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 current tax benefit (savings)associated with income or expense to be reported in future year GAAP financial statements.

Answer 2

False

Question 3

If a valuation allowance is increased in the current year,the corporation's effective tax rate is less than if the valuation allowance had not increased.

Answer 3

False

Question 4

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

Question 5

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 6

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

Question 7

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

Question 8

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

Question 9

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 10

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 11

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

Question 12

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 13

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

Question 14

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

Question 15

Foreign entities owned at least 80% by the parent are included in a consolidated group's U.S.tax return.

Question 16

One can describe the benefits of ASC 740-30 (APB 23)as "all or nothing." If it is elected,APB 23 applies to the earnings from all foreign subsidiaries,in the current year and thereafter.

Question 17

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

Question 18

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

Question 19

"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 20

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

Question 21

Current tax expense always totals the amount a taxpayer actually paid all Federal,state,and foreign tax authorities in a particular year.

Question 22

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

Question 23

ASC 740 (FIN 48)is the GAAP equivalent of the Form 1120 Schedule M-3.

Question 24

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,Digital,and Record.
B)Create,Vinyl,and Record.
C)Create,Vinyl,and Digital.
D)Create,Digital,and Record.
E)None of the above.

Question 25

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 26

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 27

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

Question 28

The major purpose of ASC 740 (SFAS 109)is to match current-year GAAP income with its corresponding tax expenses.

Question 29

A $50,000 cash tax savings that is temporary has the same effect on a corporation's current year effective tax rate as a $50,000 cash tax savings that is a permanent book-tax difference.

Question 30

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 31

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

A)Municipal bond interest.
B)Compensation-related expenses.
C)Meals and entertainment expense deduction.
D)Nondeductible penalties.

Question 32

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 33

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 34

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

Question 35

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 36

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

Question 37

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

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

Question 38

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 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

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

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

Question 41

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 42

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

A)Capital and ordinary.
B)Domestic and foreign.
C)Current and non-current.
D)Positive and negative.

Question 43

Collins,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 Collins,Inc.'s effective tax rate with its competitors,all of whom have an effective tax rate between 32 and 36%?

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

Question 44

Beach,Inc. ,a domestic corporation,owns 100% of Mountain,Ltd. ,a manufacturing facility in Ireland.Mountain has no operations or activities in the United States.The U.S.tax rate is 35% and the Irish 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 Ireland,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 45

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.

Question 46

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 47

South,Inc. ,earns book net income before tax of $400,000 in 2012.South acquires a depreciable asset in 2012,and first year tax depreciation exceeds book depreciation by $50,000.At the end of 2012,South's deferred tax liability account balance is $17,500.In 2013,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 2013?

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

Question 48

Beach,Inc. ,a domestic corporation,owns 100% of Mountain,Ltd. ,a manufacturing facility in Ireland.Mountain has no operations or activities in the United States.The U.S.tax rate is 35% and the Irish 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 Ireland,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 49

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

Question 50

South,Inc. ,earns book net income before tax of $400,000 in 2012.South acquires a depreciable asset in 2012,and first year tax depreciation exceeds book depreciation by $50,000.At the end of 2012,South's deferred tax liability account balance is $17,500.In 2013,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 2013?

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

Question 51

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 52

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 53

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 54

South,Inc. ,earns book net income before tax of $400,000 in 2012.South acquires a depreciable asset in 2012,and first year tax depreciation exceeds book depreciation by $50,000.At the end of 2012,South's deferred tax liability account balance is $17,500.In 2013,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 2013?

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

Question 55

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

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

Question 56

Kooler,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.

Question 57

Cold,Inc. ,reported a $100,000 total tax expense for financial statement purposes in 2012.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 2013,Cold reports $600,000 in book net income before tax.Cold records no other permanent or temporary book-tax differences.At the end of 2013,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 2013?

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

Question 58

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 59

Larson,Inc. ,hopes to report a total book tax expense of $160,000 in the current year.This $160,000 expense consists of $240,000 in current tax expense and an $80,000 tax benefit related to the expected future use of an NOL by Larson.If the auditors determine that a valuation allowance of $30,000 must be placed against Larson's deferred tax assets,what is Larson's total book tax expense?

A)$130,000.
B)$160,000.
C)$190,000.
D)$240,000.

Question 60

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 10%.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 as follows.Determine PaintCo's total tax expense reported on its financial statements,its current tax expense (benefit),and its deferred tax expense (benefit).

Question 61

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.

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.

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.

Question 64

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?

Question 65

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.

Question 66

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,gross deferred tax assets and liabilities at the beginning of Amelia's year are listed below.

Question 67

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.

Question 68

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 10%.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 as follows.Provide the income tax footnote rate reconciliation for PaintCo using both dollar amounts and percentages.

Question 69

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,gross deferred tax assets and liabilities at the beginning of Amelia's year are listed below.

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.

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.

Question 72

At the beginning of the year,the balance sheet of Jensen Inc. ,shows a $500,000 deferred tax asset relating to a net operating loss carryforward,offset by a $100,000 valuation allowance.At the end of the year,Jensen's auditors agree to release $40,000 of the allowance.Develop the journal entry to record this change in the valuation allowance.

Question 73

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.

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.

Question 75

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.

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,gross deferred tax assets and liabilities at the beginning of Amelia's year are listed below.

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.

Question 78

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.

Question 79

At the beginning of the year,Jensen 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 Jensen's auditors want to record a $100,000 valuation allowance against this amount,because of a persistent downturn in Jensen's profitability.Develop the journal entry to record the valuation allowance.

Question 80

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.