Deck 3: Taxation on the Financial Statements

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

True

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

"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.

Question 6

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

Question 7

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 8

A valuation allowance expresses on the GAAP balance sheet that there exists uncertainty that the taxpayer will be able to recover a deferred tax asset.

Question 9

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

Question 10

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 11

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

Question 12

"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 13

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 decreased.

Question 14

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

Question 15

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 16

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

Question 17

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 18

The IRS decides upon audit whether the taxpayer can claim the tax deferral benefits of ASC 740-30 (APB 23).

Question 19

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

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

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 income tax return for the current year, assuming that 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 22

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 23

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 24

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

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

Question 25

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

Question 26

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 27

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 28

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 29

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

Question 30

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

Question 31

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 32

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

Question 33

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 34

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 35

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 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

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 38

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 income tax return for the current year, assuming that 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 39

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 40

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 41

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end
of the year.Assume a 35% corporate tax rate and no valuation allowance. $\begin{array}{lrr}&\text { Tax Debit/(Credit) }&\text { Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 300 & \$ 300 \\\text { Accounts Receivable } & 5,000 & 5,000 \\\text { Buildings } & 300,000 & 300,000 \\\text { Accumulated Depreciation } & (150,000) & (80,000) \\\text { Furniture \& Fixtures } & 40,000 & 40,000 \\\text { Accumulated Depreciation } & \underline{(21,000)} & \underline{(15,000)} \\\text { Total Assets } & \underline{\$ 174,300} & \underline{\$ 250,300}\\\\\text { Liabilities }\\\text { Accrued Litigation Expense } & \$-0- & (\$ 27,000) \\\text { Note Payable } & \underline{(116,000)} & \underline{(116,000)} \\\text { Total Liabilities } &{(\$ 116.000)}& \$ 143,000)\\\\\text { Stockholders' Equity }\\\text { Paid in Capital } & (\$ 1,000) & (\$ 1,000) \\\text { Retained Earnings } & (57,300) & (106,300) \\\text { Total Liabilities and } &\\\text { Stockholders' Equity } & (\$ 174,300) & (\$ 250,300) \end{array}$ ?
Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. $\begin{array}{lr}&\text { Beginning of Year }\\\text { Accrued Litigation Expense } & \underline{\$ 20,000} \\\text { Subtotal } & \$ 20,000 \\\text { Applicable Tax Rate } & \times 35 \% \\\text { Gross Deferred Tax Asset } & \$ 7.000 \\\text { Building - Accumulated Depreciation } & (\$ 61,000) \\\text { Furniture \& fixtures - Accumulated Depreciation } & (3,000) \\\text { Subtotal } & (\$ 64,000) \\\text { Applicable tax rate } & \times 35 \% \\\text { Gross deferred tax liability } & (\$ 22,400)\end{array}$ ?
Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.Determine the change in Black's deferred tax assets for the current year.

Question 42

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 43

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 44

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 45

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 46

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). $\begin{array}{lrr}&\text { PaintCo }&\text { BrushCo }\\\text { Book income before tax } & \$ 600,000 & \$ 400,000 \\\text { Permanent differences } & & \\\quad \text { Meals \& entertainment expense } & 40,000 & -0- \\\quad \text { Municipal bond interest income } & (10,000) & -0- \\\text { Temporary differences } & & \\\quad \text { Tax }>\text { book depreciation } & (100,000) & -0- \\\text { Book }>\text { tax bad debt expense } & 20,000 & -0-\end{array}$

Question 47

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 48

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 49

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).There is no valuation allowance, and the effective tax rates do not change.PaintCo's book income, permanent and temporary book-tax differences, and current tax expense are reported as follows.
? $$\begin{array} { l r r } & \text { PaintCo } & \text { BrushCo } \\\text { Book income before tax } & \$ 600,000 & \$ 400,000 \\\text { Permanent differences } & & \\\quad \text { Meals \& entertainment expense } & 40,000 & - 0 - \\\quad \text { Municipal bond interest income } & ( 10,000 ) & - 0 - \\\quad \text { Temporary differences } & & \\\quad \text { Tax } > \text { book depreciation } & ( 100,000 ) & - 0 - \\\quad \text { Book } > \text { tax bad debt expense } & 20,000 & - 0 -\end{array}$$ ?
Provide the GAAP income tax footnote rate reconciliation for PaintCo, using both dollar amounts and percentages.

Question 50

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.

Question 51

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 52

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 53

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

Question 54

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?

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

Question 55

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%?

A)Healy Inc., is managing its tax burden in a more efficient manner than its competitors.
B)Healy Inc., structural effective tax rate is actually quite close to its competitors.
C)Healy Inc., earned more cash profits because of its lower effective tax rate.
D)Healy Inc., is likely to be engaged in tax shelter activities.

Question 56

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 57

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 58

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 59

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 60

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 61

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance. ?
Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.Determine Black's change in net deferred tax asset or net deferred tax
liability for the current year, and provide the journal entry to record this amount.

Question 62

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance.

$\begin{array}{lcc}&\text { Tax Debit/(Credit) }&\text {Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 1,200 & \$ 1,200 \\\text { Accounts Receivable } & 20,000 & 20,000 \\\text { Buildings } & 1,200,000 & 1,200,000 \\\quad \text { Accumulated Depreciation } & (600,000) & (320,000) \\\text { Furniture \& Fixtures } & 160,000 & 160,000 \\\quad \text { Accumulated Depreciation } & \underline{(84,000)} & \underline{(60,000)} \\\text { Total Assets } & \underline{\underline{\$ 697,200}} & \underline{\underline{\$ 1,001,200}}\\\\\text { Liabilities }\\\text { Accrued Vacation Pay } & \$-0- & (\$ 108,000) \\\text { Note Payable } & \underline{(464,000)}& \underline{(464,000) }\\\text { Total Liabilities } & \underline{(\$ 464,000)} & \underline{(\$ 572,000)}\\\\\text { Paid in Capital } & (\$ 4,000) & (\$ 4,000) \\\text { Retained Earnings } & \underline{(229,200)} & \underline{(425,200)} \\\text { Total Liabilities and } \text { Stockholders' Equity } & \underline{ \underline{(\$ 697,200)}} & \underline{\underline{(\$ 1,001,200)}} \\\end{array}$

Amelia, Inc.’s, gross deferred tax assets and liabilities at the beginning of Amelia’s year are listed below.
$\begin{array}{lr}&\text { Beginning of Year }\\\text { Accrued Vacation Pay } & \$ 84,000 \\\text { Subtotal } & \$ 84,000 \\\text { Applicable Tax Rate } & \times 34 \% \\\text { Gross Deferred Tax Asset } & \underline{\$ 28,560}\\\\\text {Building -}&(\$ 244,000) \\\text {Accumulated Depreciation}\\\text {Furniture \& fixtures -}\\\text {Accumulated Depreciation}&(12,800) \\\text {Subtotal}&(\$256,800)\\\text {Applicable tax rate}&\underline{\times34\%}\\\text { Gross deferred tax liability}&\underline{(\$87,312)}\end{array}$

Amelia, Inc.’s, book income before tax is $25,200. Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense. What is Amelia’s total provision for income tax expense reported on its
financial statement and its book net income after tax?

Question 63

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance. ?
Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.What is Black's total provision for income tax expense reported on its
GAAP financial statement and its book net income after tax?

Question 64

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200.Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense.Determine Amelia's change in net deferred tax asset or net deferred tax
liability for the current year, and provide the journal entry to record this amount.

Question 65

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200.Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense.Determine the change in Amelia's deferred tax assets for the current year.

Question 66

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance. $$\begin{array} { l r r } & \text { Tax Debit/(Credit) } & \text { Book Debit/(Credit) } \\\text { Assets } & & \\\text { Cash } & \$ 300& \$ 300 \\ \text { Accounts Receivable } & 5,000 & 5,000 \\\text { Buildings } &300,000&300,000\\\text { Accumulated Depreciation } & ( 150,000 ) &(80,000) \\\text { Furniture \& Fixtures } & 40,000 & ( 40,000 )\\\text { Accumulated Depreciation } & \underline { ( 21,000 ) } &\underline { 15,000} \\\text { Total Assets } & \underline { \$ 174,300 } & \underline { ( 15,000 ) } \\\\\text { Liabilities } & & \\\text { Accrued Litigation Expense } &\$-0- & ( \$ 27,000 ) \\\text { Note Payable } & \underline { ( 116,000 ) }&\underline { ( \$ 116,000 ) } \\\text { Total Liabilities } & \underline { ( 116,000 ) } & \underline { ( \$ 143,000 ) }\end{array}$$ ? $$\begin{array} { l r r } \text { Stockholders' Equity } & & \\\text { Paid in Capital } & ( \$ 1,000 ) & ( \$ 1,000 ) \\\text { Retained Earnings } & \underline { ( 57,300 ) } & \underline { ( 106,300 ) } \\\text { Total Liabilities and } & \\\text { Stockholders' Equity }&( \$ 174,300 ) & ( \$ 250,300 )\end{array}$$ Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. $\begin{array}{lr}&\text { Beginning of Year }\\\text { Accrued Litigation Expense } & \$ 20,000 \\\text { Subtotal } & \$ 20,000 \\\text { Applicable Tax Rate } & \times 35 \% \\\text { Gross Deferred Tax Asset } & \$ 7,000 \\\text { Building - } & \\\quad \text { Accumulated Depreciation } & (\$ 61,000) \\\text { Furniture \& fixtures - } & \\\quad \text { Accumulated Depreciation } & (3,000) \\\text { Subtotal } & (\$ 64,000) \\\text { Applicable tax rate } & \times 35 \% \\\text { Gross deferred tax liability } & (\$ 22,400)\end{array}$ ?
Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.Calculate Black's current tax expense.

Question 67

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance.
​ Amelia, Inc.'s, book income before tax is $25,200.Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense.Determine the net deferred tax asset or net deferred tax liability at year end.

Question 68

After applying the balance sheet method to determine the GAAP income tax expense of Poppert Inc., the following account balances are found.Determine the balance sheet presentation of these amounts.Hint: Which of the accounts should you combine for the final balance sheet disclosure?
Deferred tax assets, current.................$500,000
Deferred tax assets, noncurrent...........145,000
Deferred tax liabilities, current............80,000
Deferred tax liabilities, noncurrent......310,000

Question 69

You are assisting LipidCo, a U.S.corporation subject to GAAP, to determine its current-year book expense for income taxes.The following represent the steps that you will take in making this computation.Put the steps into the correct order.
A. Compute the deferred tax provision.
B. Determine book income before income tax effects.
C. Determine the current tax provision.
D. Determine whether a valuation allowance is required, and apply or release it.
E. Identify and measure temporary book-tax differences.
F. Prepare the disclosures for the financial statement footnotes.
G. Add/Subtract any permanent book-tax differences.

Question 70

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance. Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.Provide the income tax footnote rate reconciliation for Black, using either
dollars or percentages.

Question 71

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the
end of the year.Assume a 35% corporate tax rate and no valuation allowance. $\begin{array}{lrr}&\text { Tax Debit/(Credit) }&\text { Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 300 & \$ 300 \\\text { Accounts Receivable } & 5,000 & 5,000 \\\text { Buildings } & 300,000 & 300,000 \\\text { Accumulated Depreciation } & (150,000) & (80,000) \\\text { Furniture \& Fixtures } & 40,000 & 40,000 \\\text { Accumulated Depreciation } & \underline{(21,000)} & \underline{(15,000)} \\\text { Total Assets } & \underline{\$ 174,300} & \underline{\$ 250,300}\\\\\text { Liabilities }\\\text { Accrued Litigation Expense } & \$-0- & (\$ 27,000) \\\text { Note Payable } & \underline{(116,000)} & \underline{(116,000)} \\\text { Total Liabilities } &{(\$ 116.000)}& \$ 143,000)\\\\\text { Stockholders' Equity }\\\text { Paid in Capital } & (\$ 1,000) & (\$ 1,000) \\\text { Retained Earnings } & (57,300) & (106,300) \\\text { Total Liabilities and } &\\\text { Stockholders' Equity } & (\$ 174,300) & (\$ 250,300) \end{array}$ Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. $\begin{array}{l}&\text { Beginning of Year }\\\text { Accrued Litigation Expense } & \underline{\$ 20,000} \\\text { Subtotal } & \$ 20,000 \\\text { Applicable Tax Rate } & \times 35 \% \\\text { Gross Deferred Tax Asset } & \$ 7.000\\\\\text {Building -}&(\$61,000)\\\text {Accumulated Depreciation}\\\text { Furniture \& fixtures - } &(3,000)\\\quad \text { Accumulated Depreciation } \\\text { Subtotal } &(\$64,000)\\\text { Applicable tax rate } &\times 35\%\\\text { Gross deferred tax liability }&(\$22,400)\end{array}$ ?
Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.Determine the net deferred tax asset or net deferred tax liability at year end.

Question 72

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance.

$\begin{array}{lcc}&\text { Tax Debit/(Credit) }&\text {Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 1,200 & \$ 1,200 \\\text { Accounts Receivable } & 20,000 & 20,000 \\\text { Buildings } & 1,200,000 & 1,200,000 \\\quad \text { Accumulated Depreciation } & (600,000) & (320,000) \\\text { Furniture \& Fixtures } & 160,000 & 160,000 \\\quad \text { Accumulated Depreciation } & \underline{(84,000)} & \underline{(60,000)} \\\text { Total Assets } & \underline{\underline{\$ 697,200}} & \underline{\underline{\$ 1,001,200}}\\\\\text { Liabilities }\\\text { Accrued Vacation Pay } & \$-0- & (\$ 108,000) \\\text { Note Payable } & \underline{(464,000)}& \underline{(464,000) }\\\text { Total Liabilities } & \underline{(\$ 464,000)} & \underline{(\$ 572,000)}\\\\\text { Paid in Capital } & (\$ 4,000) & (\$ 4,000) \\\text { Retained Earnings } & \underline{(229,200)} & \underline{(425,200)} \\\text { Total Liabilities and } \text { Stockholders' Equity } & \underline{ \underline{(\$ 697,200)}} & \underline{\underline{(\$ 1,001,200)}} \\\end{array}$


Amelia, Inc.’s, gross deferred tax assets and liabilities at the beginning of Amelia’s year are listed below.
$\begin{array}{lr}&\text { Beginning of Year }\\\text { Accrued Vacation Pay } & \$ 84,000 \\\text { Subtotal } & \$ 84,000 \\\text { Applicable Tax Rate } & \times 34 \% \\\text { Gross Deferred Tax Asset } & \underline{\$ 28,560}\\\\\text {Building -}&(\$ 244,000) \\\text {Accumulated Depreciation}\\\text {Furniture \& fixtures -}\\\text {Accumulated Depreciation}&(12,800) \\\text {Subtotal}&(\$256,800)\\\text {Applicable tax rate}&\underline{\times34\%}\\\text { Gross deferred tax liability}&\underline{(\$87,312)}\end{array}$
Amelia, Inc.’s, book income before tax is $25,200. Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense. Provide the journal entry to record Amelia’s current tax expense.

Question 73

At the beginning of the year, Schrader, Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000.At the end of the year, the balance in the deferred tax asset account has not changed, but Schrader's auditors want to record a $90,000 valuation allowance against this amount, because of a persistent downturn in Schrader's profitability.Develop the journal entry to record the valuation allowance.

Question 74

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance.
?
Tax Debit/(Credit)
Book Debit/(Credit)
Assets
Cash
$ 300
$ 300
Accounts Receivable
5,000
5,000
Buildings
300,000
300,000
Accumulated Depreciation
(150,000)
(80,000)
Furniture & Fixtures
40,000
40,000
Accumulated Depreciation
(21,000)
(15,000)
Total Assets
$174,300
$250,300
?
Liabilities
Accrued Litigation Expense
$ -0-
($ 27,000)
Note Payable
(116,000)
(116,000)
Total Liabilities
($116,000)
($143,000)
?
Stockholders' Equity
Paid in Capital
($ 1,000)
($ 1,000)
Retained Earnings
(57,300)
(106,300)
Total Liabilities and
Stockholders' Equity
?
($174,300)
?
($250,300)
Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. $\begin{array}{l}&\text { Beginning of Year }\\\text { Accrued Litigation Expense } & \underline{ \$ 20,000} \\\text { Subtotal } & \$ 20,000 \\\text { Applicable Tax Rate } & \underline{ \times 35 \%} \\ \text { Gross Deferred Tax Asset } & \$ \underline{\$ 7.000} \\\\\text { Building - } &(\$61,000)\\\quad \text { Accumulated Depreciation } \\\text { Furniture \& fixtures - } & \underline{(3,000)}\\\quad \text { Accumulated Depreciation } \\\text { Subtotal } &(\$64,000)\\\text { Applicable tax rate } & \underline{\times35\%}\\\text { Gross deferred tax liability }& \underline{(\$22,400)}\end{array}$ ?
Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.Provide the journal entry to record Black's current tax expense.

Question 75

After applying the balance sheet method to determine the GAAP income tax expense of Cutter Inc., the following account balances are found.Determine the balance sheet presentation of these amounts.Hint: Which of the accounts should you combine for the final balance sheet disclosure?
Deferred tax assets, current.................$100,000
Deferred tax liabilities, current............415,000
Deferred tax assets, noncurrent............120,000
Deferred tax liabilities, noncurrent.......30,000

Question 76

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200.Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense.Determine the change in Amelia's deferred tax liabilities for the current year.

Question 77

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200.Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense.Calculate Amelia's current tax expense.

Question 78

At the beginning of the year, the balance sheet of Schrader, Inc., shows a $500,000 deferred tax asset relating to a net operating loss carryforward, offset by a $90,000 valuation allowance.At the end of the year, Schrader's auditors agree to release $20,000 of the allowance.Develop the journal entry to record this change in the valuation allowance.

Question 79

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance. ?
Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.
It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals
and entertainment expense.Determine the change in Black's deferred tax liabilities for the current year.

Question 80

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance.

$\begin{array}{lcc}&\text { Tax Debit/(Credit) }&\text {Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 1,200 & \$ 1,200 \\\text { Accounts Receivable } & 20,000 & 20,000 \\\text { Buildings } & 1,200,000 & 1,200,000 \\\quad \text { Accumulated Depreciation } & (600,000) & (320,000) \\\text { Furniture \& Fixtures } & 160,000 & 160,000 \\\quad \text { Accumulated Depreciation } & \underline{(84,000)} & \underline{(60,000)} \\\text { Total Assets } & \underline{\underline{\$ 697,200}} & \underline{\underline{\$ 1,001,200}}\\\\\text { Liabilities }\\\text { Accrued Vacation Pay } & \$-0- & (\$ 108,000) \\\text { Note Payable } & \underline{(464,000)}& \underline{(464,000) }\\\text { Total Liabilities } & \underline{(\$ 464,000)} & \underline{(\$ 572,000)}\\\\\text { Paid in Capital } & (\$ 4,000) & (\$ 4,000) \\\text { Retained Earnings } & \underline{(229,200)} & \underline{(425,200)} \\\text { Total Liabilities and } \text { Stockholders' Equity } & \underline{ \underline{(\$ 697,200)}} & \underline{\underline{(\$ 1,001,200)}} \\\end{array}$


Amelia, Inc.’s, gross deferred tax assets and liabilities at the beginning of Amelia’s year are listed below.
$$\begin{array} { l r } & \text { Beginning of Year } \\\text { Accrued Vacation Pay } & \$ 84,000 \\\text { Subtotal } & \$ 84,000 \\\text { Applicable Tax Rate } & \times 34 \% \\\text { Gross Deferred Tax Asset } & \$ 28,560 \\\text { Building - } & ( \$ 244,000 ) \\\quad \text { Accumulated Depreciation } & \\\text { Furniture \& fixtures - } & ( 12,800 ) \\\quad \text { Accumulated Depreciation } & \\\text { Subtotal } & ( \$ 256,800 ) \\\text { Applicable tax rate } & \times 34 \% \\\text { Gross deferred tax liability } & \underline { ( \$8 7,312 ) } \\\end{array}$$
Amelia, Inc.’s, book income before tax is $25,200. Amelia records two permanent book-tax differences.
It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and
entertainment expense. Provide the income tax footnote rate reconciliation for Amelia, using either dollars or percentages.