Question 1

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?

Accepted Answer

The taxable income is $750,000 ($720,000 + $30,000 non-deductible). The tax expense is 25% of $750,000, which is $187,500.

Question 2

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.)

Accepted Answer

The answer of Gallagher Corporation's book income before taxes is...

Question 3

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.)

Accepted Answer

Municipal bond interest is tax-exempt, so it reduces taxable income. Fines and penalties are not deductible. Taxable income = $890,000 - $40,000 + $20,000 = $870,000. Tax = $870,000 * 45% = $391,500. Effective tax rate = $391,500 / $890,000 = 44%.

Question 4

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?

Accepted Answer

Interest from municipal bonds is tax-exempt. So, the taxable income is $360,000 - $60,000 = $300,000. Income tax expense is $300,000 * 30% = $90,000.

Question 5

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?

Accepted Answer

Municipal bond interest is tax-exempt, so $70,000 is not included in taxable income. Fines and penalties are not deductible, so they do not affect the book-tax difference. Therefore, book income is $70,000 greater than taxable income.

Question 6

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

Accepted Answer

The answer of Temporary differences cause the effective income tax...

Question 7

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

Accepted Answer

Temporary differences arise when the accounting treatment of a transaction differs from its tax treatment, leading to deferred tax assets or liabilities that will reverse in future periods.

Question 8

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?

Accepted Answer

Municipal bond interest is tax-exempt, so it is subtracted from income, while fines and penalties are not deductible, so they are added back. Taxable income = $900,000 - $80,000 + $10,000 = $830,000.

Question 9

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

Accepted Answer

A deferred tax asset arises when there are temporary differences between the book and tax bases of assets and liabilities, leading to future tax benefits.

Question 10

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.)

Accepted Answer

The answer of Danio Inc.'s income before taxes is $550,000...

Question 11

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.)

Accepted Answer

The effective tax rate is calculated based on taxable income. The fines and penalties are not deductible, so taxable income is $410,000 - $50,000 = $360,000. Tax is 40% of $360,000 = $144,000. The effective tax rate is $144,000 / $410,000 = 35%.

Question 12

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?

Accepted Answer

The answer of Purrfect Pet Industries' income before taxes is...

Question 13

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.)

Accepted Answer

The answer of Piper Inc.'s income before taxes is $550,000...

Question 14

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

Accepted Answer

Under U.S. GAAP, the balance sheet approach is used to account for deferred tax assets and liabilities, which arise from temporary differences between the book and tax bases of assets and liabilities.

Question 15

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

Accepted Answer

Under U.S. GAAP, companies use the asset and liability method, not a cash flow approach, to account for temporary differences between book and tax treatment of transactions.

Question 16

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?

Accepted Answer

The answer of Lyon Group's income before taxes is $420,000...

Question 17

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

Accepted Answer

When inventory is written down for obsolescence, the write-down is recognized as an expense for book purposes but not for tax purposes until the inventory is actually disposed of. This creates a temporary difference, leading to a deferred tax asset.

Question 18

A deferred tax liability is created when ________.

Accepted Answer

A deferred tax liability arises when the book basis of assets is greater than the tax basis of assets, leading to future taxable amounts.

Question 19

A deferred tax asset exists when ________.

Accepted Answer

A deferred tax asset arises when the book basis of liabilities is greater than the tax basis of liabilities, indicating that future tax deductions will be available.

Question 20

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.)

Accepted Answer

The answer of Betz Corporation's income before taxes is $725,000...

Quiz 17: Accounting for Income Taxes