Question 1

How are deferred tax liabilities and assets categorized on the balance sheet?

Accepted Answer

Deferred tax liabilities and assets are categorized as either current or non-current on the balance sheet, based on their expected timing of reversal. Current liabilities and assets are those expected to reverse within one year from the balance sheet date, while non-current liabilities and assets are those expected to reverse after one year.

Question 2

Which of the following statements best describes considerations regarding a company's tax expense that may be made by users of GAAP financial statements?

Accepted Answer

A) The breakdown of tax expense between current and deferred may provide useful information regarding the comparison of tax burdens between companies. This statement is correct as it allows users to compare the tax expenses between companies based on their current tax rates and deferred tax obligations.

B) An analysis of earnings before interest, taxes, depreciation, and amortization (EBITDA) is often a better approach to comparing operating results of two companies. This statement is not related to considerations regarding a company's tax expense.

C) One-time effects within a company's effective tax rate should be removed before comparing effective tax rates across companies (or across years for the same company). This statement is also correct as one-time effects can distort effective tax rates, making it difficult to compare them across companies or time periods.

Therefore, all of the above observations are correct.

Question 3

Hot, Inc.'s primary competitor is Cold, Inc. When comparing relative deferred tax asset and liability accounts with Cold, which of the following benchmarking activities should Hot undertake?

Accepted Answer

Scaling the deferred tax assets and liabilities by total sales or total assets allows for a more accurate comparison between Hot and Cold, as it takes into account the size and scope of each company. Comparing raw dollar amounts could be misleading if one company is significantly larger than the other. Ignoring the deferred tax assets and liabilities or focusing only on the current tax expense would not provide a comprehensive analysis.

Question 4

Healy, Inc., reports an effective tax rate in its income tax footnote of 14%. The only reconciling item with regard to the hypothetical tax at 35% is a valuation allowance reversal of negative 21%. Which of the following statements is true concerning comparing Healy, Inc.'s effective tax rate with its competitors, all of whom have an effective tax rate between 32 and 36%?

Accepted Answer

Healy, Inc.'s reconciling item of a valuation allowance reversal of negative 21% indicates that the company had previously recognized a valuation allowance to reduce the carrying value of its deferred tax assets, possibly due to prior years' losses. The reversal of this allowance suggests that Healy, Inc. now expects to generate sufficient taxable income to utilize its deferred tax assets, which would reduce its effective tax rate. Therefore, Healy, Inc.'s lower effective tax rate is likely a result of factors such as loss carryforwards or tax deductions that differentiate the company from its competitors. However, the difference between Healy, Inc.'s effective tax rate and its competitors' is not substantial, and therefore its structural effective tax rate is actually quite close to its competitors. Choice A is incorrect because the information provided does not indicate whether Healy, Inc.'s tax burden is more or less efficient than its competitors. Choice C is also incorrect because the information provided does not give any indication about the company's cash profits. Choice D is unlikely to be true since the information provided does not suggest that Healy, Inc. is engaged in tax shelter activities.

Question 5

Morrisson, Inc., earns book net income before tax of $500,000. In computing its book income, Morrisson deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Morrisson records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35% and no valuation allowance is required, what is Morrisson's current income tax expense reported on its GAAP financial statements?

Accepted Answer

The answer of Morrisson, Inc., earns book net income before...

Question 6

Budlow, Inc., reported the following results for the current year.
Determine Budlow's taxable income for the current year. Identify any temporary or permanent book-tax differences.

Accepted Answer

The answer of Budlow, Inc., reported the following results for...

Question 7

Bunker, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a foreign corporation, and 35% of Iowa, Inc., a domestic corporation.
a.Which entities' incomes are included in Bunker's Federal consolidated income tax return?
b.How would your answer change if Bunker instead owned 15% of Iowa?

Accepted Answer

The answer of Bunker, Inc., is a domestic corporation. It...

Question 8

Never, Inc., earns book net income before tax of $500,000. In computing its book income, Never deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Never records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35% and no valuation allowance is required, what is Never's deferred income tax asset reported on its GAAP financial statements?

Accepted Answer

The answer of Never, Inc., earns book net income before...

Question 9

Which of the following items are not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?

Accepted Answer

The answer of Which of the following items are not...

Question 10

Beach, Inc., a domestic corporation, owns 100% of Mountain, Ltd., a manufacturing facility in Atlantis. Mountain has no operations or activities in the United States. The U.S. tax rate is 35% and the applicable Atlantis tax rate is 10%. For the current year, Beach earns $500,000 in taxable income. Mountain earns $300,000 in taxable income from its operations, pays $30,000 in taxes to Atlantis, and makes no distributions to Beach. What is Beach's effective tax rate for GAAP book purposes, assuming that Beach makes the permanent reinvestment assumption of ASC 740-30 (APB 23)?

Accepted Answer

The answer of Beach, Inc., a domestic corporation, owns 100%...

Question 11

Van Dyke, Inc., hopes to report a total book tax expense of $150,000 in the current year. This amount consists of $200,000 in current tax expense and a $50,000 tax benefit related to the expected future use of an NOL by Van Dyke. If the auditors determine that a valuation allowance of $20,000 must be placed against Van Dyke's deferred tax assets, what is Van Dyke's total book tax expense?

Accepted Answer

The total book tax expense would be current tax expense + change in deferred tax assets - change in deferred tax liabilities. In this case, the change in deferred tax assets is a $50,000 tax benefit from the expected future use of an NOL, but there is also a $20,000 valuation allowance placed against these deferred tax assets, resulting in a net change in deferred tax assets of $30,000. Therefore, the total book tax expense would be $200,000 (current tax expense) + $30,000 (net change in deferred tax assets) = $230,000. However, since a valuation allowance of $20,000 was placed against the deferred tax assets, the total book tax expense would be reduced to $230,000 - $20,000 = $210,000. Finally, since we are told that Van Dyke hopes to report a total book tax expense of $150,000, we can infer that there must be a $60,000 change in deferred tax liabilities, resulting in a total book tax expense of $150,000 + $60,000 = $170,000.

Question 12

Cold, Inc., reported a $100,000 total tax expense for financial statement purposes in year 1. This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000. The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000. In year 2, Cold reports $600,000 in book net income before tax. Cold records no other permanent or temporary book-tax differences. At the end of year 2, Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero. What is Cold's total tax expense for year 2?

Accepted Answer

In year 1, Cold's total tax expense was $100,000, consisting of a $150,000 current tax expense and a $50,000 deferred tax benefit, which included a $40,000 valuation allowance.
Since the valuation allowance was reduced to zero at the end of year 2, Cold will now recognize the full $90,000 deferred tax assets and will have a deferred tax liability of $90,000, resulting in a net deferred tax expense of $0 for year 2.
Therefore, Cold's total tax expense for year 2 will be the current tax expense of $210,000 ($600,000 book net income before tax x 35% tax rate). Adding this to the net deferred tax expense of $0, the total tax expense for year 2 is $210,000.

Question 13

PaintCo Inc., a domestic corporation, owns 100% of BrushCo Ltd., an Irish corporation. Assume that the U.S. corporate tax rate is 35% and the Irish rate is 15%. PaintCo is permanently reinvesting BrushCo's earnings outside the United States under ASC 740-30 (APB 23). The corporations' book income, permanent and temporary book-tax differences, and current tax expense are reported as follows. There is no valuation allowance, and the effective tax rates do not change. Determine PaintCo's total tax expense reported on its GAAP financial statements, its current tax expense (benefit), and its deferred tax expense (benefit).

Accepted Answer

The answer of PaintCo Inc., a domestic corporation, owns 100%...

Question 14

Ursula, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a foreign corporation, and 45% of Iowa, Inc., a domestic corporation.
a.Which entities' incomes are included in Ursula's combined GAAP financial statements?
b.How would your answer change if Ursula instead owned 15% of Iowa?

Accepted Answer

The answer of Ursula, Inc., is a domestic corporation. It...

Question 15

Which of the following items is not included in the income tax footnote for a publicly traded company?

Accepted Answer

The breakdown of income tax among U.S. states is not typically included in the income tax footnote for a publicly traded company. The other items listed are commonly included in the disclosure.

Question 16

Beach, Inc., a domestic corporation, owns 100% of Mountain, Ltd., a manufacturing facility in Erasmus. Mountain has no operations or activities in the United States. The U.S. tax rate is 35% and the applicable Erasmus tax rate is 10%. For the current year, Beach earns $500,000 in taxable income. Mountain earns $300,000 in taxable income from its operations, pays $30,000 in taxes to Erasmus, and makes no distributions to Beach. What is Beach's effective tax rate for GAAP book purposes, assuming that Beach does not make the permanent reinvestment assumption of ASC 740-30 (APB 23)?

Accepted Answer

The answer of Beach, Inc., a domestic corporation, owns 100%...

Question 17

South, Inc., earns book net income before tax of $400,000 in year 1. South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $17,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is South's current income tax expense reported on its GAAP financial statements for year 2?

Accepted Answer

To calculate the current income tax expense reported on GAAP financial statements for year 2, we need to compute South's taxable income for year 2 based on its book net income and book-tax difference in depreciation:

Taxable income = Book net income - Tax depreciation + Book depreciation
Taxable income = $500,000 - $20,000 + $50,000 (note that the book-tax difference in year 1 depreciation reduces the tax basis of the asset and increases the book-tax difference in year 2)
Taxable income = $530,000

Income tax expense = Taxable income x Tax rate
Income tax expense = $530,000 x 35%
Income tax expense = $185,500

However, we also need to adjust for the change in deferred tax liability from year 1 to year 2:

Deferred tax liability balance at end of year 2 = Deferred tax liability balance at end of year 1 + Income tax expense - Income taxes paid
$17,500 = $0 + $185,500 - Income taxes paid
Income taxes paid = $168,000

Therefore, the current income tax expense reported on South's GAAP financial statements for year 2 is $182,000 ($185,500 - $3,500). Answer choice D is the correct answer.

Question 18

South, Inc., earns book net income before tax of $400,000 in year 1. South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $17,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is South's total provision for income tax expense reported on its GAAP financial statements for year 2?

Accepted Answer

South's taxable income for Year 1 is $450,000 ($400,000 book net income + $50,000 excess tax depreciation). Applying the tax rate of 35% results in income tax payable of $157,500. South's deferred tax liability balance at the end of Year 1 is $17,500, indicating that South's income tax payable must have been $175,000 ($157,500 + $17,500) and that South recognized a $17,500 deferred tax expense.

In Year 2, book depreciation exceeds tax depreciation, creating a temporary difference that will reverse in the future, reducing taxable income and income tax payable. The amount of the difference is $20,000, so South's taxable income for Year 2 is $480,000 ($500,000 book net income - $20,000 excess book depreciation). Applying the tax rate of 35% results in income tax payable of $168,000. South has no other temporary or permanent differences, and therefore, its income tax expense for Year 2 is $168,000. However, because South recognized $17,500 of deferred tax expense in Year 1, its total provision for income tax expense reported on its GAAP financial statements for Year 2 is $175,000 ($168,000 + $17,500).

Thus, the correct answer is C, $175,000.

Question 19

Qute, Inc., earns book net income before tax of $500,000. In computing its book income, Qute deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Qute records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35% and no valuation allowance is required, what is Qute's total income tax expense reported on its GAAP financial statements?

Accepted Answer

The answer of Qute, Inc., earns book net income before...

Question 20

South, Inc., earns book net income before tax of $400,000 in year 1. South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $17,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is South's balance in its deferred tax liability account at the end of year 2?

Accepted Answer

In year 1, the temporary difference between book and tax depreciation is $50,000 - this creates a future tax liability of $17,500 ($50,000 x 35%). Therefore, at the end of year 1, the deferred tax liability account balance is $17,500.
In year 2, the temporary difference between book and tax depreciation is -$20,000 (i.e. book depreciation is lower than tax depreciation). This creates a future tax asset of $7,000 ($20,000 x 35%). Therefore, the balance in the deferred tax liability account at the end of year 2 is $17,500 - $7,000 = $10,500.

Quiz 3: Tax Determination; Personal and Dependency Exemptions; an Overview of Property Transactions

How are deferred tax liabilities and assets categorized on the balance sheet?

Which of the following statements best describes considerations regarding a company's tax expense that may be made by users of GAAP financial statements?

Hot, Inc.'s primary competitor is Cold, Inc. When comparing relative deferred tax asset and liability accounts with Cold, which of the following benchmarking activities should Hot undertake?

Budlow, Inc., reported the following results for the current year. Determine Budlow's taxable income for the current year. Identify any temporary or permanent book-tax differences.

Which of the following items are not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?

Which of the following items is not included in the income tax footnote for a publicly traded company?