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The focus of ASC 740 is the income statement.

A) True
B) False

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Packard Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $10,000, unfavorable temporary differences of $100,000, and unfavorable permanent differences of $90,000. Assuming a tax rate of 34%, the Corporation's current income tax expense or benefit would be:


A) $231,200
B) $176,800
C) $170,000
D) $108,800

E) B) and D)
F) B) and C)

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Identify the following items as creating a temporary difference, permanent difference, or no difference.  Item  Temporary  Difference  Permanent  Difference  No Difference  Reserve for bad debts  Accrued other post-employment benefits  Domestic production activities deduction  Non-deductible fines and penalties  Interest from municipal bonds  Net operating loss carryover  Stock option expense under ASC 718 Deferred compensation \begin{array} { | l | l | l | l | } \hline { \text { Item } } & \begin{array} { l } \text { Temporary } \\\text { Difference }\end{array} & \begin{array} { l } \text { Permanent } \\\text { Difference }\end{array}& \begin{array} { c} \text { No} \\\text { Difference }\end{array}\\\hline \text { Reserve for bad debts } & & & \\\hline \text { Accrued other post-employment benefits } & & & \\\hline \text { Domestic production activities deduction } & & & \\\hline \text { Non-deductible fines and penalties } & & & \\\hline \text { Interest from municipal bonds } & & & \\\hline \text { Net operating loss carryover } & & & \\\hline \text { Stock option expense under ASC } 718 & & & \\\hline \text { Deferred compensation } & & & \\\hline\end{array}

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\[\begin{array} { | l | c | c | c | }
\...

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Heron Corporation reported pretax book income of $4,000,000. Included in the computation were favorable temporary differences of $500,000, unfavorable temporary differences of $700,000, and unfavorable permanent differences of $200,000. Using a tax rate of 34%, compute Heron's current income tax expense or benefit.

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ASC 740 governs how a company accounts for all taxes it incurs.

A) True
B) False

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Which of the following items does not result in a permanent difference?


A) Accelerated tax depreciation in excess of straight-line book depreciation
B) Interest income from a tax-exempt municipal bond
C) Dividend received deduction on the income tax return
D) Domestic manufacturing deduction on the income tax return

E) All of the above
F) A) and B)

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Moody Corporation recorded the following deferred tax assets and liabilities:  Current deferred tax assets $500,000 Current deferred tax liabilities 600,000) Non-current deferred tax assets 800,000 Non-current deferred tax liabilities (2,000,000) Net deferred tax liabilities $(1,300,000)\begin{array} { l r } \text { Current deferred tax assets }&\mathbf { \$ 5 0 0 , 0 0 0 }\\\text { Current deferred tax liabilities } & \mathbf { 6 0 0 , 0 0 0 ) } \\ \text { Non-current deferred tax assets } & 8 0 0 , 0 0 0 \\ \text { Non-current deferred tax liabilities } & ( \underline { \mathbf { 2 } , 000,000 } ) \\ \text { Net deferred tax liabilities } & \mathbf { \$( \underline { 1 , 3 0 0 , 0 0 0 } ) } \end{array} All of the deferred tax accounts relate to temporary differences that result from the company's U.S. operations. Moody wants to minimize the number of deferred tax accounts it reports on the balance sheet. What is the minimum number of deferred tax accounts Moody can report on its balance sheet and what are the names and dollar amounts in each account?

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$100,000 net current...

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A cumulative financial accounting (book) loss over three years likely would be considered significant negative evidence in a valuation allowance analysis.

A) True
B) False

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Which of the following statements best describes the disclosure of a company's deferred tax assets and liabilities?


A) All four categories of deferred tax accounts (current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities) must be separately disclosed in the balance sheet.
B) The four categories of deferred tax accounts can be netted and disclosed as one aggregate amount on the balance sheet.
C) Current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities can always be netted on the balance sheet.
D) Current deferred tax accounts and noncurrent deferred tax accounts can be netted on the balance sheet only if they arise in the same tax jurisdiction.

E) A) and B)
F) A) and C)

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Acai Corporation determined that $5,000,000 of its R&D credit on its current year tax return was uncertain. Acai determined that there was a 40 percent chance of the credit being sustained on audit. Management made the following assessment of the company's potential tax benefit from the R&D credit and its probability of occurring.  Potential Estimated  Benefit (000s) $5,000,0003,500,0002,000,0000 Individual Probability  of Occurring (%)05153525 Cumulative Probability  of Occurring 052055100\begin{array}{c}\begin{array}{r}\text { Potential Estimated }\\\text { Benefit (000s) } \\\hline \$ 5,000,000 \\\mathbf{3,500 , 0 0 0} \\2,000,000 \\0\end{array}\begin{array}{c}\text { Individual Probability }\\\text { of Occurring }(\%) \\\hline 05 \\15 \\35 \\25\end{array}\begin{array}{c}\text { Cumulative Probability } \\\text { of Occurring } \\\hline 05 \\20 \\55 \\100\end{array}\end{array} Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai recognize in calculating its income tax provision in the current year?

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Tax-exempt interest from municipal bonds is an example of a permanent difference.

A) True
B) False

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A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.

A) True
B) False

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Which of the following statements best describes the ASC 740 rules related to the disclosure of the components of deferred tax assets and liabilities in the company's income tax note?


A) A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.
B) A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.
C) A privately-held company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.
D) A privately-held company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.

E) A) and D)
F) All of the above

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Potter, Inc. reported pretax book income of $5,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $300,000. Potter sold a fixed asset and reported book gain of $60,000 and tax gain of $80,000. Finally, the company received $50,000 of tax-exempt municipal bond interest. Using a tax rate of 34%, compute Potter's deferred income tax expense or benefit.

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$61,200 de...

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The "current income tax expense or benefit" always represents the taxes paid or refunded in the current year.

A) True
B) False

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Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Book equivalent of taxable income is:


A) $440,000
B) $400,000
C) $360,000
D) $330,000

E) B) and D)
F) All of the above

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ASC 740 deals with accounting for uncertain tax positions.

A) True
B) False

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Which of the following temporary differences creates a current deferred tax liability?


A) Accumulated depreciation on a building
B) Accumulated amortization on a customer list (intangible with a five-year life)
C) Unearned revenue expected to be collected in the next 12 months
D) Deferred compensation expected to be paid in the next 12 months

E) None of the above
F) A) and B)

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Robinson Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000. During the year, Robinson reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. During the year, the company's tax rate increased from 34% to 35%. Robinson's deferred income tax expense or benefit for the current year would be:


A) Net deferred tax benefit of $10,500
B) Net deferred tax expense of $10,500
C) Net deferred tax benefit of $11,500
D) Net deferred tax expense of $11,500

E) C) and D)
F) None of the above

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Smith Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Using a tax rate of 34%, Smith's deferred income tax expense or benefit would be:


A) Net deferred tax expense of $10,200
B) Net deferred tax benefit of $10,200
C) Net deferred tax expense of $23,800
D) Net deferred tax benefit of $23,800

E) All of the above
F) A) and B)

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