Question 1

Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither.
-Research and development costs reported in the income statement but elected to be capitalized and amortized over five years for tax purposes.

Accepted Answer

This situation will create a deferred tax asset because the company has paid more taxes in the current period than they will owe in the future due to the lower taxable income resulting from the tax deduction for the capitalized R&D.

Question 2

At December 31, 2018, Moonlight Bay Resorts had the following deferred income tax items: Deferred tax asset of $54 million related to a current liability
Deferred tax asset of $36 million related to a noncurrent liability
Deferred tax liability of $120 million related to a noncurrent asset
Deferred tax liability of $72 million related to a current asset
Moonlight Bay should report in its December 31, 2018, balance sheet a:

Accepted Answer

All amounts should be netted to show a single noncurrent net deferred tax asset or liability.

Question 3

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.
-Deferred tax liability

Accepted Answer

C) Arises when future taxable amounts are created by temporary differences. - This is the correct definition of a deferred tax liability. It occurs when there are temporary differences between the book value of assets and liabilities and their tax base, leading to taxable amounts in the future.

Question 4

Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither.
-An operating loss carryforward.

Accepted Answer

An operating loss carryforward will create a deferred tax asset because it can be used to offset future taxable income, resulting in a lower tax liability in the future.

Question 5

Madison Company has taken a position in its tax return to claim a tax credit of $60 million (direct reduction in taxes payable) and has determined that its sustainability is "more likely than not," based on its technical merits. The tax credit would be a direct reduction in current taxes payable. Madison believes the likelihood that a $60 million, $36 million, or $12 million tax benefit will be sustained is 25%, 30%, and 45%, respectively. Madison's taxable income is $510 million for the year. Its effective tax rate is 40%. What is Madison's income tax expense for the year?

Accepted Answer

Probability table: 11ea937b_35c6_73a9_a419_43f6d43b2bec_TB2599_00 11ea937b_35c6_9aba_a419_7bbe6973a094_TB2599_00 11ea937b_35c6_9abb_a419_d75281f6dd9f_TB2599_00 $36 million is the amount of tax benefit that would be recognized in the financial statements; it represents the largest amount of benefit that is more than 50% likely to be the end result. $510 × 40% = $204 - 60 = $144 tax currently payable. Add additional projected liability ($60 - $36) of $24. Total income tax expense = $168.

Question 6

Information for Hobson Corp. for the current year ($ in millions):  The applicable enacted tax rate for all periods is 40%. 
-How should Hobson report tax on the discontinued operation?

Accepted Answer

The loss on discontinued operations is reported in the income statement net of $12 tax benefit [$30 - ($30 x 40%) = $18].

Question 7

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.
-Interperiod tax allocation

Accepted Answer

The answer of Listed below are 5 terms followed by...

Question 8

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.
-Operating loss carryforward

Accepted Answer

The answer of Listed below are 5 terms followed by...

Question 9

Information for Hobson Corp. for the current year ($ in millions):  The applicable enacted tax rate for all periods is 40%.
- What should Hobson report as net income?

Accepted Answer

11ea937b_35c6_e8e0_a419_276e7705c7cd_TB2599_00 *[($150 - 25 + 10 + 5) × 40%] + [($25 - 10) × 40%] = $62

Question 10

Information for Hobson Corp. for the current year ($ in millions):  The applicable enacted tax rate for all periods is 40%.
- How much tax expense on income from continuing operations would be reported in Hobson's income statement?

Accepted Answer

[($150 - 25 + 10 + 5) × 40%] + [($25 - 10) × 40%] = $62

Question 11

A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31, 2018, its first year of operations. The income tax rate is 40%.  What amount(s) should Fieval report related to deferred income taxes in its 2018 balance sheet?

Accepted Answer

$25,000 × 40% = $10,000 deferred tax asset
$70,000 × 40% = $28,000 deferred tax liability
The deferred tax asset and liability would be offset and shown as a single noncurrent deferred tax liability.

Question 12

On its tax return at the end of the current year Webnet Inc. has $6 million of tax depreciation in excess of depreciation in its income statement. A disclosure note reveals that $1 million of the $6 million difference will reverse itself next year, and the remainder will reverse over the next 4 years. In the absence of other temporary differences, in the balance sheet at the end of the current year Webnet would report:

Accepted Answer

The $6 million of tax depreciation in excess of depreciation in the income statement creates a temporary difference that will result in future taxable amounts when the depreciation on the tax return is less than the depreciation on the income statement in future years. This leads to a deferred tax liability, not an asset. Since the difference will reverse over more than one year, it is classified as a noncurrent deferred tax liability.

Question 13

A reconciliation of pretax financial statement income to taxable income is shown below for See Shipping for the year ended December 31, 2018, its first year of operations. The income tax rate is 40%.  What amount should See report as a noncurrent item related to deferred income taxes in its 2018 balance sheet?

Accepted Answer

$30,000 × 40% = $12,000 deferred tax liability
$20,000 × 40% = $8,000 deferred tax liability
$5,000 × 40% = $2,000 deferred tax asset
$12,000 + 8,000 - 2,000 = $18,000 net noncurrent liability

Question 14

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.
-Permanent difference

Accepted Answer

B)Is reduced by a valuation allowance if realization of future tax benefit is not more likely than not. - Deferred Tax Asset
C)Arises when future taxable amounts are created by temporary differences. - Deferred Tax Liability
D)Is the process of allocating income taxes among two or more reporting periods. - Income Tax Allocation
E)Will always create a deferred tax asset. - False

Answer: 
A) Permanent Difference
B) Deferred Tax Asset
C) Deferred Tax Liability
D) Income Tax Allocation
E) False

A permanent difference is a difference between the book (financial statement) income and taxable income that will never reverse. 
A deferred tax asset is a balance sheet item that arises when tax deductions exceeds book expense. 
A deferred tax liability is a balance sheet item that arises when the book income exceeds taxable income. 
Income tax allocation is a procedure of allocating income tax provision to financial income to determine income taxes payable. 
Not all temporary differences create deferred tax assets. Some may create deferred tax liabilities.

Question 15

Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither.
-Organization costs reported in the income statement but amortized and deducted over five years for tax purposes.

Accepted Answer

Organization costs reported in the income statement but amortized and deducted over five years for tax purposes will create a deferred tax asset as the company has already recognized the expense in their financial statements, but will have a tax deduction in future years. This results in a temporary difference between the financial statement and tax basis, thus creating a deferred tax asset.

Question 16

Information for Hobson Corp. for the current year ($ in millions):  The applicable enacted tax rate for all periods is 40%.
- What should Hobson report as income from continuing operations?

Accepted Answer

11ea937b_35c6_c1ce_a419_7dce5b55c2d6_TB2599_00 *[($150 - 25 + 10 + 5) × 40%] + [($25 - 10) × 40%] = $62

Question 17

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.
-Deferred tax asset

Accepted Answer

B) Is reduced by a valuation allowance if realization of future tax benefit is not more likely than not. - This statement accurately describes a characteristic of a deferred tax asset, which is an accounting concept used to recognize differences between the timing of income recognition for tax purposes and for financial reporting purposes. If it is not more likely than not that the future tax benefit associated with a deferred tax asset will be realized, a valuation allowance is recorded to reduce the reported amount of the deferred tax asset.

Question 18

A reconciliation of pretax financial statement income to taxable income is shown below for Chan Inc. for the year ended December 31, 2018, its first year of operations. The income tax rate is 40%.  The inventory impairments relate to Chan's Columbian tax return. The depreciation relates to Chan's U.S. tax return. What amount(s) should Chan report related to deferred income taxes in its 2018 balance sheet?

Accepted Answer

$40,000 × 40% = $16,000 deferred tax asset
$120,000 × 40% = $48,000 deferred tax liability
The deferred tax asset and liability could not be offset because they relate to different tax jurisdictions.

Question 19

Due to differences between depreciation reported in the income statement and depreciation deducted for tax purposes, Lucas Corp. has $2 million in temporary differences that will increase taxable income next year. Assuming that Lucas has no other temporary differences, deferred income taxes should be reported in this year's ending balance sheet as a:

Accepted Answer

These temporary differences that will increase taxable income in the future result in a deferred tax liability. Since the effect is expected beyond the next year, it is classified as noncurrent.

Question 20

Information for Hobson Corp. for the current year ($ in millions):  The applicable enacted tax rate for all periods is 40%.
- What is Hobson's income tax payable for the current year?

Accepted Answer

11ea937b_35c6_e8e2_a419_29b0e06fae56_TB2599_00

Quiz 16: Accounting for Income Taxes

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Deferred tax liability

Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither. -An operating loss carryforward.

Information for Hobson Corp. for the current year ($ in millions) : The applicable enacted tax rate for all periods is 40%. -How should Hobson report tax on the discontinued operation?

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Interperiod tax allocation

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Operating loss carryforward

Information for Hobson Corp. for the current year ($ in millions) : The applicable enacted tax rate for all periods is 40%. - What should Hobson report as net income?

Information for Hobson Corp. for the current year ($ in millions) : The applicable enacted tax rate for all periods is 40%. - How much tax expense on income from continuing operations would be reported in Hobson's income statement?

A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31, 2018, its first year of operations. The income tax rate is 40%. What amount(s) should Fieval report related to deferred income taxes in its 2018 balance sheet?

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Permanent difference

Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither. -Organization costs reported in the income statement but amortized and deducted over five years for tax purposes.

Information for Hobson Corp. for the current year ($ in millions) : The applicable enacted tax rate for all periods is 40%. - What should Hobson report as income from continuing operations?

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Deferred tax asset

Information for Hobson Corp. for the current year ($ in millions) : The applicable enacted tax rate for all periods is 40%. - What is Hobson's income tax payable for the current year?