Deck 14: Taxes on the Financial Statements

Question 1

Only U.S. corporations are included in a combined GAAP financial statement.

Answer 1

False

Question 2

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current year GAAP financial statements.

Answer 2

True

Question 3

"Permanent differences" include items that appear in the Federal income tax return as income or deduction, and in the GAAP financial statements as revenue or expense, but in different reporting periods.

Answer 3

False

Question 4

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

Question 5

If a valuation allowance is decreased (released) in the current year, the corporation's effective tax rate is lower than if the valuation allowance had not increased.

Question 6

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

Question 7

Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.

Question 8

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23) benefits were previously adopted will decrease a corporation's current year effective tax rate.

Question 9

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

Question 10

Under GAAP, a corporation can defer reporting the U.S. tax expense related to the earnings of foreign subsidiaries, by taking into account its repatriation plans for these earnings.

Question 11

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return, if a proper election is made.

Question 12

If a corporation has no operations outside the U.S., its GAAP book and taxable income are identical.

Question 13

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. Yahr's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

Question 14

The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.

Question 15

A valuation allowance reflects uncertainty that the taxpayer will be able to recover a deferred tax asset.

Question 16

"Temporary differences" are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return, but not in the same reporting period.

Question 17

Giant uses the "equity method" to account for the operations of its 40% owned subsidiary Little. A portion of Little's profits for the year are included in Giant's GAAP book income.

Question 18

The IRS decides upon audit whether the taxpayer can claim the tax deferral benefits of ASC 740-30.

Question 19

A partnership owned at least 80% by a corporation is included in a consolidated group's U.S. income tax return.

Question 20

In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments, for the current year and all future years.

Question 21

A deferred tax liability represents a potential future tax benefit associated with income reported in the current year GAAP financial statements.

Question 22

A CFO probably prefers a tax planning strategy that produces a temporary book-tax savings difference to one that produces a permanent difference.

Question 23

Create, Inc., a domestic corporation, owns 90% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 60% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's Federal tax return for the current year assuming Create elects to include all eligible entities in its consolidated Federal income tax return?

A) Create, Vinyl, Digital, and Record.
B) Create, Vinyl, and Digital.
C) Create, Vinyl, and Record.
D) Create and Digital.

Question 24

ASC 740 (FIN 48) is the GAAP equivalent of the Form 1120 Schedule UTP.

Question 25

Which of the following taxes are included in the total income tax liability of a corporation reported on its Federal tax return?

A) Federal income taxes.
B) Foreign income taxes.
C) State income taxes.
D) All the above taxes are included.

Question 26

Which of the following items represents a temporary book-tax difference?

A) Municipal bond interest.
B) Federal income tax paid.
C) Addition to bad debt allowance.
D) Nondeductible penalties.

Question 27

Purple, Inc., a domestic corporation, owns 80% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 50% of Green, Inc., a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities' net income are included in Purple's Federal tax return for the current year assuming Purple elects to include all eligible entities in its consolidated Federal income tax return?

A) Purple, Blue, Yellow, and Green.
B) Purple, Blue, and Yellow.
C) Purple, Blue, and Green.
D) Purple and Yellow.

Question 28

Kling Corporation reports a $150,000 cash tax savings from a temporary book-tax difference. This item has the same effect on Kling's current year effective tax rate as a $150,000 cash tax savings that is a permanent book-tax difference.

Question 29

The release of a valuation allowance may relate to a tax planning strategy adopted by the taxpayer that will produce taxable income in the future.

Question 30

Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Gravel's current income tax expense reported on its GAAP financial statements?

A) $252,000
B) $210,000
C) $168,000
D) $42,000

Question 31

Purple, Inc., a domestic corporation, owns 100% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 40% of Green, Inc., a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities' net income are included in Purple's GAAP income statement for current year financial reporting purposes?

A) Purple, Yellow, and Green.
B) Purple, Blue, and Yellow.
C) Purple, Blue, and Green.
D) Purple, Blue, Yellow, and Green.

Question 32

The income tax footnote to the GAAP financial statements includes a reconciliation of a corporation's hypothetical tax on book income to its book tax expense as if it were taxed in full at the applicable U.S. income tax rates.

Question 33

The taxpayer should use ASC 740-30 (APB 23) income deferral only when the tax rates that apply to the subsidiary are less than those of the applicable U.S. income tax rate.

Question 34

Jogg, Inc., earns book net income before tax of $600,000. Jogg puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Jogg has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, and that this is Jogg's first year of operations, what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year end?

A) $42,000 and $0.
B) $0 and $0.
C) $0 and $42,000.
D) $42,000 and $42,000.

Question 35

Which of the following taxes are included in the total income tax expense of a corporation as reported on its GAAP financial statements?

A) Federal income taxes.
B) Foreign income taxes.
C) State income taxes.
D) All of the above taxes are included.

Question 36

Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 12% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's income statement for current year financial reporting purposes?

A) Create, Vinyl, and Digital.
B) Create, Vinyl, and Record.
C) Create, Digital, and Record.
D) Create, Vinyl, Digital, and Record.

Question 37

Phyllis, Inc., earns book net income before tax of $600,000. Phyllis puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Phyllis has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Phyllis's total income tax expense reported on its GAAP financial statements?

A) $252,000
B) $210,000
C) $168,000
D) $42,000

Question 38

Clipp, Inc., earns book net income before tax of $600,000. Clipp puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Clipp has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Clipp's deferred income tax liability reported on its GAAP financial statements?

A) $252,000
B) $210,000
C) $168,000
D) $42,000

Question 39

ASC 740 (FIN 48) addresses how an entity should report uncertain tax positions in their financial statements.

Question 40

In the "rate reconciliation" of GAAP tax footnotes, temporary book-tax differences are reconciled between book income as if taxed at U.S. tax rates and the actual book income tax expense.

Question 41

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?

A) $7,000
B) $168,000
C) $175,000
D) $182,000

Question 42

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?

A) $192,500
B) $175,000
C) $157,500
D) $17,500

Question 43

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?

A) $192,500
B) $175,000
C) $157,500
D) $17,500

Question 44

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)?

A) 38.75%.
B) 35%.
C) 31.25%.
D) 25.63%.

Question 45

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)?

A) 38.75%.
B) 35%.
C) 31.25%.
D) 25.63%.

Question 46

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?

A) $192,500
B) $175,000
C) $157,500
D) $17,500

Question 47

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

A) Capital and ordinary.
B) Current and non-current.
C) Domestic and foreign.
D) Active, portfolio, and passive.
E) Positive and negative.

Question 48

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

A) Rate reconciliation.
B) Analysis of deferred tax assets and liabilities.
C) Breakdown of income tax between foreign and domestic.
D) Breakdown of income tax among U.S. states.
E) Analysis of total tax expense components.

Question 49

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

A) The breakdown of tax expense between current and deferred may provide useful information regarding the comparison of tax burdens between companies.
B) An analysis of earnings before interest, taxes, depreciation, and amortization (EBITDA) is often a better approach to comparing operating results of two companies.
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).
D) All the above observations are correct.

Question 50

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?

A) $250,000
B) $210,000
C) $170,000
D) $40,000

Question 51

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 income tax expense reported on its GAAP financial statements for year 2?

A) $7,000
B) $168,000
C) $175,000
D) $182,000

Question 52

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

A) Hypothetical tax on book income at U.S. Federal corporate tax rate.
B) Total tax expense per the GAAP financial statements.
C) Tax effect of temporary differences.
D) Tax effect of permanent differences.

Question 53

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?

A) $0
B) $7,000
C) $10,500
D) $17,500

Question 54

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?

A) Scale the deferred tax assets and liabilities by total sales or total assets.
B) Compare raw dollar amounts of deferred tax assets and liabilities.
C) Ignore deferred tax assets and liabilities and focus on overall effective tax rate.
D) Ignore all tax information other than the current tax expense.

Question 55

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?

A) $150,000
B) $170,000
C) $200,000
D) $250,000