Deck 16: Income Taxes

Question 1

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

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

Answer 1

A

Question 2

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

Answer 2

D

Question 3

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.

Answer 3

C

Question 4

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 5

In 2014,Ryan Corporation reported $85,000 net income before income taxes.The income tax rate for 2014 was 30 percent.Ryan had an unused $65,000 net operating loss carryforward arising in 2013 when the tax rate was 35 percent.The income tax expense Ryan would report for 2014 would be

A)$7,000.
B)$6,000.
C)$24,600.
D)$32,000.

Question 6

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 7

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 8

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

Question 9

Omega Company reported net incomes in 2013 and 2014 before sustaining a significant operating loss in 2015.All of the 2015 loss can be carried back against the income of 2013 and 2014 for purposes of determining the company's 2015 income tax liability.How should the carryback be presented in the company's 2015 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 2015

Question 10

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 11

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 12

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 13

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)warranty expenses are recognized on the accrual basis for financial reporting purposes but recognized as the warranty conditions are met for tax purposes.
C)accelerated depreciation is used for tax purposes but straight-line depreciation is used for accounting 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 14

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 15

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

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

Question 16

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.

Question 17

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

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

Question 18

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 19

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 20

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 21

Ballantine Products,Inc.,reported an excess of warranty expense over warranty deductions of $72,000 for the year ended December 31,2014.This temporary difference will reverse in equal amounts over the years 2015 to 2017.The enacted tax rates are as follows:

The reporting for this temporary difference at December 31,2014,would be a

A)deferred tax liability of $23,400.
B)deferred tax asset of $23,400.
C)current deferred tax liability of $7,200 and a noncurrent deferred tax liability of $16,200.
D)current deferred tax asset of $7,200 and a noncurrent deferred tax asset of $16,200.

Question 22

Analysis of the assets and liabilities of Baxter Corp.on December 31,2014,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 2014-2017 and 35 percent for 2018-2019.The total deferred tax liability on December 31,2014,should be

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

Question 23

On December 31,2013,Breezeway,Inc.,reported a current deferred tax liability of $140,000 and a noncurrent deferred tax asset of $40,000.At the end of 2014,Breezeway reported a current deferred tax liability of $100,000,and a noncurrent deferred tax liability of $44,000.The deferred tax expense for 2014 is

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

Question 24

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 25

For three consecutive years,2012-2014,Siamese Corporation has reported income before taxes of $200,000 for both financial reporting purposes and tax reporting purposes.During this time,Siamese income tax rates were as follows:

In 2015,Siamese' tax rate changed to 35 percent.Also in 2015,the company reported a loss for both financial reporting and tax reporting purposes of $200,000.Assuming the company uses the carryback provisions,the amount Siamese' should report as an income tax refund receivable in 2015 is

A)$45,000.
B)$50,000.
C)$60,000.
D)$67,500.

Question 26

Longhorn Corporation reported a loss for both financial reporting purposes and tax reporting purposes of $231,000 in 2014.For financial reporting purposes,Longhorn reported income before taxes for years 2011-2013 as listed below:

Assuming Longhorn's tax rate is 30 percent in all periods,and that the company uses the carryback provisions,what amount should appear in Longhorn's statements for financial reporting purposes as a net loss in 2014?

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

Question 27

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 28

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 29

Amengual Corporation began operations in 2011 and had operating losses of $400,000 in 2012 and $300,000 in 2013.For the year ended December 31,2014,Amengual had a pretax financial income of $600,000.For 2012 and 2013,assume an enacted tax rate of 30 percent,and for 2014 a 35 percent tax rate.There were no temporary differences in any of the years.In Amengual's 2014 income statement,how much should be reported as income tax expense?

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

Question 30

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 31

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 32

In 2014,The Xavier Company,reported pretax financial income of $400,000.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 31,2014; and $30,000 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 31,2014,would be

A)$120,000.
B)$150,000.
C)$182,000.
D)$184,000.

Question 33

The following information was taken from Caribbean Corporation's 2014 income statement:

Caribbeans' first year of operations was 2014.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 2014 was $600,000.Assuming no other differences existed between book income and taxable income,what amount did Caribbean deduct for depreciation on its tax return for 2014?

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

Question 34

The following information is taken from Glenville Corporation's 2014 financial records:

Assume the taxable temporary difference was created entirely in 2014 and will reverse in equal net taxable amounts in each of the next three years.If tax rates are 40 percent in 2014,35 percent in 2015,35 percent in 2016,and 30 percent in 2017,then the total deferred tax liability Glenville should report on its December 31,2014,balance sheet is

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

Question 35

Hagar Corporation reported depreciation of $250,000 on its 2014 tax return.However,in its 2014 income statement,Hagar reported depreciation of $100,000.The difference in depreciation is a temporary difference that will reverse over time.Assuming Hagar's tax rate is constant at 30 percent,what amount should be added to the deferred income tax liability in Hagar's December 31,2014,balance sheet?

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

Question 36

The Morris Corporation reported a $59,000 operating loss in 2014.In the preceding three years,Morris reported the following income before taxes and paid the indicated income taxes:

The amount of tax benefit to be reported in 2014 arising from the tax carryback provisions of the current tax code would be

A)$20,650
B)$22,500.
C)$21,300.
D)$20,100

Question 37

Garden Company had pretax accounting income of $24,000 during 2014.Garden's only temporary difference for 2011 relates to a sale made in 2012 and recognized for accounting purposes at that time.However,Garden uses the installment sales method of revenue recognition for tax purposes.During 2014 Garden collected a receivable from the 2012 sale which resulted in $6,000 of income under the installment sales method.Garden's taxable income for 2014 would be

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

Question 38

The Racing Company had taxable income of $12,000 during 2014.Racing used accelerated depreciation for tax purposes ($3,400)and straight-line depreciation for accounting purposes ($2,000).Assuming Racing had no other temporary differences,what would the company's pretax accounting income be for 2014?

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

Question 39

International accounting standards currently are moving toward the

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

Question 40

Concourse Corporation paid $20,000 in January of 2014 for premiums on a two- year life insurance policy which names the company as the beneficiary.Additionally,Concourse Corporation's financial statements for the year ended December 31,2014,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 2015 (at which time a $200,000 loss was recognized for tax purposes)and that Concourse's tax rate is 30 percent for both 2014 and 2015,what amount should Concourse report as asset for net deferred income taxes on its 2014 balance sheet?

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

Question 41

For the current year,Southern Cross 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 42

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 43

For the current year,Eastern Atlantic Company reported income tax expense of $21,000.Income taxes payable at the end of the prior year were $19,000 and at the end of the current year were $20,000.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 $21,000 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)$18,000
B)$20,000
C)$21,000
D)$19,000

Question 44

Rodeo Corporation reported depreciation of $450,000 on its 2014 tax return.However,in its 2014 income statement,Rodeo 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.Rodeo's enacted income tax rates are as follows:

What amount should be included in the deferred income tax liability in Rodeo's December 31,2014,balance sheet?

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

Question 45

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 46

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 47

Tongass had pretax accounting income of $1,400 during 2014.Tongass used accelerated depreciation for tax purposes ($1,000)and straight-line depreciation for financial reporting purposes ($200).During 2014,Tongass accrued warranty expenses of $900 and paid cash to honor warranties of $500.Tongass's taxable income for 2014 would be

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

Question 48

During 2014,Epsilon Company had pretax accounting income of $620.Epsilon's only temporary difference for 2014 was the collection of a receivable that resulted in $220 of income under the installment sales method of revenue recognition that Epsilon uses for tax purposes.The sale was originally made in 2012 and recognized for accounting purposes at that time.Epsilon's taxable income for 2014 would be

A)$400.
B)$640.
C)$660.
D)$840.

Question 49

During a year,Awesome Company reported income tax expense of $300,000.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)$256,000
B)$260,000
C)$296,000
D)$206,000

Question 50

Alpha had taxable income of $1,500 during 2014.Alpha used accelerated depreciation for tax purposes ($2,000)and straight-line depreciation for financial reporting purposes ($800).On December 30,2014,Alpha collected the January 2015 rent of $600 on a lot it rents on a month-by-month basis to Zenith.Alpha's pretax accounting income for 2014 would be

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

Question 51

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 52

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 53

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 54

The books of the Speedster Company for the year ended December 31,2014,showed pretax income of $295,000.In computing the taxable income for federal income tax purposes,the following timing differences were taken into account:
Depreciation deducted for tax purposes in excess of
Depreciation recorded on the books ...................
$14,500
Income from installment sale reportable for tax purposes
In excess of income recognized on the books ..........
11,500
What should Speedster record as its current federal income tax liability at December 31,2014,assuming a corporate income tax rate of 30 percent?

A)$80,700
B)$84,700
C)$87,600
D)$89,400

Question 55

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 56

Bodner Corporation's income statement for the year ended December 31,2014,shows pretax income of $1,000,000.The following items are treated differently on the tax return and in the accounting records:

Assume that Bodner's tax rate for 2014 is 30 percent.What is the amount of income tax payable for 2014?

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

Question 57

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 58

Creative Corporation's income statement for the year ended December 31,2014,shows pretax income of $300,000.The following items are treated differently on the tax return and in the accounting records:

Assume that Creative's tax rate for 2014 is 40 percent.What is the current portion of Creative's total income tax expense for 2014?

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

Question 59

Which of the following represents a permanent difference?

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

Question 60

For the current year,Phoenix 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 61

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 62

Grisoft Inc.computed a pretax financial income of $40,000 for the first year of its operations ended December 31,2014.Analysis of the tax and book basis of its liabilities disclosed $360,000 in unearned rent revenue on the books that had been recognized as taxable income in 2014 when the cash was received.
The unearned rent is expected to be recognized on the books 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.
(1)Prepare a schedule showing the reversal of the temporary difference and the computation of income taxes payable and deferred tax assets or liabilities as of December 31,2014.
(2)Prepare journal entries to record income taxes payable and deferred income taxes.
(3)Prepare the income statement for Grisoft beginning with "Income from continuing operations before income taxes" for the year ended December 31,2014.

Question 63

Bailey Company has a deferred tax asset of $1,000,000 at December 31,2014.This amount arises from the recording of the company's liability for postretirement benefits other than pensions.The company's CPA has asked management whether a valuation allowance should be recorded to reduce the deferred tax asset to zero
Required:
1.Why would Bailey not want to report a valuation allowance?
2.What evidence might the company offer to argue against recording a valuation allowance?
3.Assume that the company determines that a valuation allowance of $400,000 is required.How would the company have arrived at this determination,and what effect will it have on net income for fiscal 2014?

Question 64

The statutory federal tax rate of Yolanda Company has been 35 percent for a number of years.Late in the third quarter of 2014,a new rate of 40 percent was approved as the new statutory tax rate,effective as of January 1,2014.The CEO of the Yolanda is concerned about what effect,if any,the new tax rate will have on 2014 earnings.
At the beginning of the year,Yolanda had a deferred tax asset of $10 million and a deferred tax liability of $6 million.A valuation allowance was not needed and it is not expected that a valuation allowance will be needed this year.Pretax accounting income is estimated to be approximately $5 million for 2014 and taxable income will be about $7 million.Yolanda is a publicly traded company with 500,000 shares outstanding throughout the entire year.
Required:
1.Explain the effect of the tax rate increase on the balance sheet and income statement of the company for 2014,with particular attention to the effect the change will have on earnings per share.
2.If the effect is expected to be negative,provide recommendations regarding actions the company might consider during the last few days of 2014 to minimize the impact.
3.Explain the effect the tax rate change might have on the company's stock price.

Question 65

The Internal Revenue Code allows a corporation to carry back or carry forward an operating loss occurring in a given year.
Required:
1.Explain the nature of an operating loss carryback and a carryforward and the effect of each of these actions.
2.Summarize the current generally accepted accounting principles for the financial reporting of operating loss carrybacks and for reporting operating loss carryforwards.
3.Explain why an entity might forgo the opportunity to obtain a tax refund with a carryback,choosing instead to utilize the carryforward-only option.

Question 66

Many non-accountants are confused when they hear that company has a tax refund of $1,200,but reported an income tax expense of $7,400.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 67

The notes to the 2014 financial statements of Halvoline Oil Company provide the following disclosure regarding the deferred tax asset and liability accounts at December 31,2014 (amounts in millions of dollars):

Required:
1.What is the total amount of deferred liability at December 31,2014? What is the total amount of deferred tax asset? What is the net amount of the deferred tax asset or liability?
2.Assuming a federal tax rate of 35 percent,estimate the temporary difference arising from depreciation that exists for Halvoline at December 31,2014.
3.On December 31,2014,Halvoline shows a noncurrent liability on its balance sheet,captioned "deferred income taxes",in the amount of $634 million.What other deferred tax account,if any is included in the balance sheet? What is the amount of this other deferred tax account?

Question 68

Smart Services computed pretax financial income of $220,000 for its first year of operations ended December 31,2014.In preparing the income tax return for the year,the tax accountant determined the following differences between 2014 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.
(1)Prepare a schedule showing the reversal of the temporary differences and the computation of income taxes payable and deferred tax assets or liabilities as of December 31,2014.
(2)Prepare journal entries to record income taxes payable and deferred income taxes.
(3)Prepare the income statement for Smart Services beginning with "Income from continuing operations before income taxes" for the year ended December 31,2014.

Question 69

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 70

The accounting profession has wrestled for many years with the issue of interperiod allocation of income tax.Since 1967,the authoritative position of the profession has been that interperiod tax allocation is appropriate.Some in the profession have not agreed with the authoritative position.Some respondents to the Discussion Memorandum for SFAS No.109 advocated that income tax expense for financial reporting should be the amount of taxes payable for the year as determined by the tax return.
Required:
Assume that you advocate the use of the amount of taxes payable for the year as determined on the tax return as the income tax expense for financial reporting purposes.Provide arguments to support your position.

Question 71

Myerson Company reported taxable income of $60,000 for 2014,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 31,2014,the enacted tax rate for 2014 and future years was 40 percent.

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.Also assume that all the temporary differences relate to noncurrent items.
Compute the amount of the deferred tax assets and/or liabilities that would be reported on Myerson's balance sheet as of December 31,2014.

Question 72

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 73

The data shown below represent the complete taxable income history for Confederacy Corporation.The tax rate was 35% throughout the entire period 2008 through 2015:

If the company always chooses the carryback,carryforward option,what is the tax liability for 2014?

A)$1,750
B)$8,750
C)$5,250
D)$0

Question 74

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 75

Oriole Industries computed a pretax financial income of $118,500 for the first year of its operations ended December 31,2014.Oriole 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 2014 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.
(1)Prepare a schedule showing the pattern of depreciation differences,the computation of income taxes payable,and deferred tax assets or liabilities as of December 31,2014.
(2)Prepare journal entries to record income taxes payable and deferred income taxes.
(3)Prepare the income statement for Oriole Industries beginning with "Income from continuing operations before income taxes" for the year ended December 31,2014.

Question 76

The following differences between financial and taxable income were reported by Angostura Corporation for the current year:

Assume that Angostura Corporation had pretax accounting income [before considering items (a)through (h)] of $900,000 for the current year.Compute the taxable income for the current year.

Question 77

Allsgood Appliances computed a pretax financial loss of $60,000 for the first year of its operations ended December 31,2014.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 2014,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.
(1)Prepare a schedule showing the reversal of the temporary difference and the computation of income taxes payable and deferred tax assets or liabilities as of December 31,2014.
(2)Prepare journal entries to record income taxes payable and deferred income taxes.
(3)Prepare the income statement for Allsgood beginning with "Income from continuing operations before income taxes" for the year ended December 31,2014.

Question 78

Eva Designs,Inc.,a corporation organized on January 1,2005,reported the following incomes (losses)for the ten-year period,2005-2014:

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 31,2014

Question 79

Seymour Associates computed a pretax financial income of $280,000 for the first year of its operations ended December 31,2014.Included in financial income was $20,000 of nondeductible expense and $70,000 gross profit on installment sales that was deferred for tax purposes until the installments were collected.
The temporary differences are expected to reverse in the following pattern.

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

(1)Prepare a schedule showing the reversal of the temporary differences and the computation of income taxes payable and deferred tax assets or liabilities as of December 31,2014.
(2)Prepare journal entries to record income taxes payable and deferred income taxes.
(3)Prepare the income statement for Seymour beginning with "Income from continuing operations before income taxes" for the year ended December 31,2014.

Question 80

Mostel Company has each of the following items on its balance sheet at December 31,2014:

The prepaid expenses have already been deducted for tax purposes.No deductions have yet been take related to the warranty liability or the postretirement liability other than pensions.No evidence exists that the goodwill is impaired.The current and future tax rate is 35 percent.
Required:
1.Explain which of the above items requires a deferred tax amount to be recorded,the amount of each,whether each is a deferred tax asset or a deferred tax liability.
2.Determine the amounts of deferred tax asset and deferred tax liability that would be reported on the balance sheet and the current or noncurrent classification of each.