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Exam 17: Accounting for Income Taxes

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Question 1

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Which of the following statements is true?

A) Another name for a taxable temporary difference is an unfavorable difference.
B) Another name for a taxable temporary difference is a favorable difference.
C) Another name for a deductible temporary difference is a favorable difference.
D) Another name for a deductible temporary difference is a permanent difference.

E) C) and D)
F) A) and D)

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Question 2

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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) B) and D)
F) A) and D)

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Question 3

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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. Compute Potter's deferred income tax expense or benefit.

Stone Corporation reported pretax book income of $1,000,000 in 2018. Tax depreciation exceeded book depreciation by $300,000. In addition, the reserve for bad debts decreased by $50,000. Stone had a net deferred tax asset of $34,000 at the beginning of the year, representing a net deductible temporary difference of $100,000 (taxed at 34%). At the beginning of the tax year, Congress reduced the corporate tax rate to 21%. Compute the Company's current and deferred income tax expense or benefit for 2018.

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:

ASC 740 applies to accounting for state and local and international income taxes as well as federal income taxes.

The focus of ASC 740 is the income statement.

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized.

Which of the following taxes would not be accounted for under ASC 740?

Which of the following book-tax basis differences results in a deductible temporary difference?

Whitman Corporation reported pretax book income of $400,000 in 2018. Book depreciation exceeded tax depreciation by $100,000. In addition, the Company accrued vacation pay of $50,000 that was not deductible until paid in 2019. Whitman has a net operating loss carryforward of $200,000 from 2017. Compute the company's deferred income tax expense or benefit for 2018.

Price Corporation reported pretax book income of $600,000 in 2018. Tax depreciation exceeded book depreciation by $100,000. In addition, the reserve for warranties increased by $40,000. Price had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000. At the beginning of the year, Congress reduced the corporate tax rate to 21%. Compute the company's current and deferred income tax expense or benefit for 2018.

Which of the following items is not a permanent book/tax difference?

Yellow Rose Corporation reported pretax book income of $100,000,000. Tax depreciation exceeded book depreciation by $100,000. During the year Yellow Rose capitalized $50,000 into ending inventory under §263A. Capitalized inventory costs of $75,000 in beginning inventory were deducted as part of cost of goods sold on the tax return. Compute Yellow Rose's taxes payable or refundable.

Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Compute Sparrow's current income tax expense or benefit.

Oriole Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $1,200,000. The unfavorable book-tax difference of $200,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $300,000 due to an increase in the reserve for bad debts, and a $100,000 unfavorable permanent difference from the disallowance of compensation expense related to the exercise of incentive stock options. a. Compute Oriole's current income tax expense. b. Compute Oriole's deferred income tax expense or benefit. c. Compute Oriole's effective tax rate. d. Provide a reconciliation of Oriole's effective tax rate with its hypothetical tax rate of 21%.

Which of the following statements is true?

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

Which of the following statements is true with respect to a company's effective tax rate reconciliation?

Which of the following items is not considered evidence in determining if a valuation allowance is necessary?