a revenue item is reported for tax purposes in a period

Question 26

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

A) handled retroactively in accordance with the guidance related to changes in accounting principles.
B) considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.
C) reported as an adjustment to income tax expense in the period of change.
D) applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

Question 27

Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be

A) a balance in the Unearned Rent account at year end.
B) using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
C) a fine resulting from violations of OSHA regulations.
D) making installment sales during the year.

Question 28

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?

A) Prepaid expenses that are deducted on the tax return in the period paid.
B) Product warranty liabilities.
C) Depreciable property.
D) Fines and expenses resulting from a violation of law.

Question 29

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

A) Subscriptions received in advance.
B) Prepaid royalty received in advance.
C) An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.
D) Interest received on a municipal obligation.

Question 30

Which of the following differences would result in future taxable amounts?

A) Expenses or losses that are tax deductible after they are recognized in financial income.
B) Revenues or gains that are taxable before they are recognized in financial income.
C) Revenues or gains that are recognized in financial income but are never included in taxable income.
D) Expenses or losses that are tax deductible before they are recognized in financial income.

Question 31

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

A) it is probable that a future tax rate change will occur.
B) it appears likely that a future tax rate will be greater than the current tax rate.
C) the future tax rates have been enacted into law.
D) it appears likely that a future tax rate will be less than the current tax rate.

Question 32

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?

Question 33

Which of the following will not result in a temporary difference?

A) Product warranty liabilities
B) Advance rental receipts
C) Installment sales
D) All of these will result in a temporary difference.

Question 34

Which of the following is not considered a permanent difference?

A) Interest received on municipal bonds.
B) Fines resulting from violating the law.
C) Premiums paid for life insurance on a company's CEO when the company is the beneficiary.
D) Stock-based compensation expense.

Question 35

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?
I)Accrual for product warranty liability.
II)Subscriptions received in advance
III)Prepaid insurance expense.

A) I and II only.
B) II only.
C) III only.
D) I and III only.

Question 36

An example of a permanent difference is

A) proceeds from life insurance on officers.
B) interest expense on money borrowed to invest in municipal bonds.
C) insurance expense for a life insurance policy on officers.
D) All of these answers are correct.

Question 37

The deferred tax expense is the

A) increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
B) increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
C) increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
D) decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

Question 38

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in

Question 39

22 Taxable income of a corporation differs from pretax financial income because of

Question 40

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?
I)A revenue is deferred for financial reporting purposes but not for tax purposes.
II)A revenue is deferred for tax purposes but not for financial reporting purposes
III)An expense is deferred for financial reporting purposes but not for tax purposes.IV. An expense is deferred for tax purposes but not for financial reporting purposes.

A) item II only
B) items I and II only
C) items II and III only
D) items I and IV only

Question 41

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

A) their expected reversal dates.
B) their debit or credit balance.
C) the length of time the deferred tax amounts will generate future tax deferral benefits.
D) the classification of the related asset or liability.

Question 42

Major reasons for disclosure of deferred income tax information is (are)

A) better assessment of quality of earnings.
B) better predictions of future cash flows.
C) predicting future cash flows for operating loss carryforwards.
D) All of these answer choices are correct.

Question 43

Use the following information for questions 58 through 60.
Hopkins Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: The estimated litigation expense of $2,000,000 will be deductible in 2015 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years.
The deferred tax asset to be recognized is

A) $150,000 current.
B) $300,000 current.
C) $450,000 current.
D) $600,000 current.

Question 44

Accounting for income taxes can result in the reporting of deferred taxes as any of the following except

A) a current or long-term asset.
B) a current or long-term liability.
C) a contra-asset account.
D) All of these are acceptable methods of reporting deferred taxes.

Question 45

Lehman Corporation purchased a machine on January 2, 2013, for $3,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Lehman's balance sheet at December 31, 2014 be

Question 46

Recognizing a valuation allowance for a deferred tax asset requires that a company

A) consider all positive and negative information in determining the need for a valuation allowance.
B) consider only the positive information in determining the need for a valuation allowance.
C) take an aggressive approach in its tax planning.
D) pass a recognition threshold, after assuming that it will be audited by taxing authorities.

Question 47

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

A) it is probable and can be reasonably estimated.
B) there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities.
C) it is more likely than not that the tax position will be sustained upon audit.
D) Any of the above exist.

Question 48

Use the following information for questions 52 and 53.
At the beginning of 2015, Pitman Co. purchased an asset for $1,200,000 with an estimated useful life of 5 years and an estimated salvage value of $100,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2015 and all future years.
At the end of 2015, what are the book basis and the tax basis of the asset?

Question 49

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

A) the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.
B) totally eliminated from the financial statements if the amount is related to a noncurrent asset.
C) based on the classification of the related asset or liability for financial reporting purposes.
D) the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

Question 50

Deferred taxes should be presented on the balance sheet

A) as one net debit or credit amount.
B) in two amounts: one for the net current amount and one for the net noncurrent amount.
C) in two amounts: one for the net debit amount and one for the net credit amount.
D) as reductions of the related asset or liability accounts.

Question 51

Use the following information for questions 55 through 57.
Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years.
The deferred tax asset to be recognized is

A) $0.
B) $120,000 current.
C) $600,000 current.
D) $600,000 noncurrent.

Question 52

Use the following information for questions 58 through 60.
Hopkins Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: The estimated litigation expense of $2,000,000 will be deductible in 2015 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years.
The deferred tax liability to be recognized is

Question 53

Recognition of tax benefits in the loss year due to a loss carryforward requires

A) the establishment of a deferred tax liability.
B) the establishment of a deferred tax asset.
C) the establishment of an income tax refund receivable.
D) only a note to the financial statements.

Question 54

Use the following information for questions 55 through 57.
Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years.
The income tax expense is

A) $240,000.
B) $360,000.
C) $400,000.
D) $800,000.

Question 55

Use the following information for questions 58 through 60.
Hopkins Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: The estimated litigation expense of $2,000,000 will be deductible in 2015 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years.
Income taxes payable is

A) $0.
B) $150,000.
C) $300,000.
D) $450,000.

Question 56

All of the following are procedures for the computation of deferred income taxes except to

A) identify the types and amounts of existing temporary differences.
B) measure the total deferred tax liability for taxable temporary differences.
C) measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks.
D) All of these are procedures in computing deferred income taxes.

Question 57

Use the following information for questions 55 through 57.
Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years.
The deferred tax liability-current to be recognized is

A) $120,000.
B) $360,000.
C) $240,000.
D) $480,000.

Question 58

Use the following information for questions 52 and 53.
At the beginning of 2015, Pitman Co. purchased an asset for $1,200,000 with an estimated useful life of 5 years and an estimated salvage value of $100,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2015 and all future years.
At the end of 2015, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet?

Question 59

Tanner, Inc. incurred a financial and taxable loss for 2015. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2015 financial statements?

A) The reduction of the loss should be reported as a prior period adjustment.
B) The refund claimed should be reported as a deferred charge and amortized over five years.
C) The refund claimed should be reported as revenue in the current year.
D) The refund claimed should be shown as a reduction of the loss in 2015.

Question 60

Uncertain tax positions
I)Are positions for which the tax authorities may disallow a deduction in whole orin part.
II)Include instances in which the tax law is clear and in which the company believesan audit is likely
III)Give rise to tax expense by increasing payables or increasing a deferredtax liability.

A) I, II, and III.
B) I and III only.
C) II only.
D) I only.

Question 61

Use the following information for questions 79 and 80.
Rowen, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 40% in 2015, its first year of operations. During 2015 the company had the following transactions:
At the end of 2015, which of the following deferred tax accounts and balances is reported on Rowen, Inc.'s balance sheet?

Question 62

In 2014, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $2,400,000. The facilities were sold in March 2015 and a $2,400,000 loss was recognized for tax purposes. Also in 2014, Krause paid $100,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2014 and 2015, and that Krause paid $780,000 in income taxes in 2014, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2014, should be a

A) $680,000 asset.
B) $360,000 asset.
C) $360,000 liability.
D) $720,000 asset.

Question 63

Use the following information for questions 66 and 67.
Mitchell Corporation prepared the following reconciliation for its first year of operations: The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2015 is 35%.
In Mitchell's 2015 income statement, what amount should be reported for total income tax expense?

A) $345,000
B) $315,000
C) $315,000
D) $227,500

Question 64

Eckert Corporation's partial income statement after its first year of operations is as follows: Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $2,400,000. No other differences existed between book income 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 return for the current year?

A) $2,100,000
B) $1,125,000
C) $2,400,000
D) $2,700,000

Question 65

Use the following information for questions 79 and 80.
Rowen, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 40% in 2015, its first year of operations. During 2015 the company had the following transactions:
For 2015, what is the amount of income taxes payable for Rowen, Inc?

A) $603,200
B) $654,400
C) $686,400
D) $772,800

Question 66

Watson Corporation prepared the following reconciliation for its first year of operations: The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2015 is 28%. What amount should be reported in its 2015 income statement as the current portion of its provision for income taxes?

A) $392,000
B) $560,000
C) $504,000
D) $720,000

Question 67

Use the following information for questions 70 through 72.
Lyons Company deducts insurance expense of $126,000 for tax purposes in 2014, but the expense is not yet recognized for accounting purposes. In 2015, 2016, and 2017, no insurance expense will be deducted for tax purposes, but $42,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $108,000 at the end of 2014. There were no deferred taxes at the beginning of 2014.
What is the amount of the deferred tax liability at the end of 2014?

A) $50,400
B) $43,200
C) $18,000
D) $0

Question 68

Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture.For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%.If Ewing's December 31, 2015, balance sheet includes a deferred tax liability of $600,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of

A) $5,000,000.
B) $2,000,000.
C) $1,500,000.
D) $450,000.

Question 69

Use the following information for questions 76-78.
At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income:
The ending balance in Elephant, Inc's deferred tax liability at December 31, 2015 is

A) $23,000
B) $38,000
C) $26,000
D) $78,000

Question 70

Ferguson Company has the following cumulative taxable temporary differences: The tax rate enacted for 2015 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2015 is $4,800,000 and there are no permanent differences. Ferguson's pretax financial income for 2015 is

A) $7,500,000.
B) $5,580,000.
C) $4,020,000.
D) $2,100,000.

Question 71

Cross Company reported the following results for the year ended December 31, 2014, its first year of operations: The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2015. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2014, assuming that the enacted tax rates in effect are 40% in 2014 and 35% in 2015?

A) $360,000 deferred tax liability
B) $315,000 deferred tax asset
C) $360,000 deferred tax asset
D) $315,000 deferred tax liability

Question 72

Horner Corporation has a deferred tax asset at December 31, 2015 of $160,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2012-2014; 35% for 2015; and 30% for 2016 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of:

A) $80,000
B) $32,000
C) $28,000
D) $24,000

Question 73

Use the following information for questions 70 through 72.
Lyons Company deducts insurance expense of $126,000 for tax purposes in 2014, but the expense is not yet recognized for accounting purposes. In 2015, 2016, and 2017, no insurance expense will be deducted for tax purposes, but $42,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $108,000 at the end of 2014. There were no deferred taxes at the beginning of 2014.
Assuming that income taxes payable for 2015 is $144,000, the income tax expense for 2015 would be what amount?

A) $194,400
B) $160,800
C) $144,000
D) $127,200

Question 74

Use the following information for questions 76-78.
At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income:
Which of the following is required to adjust Elephant, Inc.'s deferred tax asset to its correct balance at December 31, 2015?

A) A credit of $52,000
B) A credit of $38,000
C) A debit of $38,000
D) A debit of $42,000

Question 75

Use the following information for questions 76-78.
At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income:
What is Elephant, Inc.'s taxable income for 2015?

A) $ 750,000
B) $ 630,000
C) $ 870,000
D) $1,130,000

Question 76

Use the following information for questions 70 through 72.
Lyons Company deducts insurance expense of $126,000 for tax purposes in 2014, but the expense is not yet recognized for accounting purposes. In 2015, 2016, and 2017, no insurance expense will be deducted for tax purposes, but $42,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $108,000 at the end of 2014. There were no deferred taxes at the beginning of 2014.
What is the amount of income tax expense for 2014?

A) $158,400
B) $151,200
C) $126,000
D) $108,000

Question 77

The following information is available for Kessler Company after its first year of operations: Kessler estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $85,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims?

A) $95,000
B) $100,000
C) $85,000
D) $75,000

Question 78

Use the following information for questions 73 and 74.
Kraft Company made the following journal entry in late 2014 for rent on property it leases to Danford Corporation. The payment represents rent for the years 2015 and 2016, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $184,000 at the end of 2014, and its tax rate is 35%.
Assuming the income taxes payable at the end of 2015 is $204,000, what amount of income tax expense would Kraft Company record for 2015?

A) $162,000
B) $183,000
C) $225,000
D) $246,000

Question 79

Use the following information for questions 66 and 67.
Mitchell Corporation prepared the following reconciliation for its first year of operations: The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2015 is 35%.
What amount should be reported in its 2015 income statement as the deferred portion of income tax expense?

A) $70,000 debit
B) $87,500 debit
C) $70,000 credit
D) $87,500 credit

Question 80

Use the following information for questions 73 and 74.
Kraft Company made the following journal entry in late 2014 for rent on property it leases to Danford Corporation. The payment represents rent for the years 2015 and 2016, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $184,000 at the end of 2014, and its tax rate is 35%.
What amount of income tax expense should Kraft Company report at the end of 2014?

A) $106,000
B) $142,000
C) $163,000
D) $226,000