Section 2L - Income Taxes

Question 1

Mobe Co. reported the following operating income (loss) for its first three years of operations:
20X0 $ 300,000
20X1 (700,000)
20X2 1,200,000

For each year, there were no deferred income taxes, and Mobe’s effective income tax rate was 30%. In its 20X1 income tax return, Mobe elected to carry back the maximum amount of loss possible. In 20X1, Mobe was unsure that it would earn any future taxable income, thus requiring a valuation allowance to write down the deferred tax asset to zero until it is used next year. In its 20X2 income statement, what amount should Mobe report as total income tax expense?

$150,000

$240,000

$360,000

$120,000

Answer 1

20X1 loss after carryback to 20X0:

= ($700,000) - $300,000
= ($400,000)

20X2 income after carryforward of remainder of 20X1 loss:

= $1,200,000 - $400,000
= $800,000

20X2 income tax expense:

= ($800,000 x 0.30)
= $240,000

A net operating loss (NOL) may be carried back 2 years (earlier year first) and forward 20 years. The taxpayer also may elect to carry the NOL forward only. Mobe’s first year of operations was Year 2, and it elected to carry the NOL back. Thus, it applied $300,000 of the loss (equal to the taxable income for Year 2) to Year 2 and the remaining $400,000 to Year 4. As a result, a deferred tax asset was recognized for the future tax benefit of the NOL. But no valuation allowance was necessary because it was more likely than not that all of the tax benefit would be realized. Accordingly, in Year 3, Mobe recognized a deferred tax asset (a debit) of $120,000 [($700,000 – $300,000 NOL carryback) NOL carryforward × 30%], a tax refund receivable (a debit) of $90,000 ($300,000 NOL carryback × 30%), and a tax benefit (a credit) of $210,000 ($120,000 + $90,000).

Question 2

Corporations calculate income taxes payable using the ___ code

Corporations calculate income tax expense using ____

Answer 2

IRS

GAAP

Question 3

the Tax Cuts and Jobs Act of 2017 (TCJA) reduced the enacted corporate income tax rate to __% from 35%.

The impact on ___deferred taxes is recognized in ___ tax expense from ___operations

The term “___method” comes from the fact that the balance sheet elements are calculated first and, from those figures, the amount of income tax expense is derived.

Answer 3

21%

cumulative , income tax, continuing

liability

Question 4

The following basic principles are applied in accounting for income taxes at the date of the financial statements:

1. A current tax __ or ___is recognized for the estimated taxes payable or refundable on tax returns for the current year.
2. A ____tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
3. The measuremnet of current and deferred tax liabilities and assets is based on provisions of the enacted ___ law ; the effects of future changes in tax laws or rates are not anticipated.
4. The measurement of ___tax assets is reduced by a ___allowance if, based on available evidence, some or all of the deferred tax asset balance is not expected to be realized.

Answer 4

liability or asset

deferred

tax

Deferred

valuation

Question 5

The annual computation of deferred taxes results from applying the following steps:

1. Identify all cumulative temporary ___and operating and tax credit ___.
2. Measure the total deferred tax liability for taxable temporary ____.
3. Measure the total deferred tax asset for ___temporary differences, loss carryforwards, and each type of tax credit carryforward.
4. ___deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax asset will____

Answer 5

differences , carryforwards

Differences

deductible

Reduce, not be realized.

Question 6

Book Income > Taxable Income = Deferred Tax ___

Book Income < Taxable Income = Defferred Tax ___

Deferred amounts will be taxed (deducted) in the future, they are temporary differences, and they are measured employing the tax rates expected to apply to them (Future or present tax rates?)

Answer 6

Liability

Asset

Future tax rates

Question 7

Only life insurance premiums that are paid on policies where the company is the ___are added back to net income.

Insurance premiums are subtracted as an expense to arrive at Net Income. But to arrive at taxable income you have to __ them back to Net Income to compute the amount of Taxable Income and then the actual tax expense.

Answer 7

beneficiary

add

Question 8

The measurement of deferred tax liabilities and assets is done using the enacted ___ or ___expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized (current or future rates?)

All deferred tax assets and liabilities, along with any related valuation allowance, are classified as ____on the balance sheet.

Answer 8

tax rate or rates, future rates

noncurrent

Question 9

Answer 9

Deferred amounts will be taxed (deducted) in the future, they are temporary differences, and they are measured employing the tax rates expected to apply to them.

Deferred income tax liability = Temporary differences x Tax rate
= ($25,000 - $10,000) x 0.30
= $15,000 x 0.30
= $4,500

For a particular tax-paying component of an enterprise and within a particular tax jurisdiction, all deferred tax liabilities and assets are offset and presented as a single noncurrent amount on the balance sheet. An enterprise cannot offset deferred tax liabilities and assets attributable to different tax-paying components of the enterprise or to different tax jurisdictions.

Question 10

Answer 10

$300

Current income tax expense = 30% × $1,000 = $300, and is defined in FASB ASC 740-10-20 as “the amount of income taxes paid or payable (or refundable) for a year is determined by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues for that year.”

Question 11

Under current generally accepted accounting principles, which approach is used to determine income tax expense?

Net of tax approach

Periodic expense approach

“With and without” approach

Asset and liability approach

Answer 11

Asset and liability approach

The FASB determines income tax expense by requiring an asset and liability approach to the expense. This method recognizes that tax expense is the result of current-year activities and preceding-year activities.

This method focuses on the calculation of and change in deferred tax assets and liabilities, current income tax payable, and valuation allowances, and calculates the periodic expense or benefit as the change in the asset or liability from the prior balance sheet date. Note that all deferred tax assets and liabilities are classified as long term on the balance sheet.

Question 12

The FASB determines income tax expense by requiring an ____ and ___ approach to the expense. This method recognizes that tax expense is the result of current-year activities and preceding-year activities.

This method focuses on the calculation of ___in deferred tax assets and liabilities, current income tax payable, and valuation allowances, and calculates the periodic expense or benefit as the change in the asset or liability from the ___balance sheet date. Note that all deferred tax assets and liabilities are classified as long term on the balance sheet.

Answer 12

asset and liability

change

prior

Question 13

Which of the following items is not subject to the application of intraperiod income tax allocation?

Prior-period adjustments

Gross profit

Discontinued operations

Income from continuing operations

Answer 13

Gross profit

Operating income is a subtotal well before income tax expense. Income tax expenses during the period are specifically allocated to the other three answer choices (discontinued operations, income from continuing operations, and prior-period adjustments).

The following items are subject to the application of intraperiod income tax allocation:

1. Discontinued operations
2. Cumulative effects of accounting changes
3. Prior-period adjustments
4. Direct adjustments to capital accounts

Question 14

The following items are subject to the application of intraperiod income tax allocation:

___operations

___effects of accounting changes

Prior-period ___

Direct adjustments to ___accounts

Answer 14

discontinued

cumulative

adjustment

capital

Question 15

Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern’s effective tax rate?

27. 0%
28. 0%
29. 5%
30. 5%

Answer 15

28.5%

The municipal interest income would be nontaxable, so this would be subtracted from accounting income and the insurance premiums would be nondeductible (since they relate to nontaxed income) and would need to be added.

Thus, net income before taxes of $200,000 minus the municipal bond interest of $20,000, plus the insurance premiums $10,000 equals taxable income of $190,000:

$200,000 - $20,000 + $10,000 = $190,000

Taxable income times the tax rate equals tax due of $57,000:

$190,000 × 0.30 = $57,000

The effective tax rate would be the total tax due divided by the total income earned:

$57,000 ÷ $200,000 = 0.285 (28.5%)

Only life insurance premiums that are paid on policies where the company is the beneficiary are added back to net income.

Insurance premiums are subtracted as an expense to arrive at Net Income. But to arrive at taxable income you have to add them back to Net Income to compute the amount of Taxable Income and then the actual tax expense.

Question 16

In assessing the “more likely than not” criterion, which of the following is required?

The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.

It shall be presumed that the tax position will be examined by the relevant taxing authority that has all access only to published knowledge concerning the entity.

Each tax position must be evaluated with consideration of the possibility of offset or aggregation with other positions.

None of the answer choices are required by the FASB.

Answer 16

The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.

“In making the required assessment of the more-likely-than-not criterion:

1. “It shall be presumed that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
2. “Technical merits of a tax position derive from sources of authorities in the tax law (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position.
3. “Each tax position shall be evaluated without consideration of the possibility of offset or aggregation with other positions.”

Question 17

In making the required assessment of the more-likely-than-not criterion:

“It shall be presumed that the tax position will be ____by the relevant taxing authority that has full knowledge of all relevant information.

“Technical ____of a tax position derive from sources of authorities in the ___ law (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position.

“Each tax position shall be evaluated without ___ of the possibility of offset or aggregation with other positions.”

Answer 17

examined

merits, tax law

consideration

Question 18

The FASB defines a tax position as a position in a previously ___tax return or a position expected to be taken in a future tax return that is reflected in measuring deferred income tax assets and liabilities for interim or annual periods. It also encompasses the following:

1. A ___not to file a tax return
2. An ___or a shift of income between jurisdictions
3. The characterization of income or a decision to ___reporting taxable income in a tax return
4. A decision to classify a transaction, entity, or other position in a tax return as tax___
5. An entity’s ___, including its status as a pass-through entity or a tax-exempt not-for-profit entity

Answer 18

filed

decision

allocation

exclude

exempt

status

Question 19

Recognition

An entity must initially recognize the effects of a tax position when it is more-than-likely___

That is, there must be a greater than __% chance that the taxing authority will agree with the entity taking the tax position

Each tax position must be considered ___; it (may or may not?) be combined or aggregated with other tax positions.

Answer 19

not

50

separately

Question 20

As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co.’s sole depreciable asset, acquired in 20X1, exceeded its tax basis by $250,000 at December 31, 20X1. The difference will reverse in future years. The enacted tax rate is 30% for 20X1 and 40% for future years. Noor has no other temporary differences. In its December 31, 20X1, balance sheet, how should Noor report the deferred tax effect of this difference?

As a noncurrent liability of $100,000

As a noncurrent asset of $100,000

As a noncurrent asset of $75,000

As a noncurrent liability of $75,000

Answer 20

As a noncurrent liability of $100,000

This temporary difference will result in additional taxes being paid in future years, so the related tax effect will be a liability.

Amount of liability = Temporary difference x Future enacted tax rate
= $250,000 x 0.40
= $100,000

In this problem, the financial income depreciation is LESS than the tax depreciation. The problem states “the financial reporting basis of Noor Co.’s sole DEPRECIABLE ASSET, acquired in 20X1, exceeded its tax basis by $250,000 at December 31, 20X1”

If the basis of the asset is higher on the books than it would be for taxes, that means less depreciation has been taken on the books and D is the correct answer because it is a deferred tax liability.

Question 21

In this problem, the financial income depreciation is LESS than the tax depreciation. The problem states “the financial reporting basis of Noor Co.’s sole DEPRECIABLE ASSET, acquired in 20X1, exceeded its tax basis by $250,000 at December 31, 20X1”

If the basis of the asset is higher on the books than it would be for taxes, that means less depreciation has been taken on the books and D is the correct answer because it is a deferred tax liability.

Book Basis>Tax Basis = Deferred tax ___. This means less depreciation is taken, so you owe more.

Book Basis

Answer 21

Liability

Asset

Question 22

Which of the following circumstances would result in a deferred tax asset for the current year?

Expenses that are recognized in financial income this year and deductible next year

Revenues that are recognized in financial income this year but are not subject to taxation

Expenses that are deductible this year and recognized in financial income next year

Revenues that are recognized in financial income this year and taxable next year

Answer 22

Expenses that are recognized in financial income this year and deductible next year

A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Deferred tax assets (DTAs) are created when taxes are paid or carried forward but not yet recognized in the income statement.

Question 23

Accounting for income taxes under FASB rules is based on the “liability method.” Under the liability method, accounting for income taxes has two primary objectives—

1. to recognize the amount of taxes ___payable or refundable
2. to recognize ___tax liabilities and assets for the future tax consequences of temporary differences.

Answer 23

currently

deferred

Question 24

Temporary differences arise when items are treated differently in the ___ statement and the ____ ___ return with the expectation that those differences will offset in the future. The following are examples of typical temporary differences:

1. ____sales and the related asset recognized under GAAP at the time of the sale but warranty expense for income tax purposes until collected
2. ____and the related liability recognized under GAAP at the time of sale but deferred for income tax purposes until paid
3. ___ recognized for an advanced payment that is taxable on receipt of cash but deferred under GAAP until earned
4. ___ recognized more rapidly for income tax purposes than under GAAP

Answer 24

financial

Income tax

installement

liability

depreciation

Question 25

Baker Co. uses the calendar year as its accounting year. During 20X1, Congress enacted new tax legislation that changed the tax rate for 20X2 from 30% to 40%. The tax rate for 20X3 and following years remained at 30%. Baker has only one type of temporary difference or carryforward—a taxable temporary difference. Accordingly, Baker had a deferred tax liability at the beginning of 20X1 and will have a deferred tax liability at the end of 20X2. With regard to the change in tax rates, Baker should:

1. include the effect of the change on the January 1, 20X1, deferred tax liability in 20X2 net income as the cumulative effect of a change in accounting principle
2. include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X1
3. include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X2
4. include the effect of the change on the January 1, 20X1, deferred tax liability in 20X1 net income as the cumulative effect of a change in accounting principle.

Answer 25

include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X1.

The effect of the change on the deferred tax asset or liability at the beginning of the year of change should be included in income from continuing operations for the period that includes the enactment date.

Question 26

On January 2, Year 1, Ross Co. purchased a machine for $70,000. This machine has a 5-year useful life, a residual value of $10,000, and is depreciated using the straight-line method for financial statement pur­poses. For tax purposes, depreciation expense was $25,000 for Year 1 and $20,000 for Year 2. Ross’s Year 2 income, before income taxes and depreciation expense, was $100,000 and its tax rate was 30%. If Ross had made no estimated tax payments during Year 2, what amount of current income tax liability would Ross report in its December 31, Year 2, balance sheet?

$25,800

$24,000

$26,400

$22,500

Answer 26

$24,000

The income tax due and yet to be paid for the year (payable) is $24,000.

The income before income taxes and depreciation is $100,000 and the tax depreciation is taken from that to compute taxable income. Taxable income is $80,000 ($100,000 – $20,000) and the tax rate is 30%, so the current income tax due is $24,000 ($80,000 × 0.30). No part of the tax has been paid (no estimates for the year, yet), so it is all still payable.

Question 27

Answer 27

$93,160

The current portion of the income tax expense is the year’s taxable income multiplied by the tax rate; the remaining part of the income tax expense is the deferred or noncurrent part ($274,000 × 34% = $93,160).

Question 28

On January 1 of the current year, Lundy Corp. purchased 40% of the voting common stock of Glen, Inc., and appropriately accounts for its investment by the equity method. During the year, Glen reported earn­ings of $225,000 and paid dividends of $75,000.

Lundy assumes that all of Glen’s undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividends-received deduction. Lundy’s current enacted income tax rate is 25%.

Lundy uses the liability method to account for temporary differences and expects to have taxable income in all future periods. The increase in Lundy’s deferred income tax liability for this temporary difference is:

$18,000.

$37,500.

$45,000.

$27,000.

Answer 28

$18,000.

When applying the equity method to an investment for financial accounting purposes, the income earned by the company partially owned is recognized by the owning investing company on its own books.

Lundy has financial accounting income of $90,000 ($225,000 × 0.40) and this income is not recognized for tax purposes until received in dividends later on. Of course, Lundy did receive some dividends already, $30,000 ($75,000 × 0.40). Thus, $60,000 of deferred income for tax purposes will generate a future tax due, a deferred tax liability now of $18,000 ($60,000 × the future tax rate of 0.30). All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Question 29

Answer 29

$88,550

The current portion of income tax expense is calculated as taxable income times the tax rate, or $88,550 ($253,000 × 0.35). The remaining income tax is calculated based on the change in deferred tax accounts

Question 30

Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20X1, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. Additional information follows:

1. All the undistributed earnings of Flame will be distributed as dividends in future periods.
2. The dividends received from Flame are eligible for the 65% dividends-received deduction.
3. There are no other temporary differences.
4. Enacted income tax rates are 21% for 20X1 and thereafter.

In its December 31, 20X1, balance sheet, what amount should Taft report for deferred income tax liability?

$31,500

$11,025

$19,500

$29,295

Answer 30

$11,025

Question 31

Rein, Inc., reported deferred tax assets and deferred tax liabilities at the end of the previous year and at the end of the current year. For the current year ended, Rein should report deferred income tax expense or benefit equal to the:

sum of the net changes in deferred tax assets and deferred tax liabilities.

increase in the deferred tax liabilities.

amount of the current tax liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities.

decrease in the deferred tax assets.

Answer 31

sum of the net changes in deferred tax assets and deferred tax liabilities.

The basic way that income tax expense is computed is to compute the correct measured values of the deferred tax assets and deferred tax liabilities at the end of the period.

When the journal entry is prepared to pay the current income tax due, the necessary adjustments are made to the balances in the accounts of the deferred tax assets and deferred tax liabilities, and the income tax expense is the amount needed to balance that journal entry.

Thus, the income tax expense is basically the sum of the changes in those deferred tax asset and liabilities accounts. All deferred tax asset and deferred tax liability accounts are classified on the balance sheet as noncurrent.

Question 32

At December 31, 20X1, Bren Co. had the following deferred income tax items:

1. A deferred income tax liability of $15,000 related to a noncurrent asset
2. A deferred income tax asset of $3,000 related to a noncurrent liability
3. A deferred income tax asset of $8,000 related to a current liability

Which of the following should Bren report in the noncurrent section of its December 31, 20X1, balance sheet?

A noncurrent asset of $3,000 and a noncurrent liability of $15,000

A noncurrent asset of $11,000 and a noncurrent liability of $15,000

A noncurrent liability of $12,000

A noncurrent liability of $4,000

Answer 32

A noncurrent liability of $4,000

All deferred tax assets and liabilities are classified as noncurrent on the balance sheet, regardless if they are related to a current or noncurrent item. Note that “amount” is singular, indicating that separate asset and liability amounts should be “netted,” leaving a single amount.

Amount to be reported in Bren’s noncurrent section of balance sheet at December 31, 20X1:

Deferred tax liability $15,000
Less deferred tax asset (3,000)
Less deferred tax asset (8,000)
Net noncurrent liability to
be reported on balance sheet $ 4,000

Question 33

At December 31, Lowe Corporation had the following deferred income tax items:

1. A deferred income tax asset of $19,000 from rent received in advance.
2. A deferred income tax liability of $27,000 from an installment sales accounting difference.
3. A deferred income tax asset of $21,000 from a contingent liability.

Which of the following should Lowe report in its 12/31 balance sheet?

A noncurrent tax liability of $13,000

A noncurrent tax asset of $13,000

A noncurrent tax asset of $40,000 and a noncurrent liability of $27,000

A noncurrent tax asset of $21,000 and a noncurrent liability of $27,000

Answer 33

A noncurrent tax asset of $13,000

All deferred tax assets are classified as noncurrent in the balance sheet. When an entity has both deferred tax asset and deferred tax liabilities, they are netted against each other on the face of the balance sheet:

$19,000 asset − $27,000 liability + $21,000 asset = $13,000 asset.

Question 34

Which of the following should be disclosed in a company’s financial statements related to deferred taxes?

1. The types and amounts of existing temporary differences
2. The types and amounts of existing permanent differences
3. The nature and amount of each type of operating loss and tax credit carryforward

II and III onl

I and II only

I and III only

I, II, and III

Answer 34

I and III only

The FASB requires that a public entity shall disclose the approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets (before allocation of valuation allowances).

A nonpublic entity shall disclose the types of significant temporary differences and carryforwards but may omit disclosure of the tax effects of each type.

An entity shall disclose the amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes. There is no requirement to disclose permanent differences.

Question 35

Brass Co. reported income before income tax expense of $60,000 for Year 2. Brass had no permanent or temporary timing differences for tax purposes. Brass has an effective tax rate of 30% and a $40,000 net operating loss carryforward from Year 1. What is the maximum income tax benefit that Brass can realize from the loss carryforward for Year 2?

$40,000

$12,000

$18,000

$20,000

Answer 35

$12,000

Since all of the net operating loss can be used to offset income in Year 2, the maximum benefit is the amount of the net operating loss multiplied by the tax rate:

$40,000 × 0.30 = $12,000

This is asking for the INCOME TAX BENEFIT – not the amount of NOL that can be used.

Question 36

Answer 36

$50,000

The pretax income was $800,000 and part of this amount is a gain that qualifies for tax deferral, the reinvested proceeds from the involuntary conversion gain. Also, the amount of tax depreciation is used to compute taxable income.

Taxable income is $400,000 ($800,000 less the gain of $350,000, and less the additional tax depreciation of $50,000). This amount multiplied by the tax rate of 30% gives us the tax due of $120,000 ($400,000 × 0.30).

Because some of this amount due has been paid in estimates already, only the remaining $50,000 is a liability yet to pay ($120,000 – $70,000).

Question 37

Under the deferred method of accounting for deferred income taxes, a credit balance in the deferred income taxes account that appears on the balance sheet (statement of financial position):

1. indicates that the amount of revenue reported to date for financial reporting purposes is less than the amount of income reported to date for tax purposes.
2. does not represent a payable in the usual sense in which the term “payable” is used in financial statements
3. indicates that the amount of expense reported to date for financial reporting purposes is greater than the amount of expense reported to date for tax purposes.
4. represents a payable in the usual sense in which the term “payable” is used in financial statements.

Answer 37

does not represent a payable in the usual sense in which the term “payable” is used in financial statements.

A credit balance in the deferred income taxes account does not represent a payable in the usual sense in which the term “payable” is used in financial statements. The term “payable” is normally associated with an amount that is owed to an outside party.

A credit balance in the deferred income taxes account results from temporary differences between the amount of income or expense reported for tax purposes and that reported for financial statement purposes

Question 38

Credit Balance in Deferred Income Taxes

A credit balance indicates that either

1. the revenue to-date for financial reporting purposes __the income to-date included in taxable income or (b
2. the expense to-date for financial reporting purposes is __than the amount of expense to-date included in taxable income.

The credit balance in the deferred income taxes account represents the tax expense recognized__-_ for financial reporting purposes that is expected to be ___in taxable income in future years.

Answer 38

exceeds

less than

to-date, included

Question 39

Larkin Co. reported a taxable loss of $10,000 in 20X1, its first year of operations, and taxable income of $0 in 20X2. Larkin had no temporary or permanent differences in either 20X1 or 20X2. At the end of 20X1 Larkin believed that 30% of the operating loss carryforward would not be realized; therefore, a valuation allowance of $1,200 (30% of $10,000 NOL × 40% tax rate) was necessary. At the end of 20X2, Larkin believes that the valuation allowance is no longer necessary.

Assuming a tax rate of 40%, Larkin should report total income tax expense (benefit) in 20X1 and 20X2 of:

$0 in 20X1 and $0 in 20X2.

$(2,800) in 20X1 and $0 in 20X2.

$(2,800) in 20X1 and $(1,200) in 20X2.

$(4,000) in 20X1 and $0 in 20X2.

Answer 39

$(2,800) in 20X1 and $(1,200) in 20X2.

Question 40

For the year ended December 31, 20X1, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income was $650,000. The difference is due to accelerated depreciation for income tax purposes. Tyre’s effective income tax rate is 30%, and Tyre made estimated tax payments during 20X1 of $90,000. What amount should Tyre report as current income tax expense for 20X1?

$135,000

$105,000

$195,000

$225,000

Answer 40

$195,000

Tyre’s current income tax expense is simply taxable income multiplied by the effective income tax rate. (Note: Tyre also has a noncurrent deferred income tax liability in the amount of $30,000 ($100,000 timing difference multiplied by the 30% tax rate).)

Current income tax expense = Taxable income x Tax rate
= $650,000 x 0.30
= $195,000

Question 41

A deferred tax liability may result from which of the following items?

Interest on municipal bonds

Penalties paid for legal violations

Life insurance proceeds received on the death of key employees

Depreciation of tangible assets

Answer 41

Depreciation of tangible assets

The most common source of a deferred tax liability is the use of accelerated depreciation for tax purposes only (not for financial accounting).

More tax expenses are taken immediately than for financial accounting, thus leaving fewer tax deductions for future use (and higher taxes to pay later on, thus a deferred tax liability).

The other answer choices are permanent differences. All deferred tax assets and liabilities are classified as noncurrent on the balance sheet.

Question 42

As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Lander Corporation’s sole depreciable asset, acquired in 20X3, exceeded its tax basis by $73,000 at December 31, 20X3. The difference will reverse in future years. The enacted tax rate is 35% for 20X3 and 30% for future years. Lander has no other temporary differences. In its December 31, 20X3, balance sheet, how should Lander report the deferred tax effect of this difference?

As a noncurrent asset of $21,900

As a noncurrent asset of $25,550

As a noncurrent liability of $21,900

As a noncurrent liability of $25,550

Answer 42

As a noncurrent liability of $21,900

This temporary difference will result in additional taxes being paid in future years, so the related tax effect will be a liability, computed as follows: $73,000 × 0.30 = $21,900. Remember that all deferred taxes are noncurrent

Question 43

Ajax Corp. has an effective tax rate of 30%. On January 1 of the current year, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during the year by using the 150%-declining-balance method of depreciation for tax purposes instead of the straight-line method?

$3,000

$1,500

$5,000

$4,500

Answer 43

$1,500

Question 44

In Year 2, Ajax, Inc., reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible premiums on Ajax’s officers’ life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax’s effective tax rate is 30%. In its Year 2 income statement, what amount should Ajax report as income tax expense—current portion?

$120,000

$108,000

$90,000

$102,000

Answer 44

$120,000

Income tax expense—current is the tax currently payable ($400,000 × 0.30 = $120,000).

Journal Entry:

Tax expense-current 120,000
________Tax payable 120,000

Question 45

The term “tax position” as used by the FASB refers to which of the following?

A decision not to file a tax return

All of the answer choices are correct.

An allocation or a shift of income between jurisdictions

The characterization of income or a decision to exclude reporting taxable income in a tax return

Answer 45

All of the answer choices are correct.

.

he term tax position also encompasses, but is not limited to:

1. “A decision not to file a tax return
2. “An allocation or a shift of income between jurisdictions
3. “The characterization of income or a decision to exclude reporting taxable income in a tax return
4. “A decision to classify a transaction, entity, or other position in a tax return as tax exempt
5. “An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.”

Question 46

Answer 46

$56,000

Income tax expense is calculated as follows:

Current portion = Taxable income x Tax rate
= $140,000 x 0.40
= $56,000

Question 47

Dodd Corp. is preparing its December 31 current-year financial statements and must determine the proper accounting treatment for the following situations:

1. For the current year ended December 31, Dodd has a loss carryforward of $180,000 avail­able to offset future taxable income. However, there are no temporary differences. Based on an analysis of both positive and negative evidence, Dodd has reason to believe it is more likely than not that the benefits of the entire loss carryforward will be realized within the carryforward period.
2. On 12/31 of this year, Dodd received a $200,000 offer for its patent. Dodd’s management is considering whether to sell the patent. The offer expires on 2/28 of next year. The patent has a carrying amount of $100,000 at 12/31.

Assume a current and future income tax rate of 30%. In its current-year income statement, Dodd should recognize an increase in net income of:

$70,000.

$0.

$54,000.

$124,000.

Answer 47

$54,000.

Deferred tax assets are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. The loss carryforward is recognized as a deferred tax asset at the total future deductible amount multiplied by the future tax rate that will be available for the later tax deductions. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Thus, the deferred tax asset is a tax benefit (lowering of this year’s income tax expense) and will increase net income by the total amount of the expected benefit amount of $54,000 ($180,000 deduction × 0.30 (the future tax rate of 30%)).

The other gain is not recognized until the sale is finalized and agreed to by both parties.

Question 48

Answer 48

$30,000

An entity must recognize the effects of a tax position when it is more likely than not (greater than 50% chance), based on the technical merits, that the position will be sustained upon examination.

If the position meets the more-likely-than-not recognition threshold, a tax position should be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement.

Here, only the $30,000 and $10,000 outcomes have a cumulative probability over 50%—representing one of those outcomes is more likely than not to occur.

Because $30,000 is the larger tax benefit, it is recognized fully. The $100,000 likely outcome has an individual and cumulative probability of only 20% and is not more likely than not to be recognized.

Question 49

Permanent differences between taxable income and pre-tax accounting income affect:

intraperiod income tax allocation.

interperiod income tax allocation.

neither interperiod nor intraperiod income tax allocation.

both interperiod and intraperiod income tax allocation.

Answer 49

neither interperiod nor intraperiod income tax allocation.

FASB ASC 740-10-10-1 notes: “Certain revenues are exempt from taxation and certain expenses are not deductible.”

The items referred to in this passage are commonly called permanent differences. A permanent difference affects only the current reconciliation of book income to taxable income, and the permanent difference has no effect on the computation of deferred taxes. Permanent differences do not affect either interperiod or intraperiod income tax allocation.

Question 50

Other differences in the determination of financial and taxable income are permanent in nature in that they are not expected to ___in the future. Examples are items that are included in either taxable or financial income, but which will never enter into the determination of the other, such as the following:

1. Interest received on investments in __securities that is included in the determination of financial income but is not__
2. Insurance ___paid on policies for which the company is ___that are not deductible for tax purposes
3. ___in excess of cost that is deductible for income tax purposes but is not included in the determination of financial income

Permanent differences do not affect either ___or ___income tax allocation. T/F

A permanent difference affects only the current reconciliation of ___ to ___, and the permanent difference has no effect on the computation of deferred taxes.

Permanent differences (do not/ they do) affect either interperiod or intraperiod income tax allocation.

Answer 50

reverse

municipal securities, not taxable

premiums, beneficiary

Depletion

interperiod or intraperiod

book income to taxable income

they do not

Question 51

Answer 51

$104,000

The permanent difference from tax-exempt interest does not produce deferred taxes.
Uncollectible accounts

($220,000 - $250,000)_$(30,000)
Depreciation expense

($860,000 - $570,000)__290,000
Net temporary differences $260,000
Tax rate x .40

Deferred tax expense $104,000

Question 52

Answer 52

$18,000.

Deferred tax benefits only come about from temporary differences, like depreciation and warranty costs. All deferred tax assets and liabilities are classified as noncurrent, and apply to both financial accounting and to tax accounting, but are taken at different times for each. The other items are only taken into account in financial accounting, and are not income or expense items for taxes.

When depreciation for tax purposes is in excess of depreciation for financial accounting, then it will not give rise to a benefit, but instead to a liability. This leaves only the warranty costs, which do give rise to a deferred tax benefit, since the warranty costs will defer to future years’ additional tax deductions.

$60,000 × 0.30 = $18,000

Question 53

The asset/liability method of accounting for income taxes requires that deferred income taxes be:

based on the tax rates currently enacted for the future periods in which the temporary differences are expected to reverse.

None of the answer choices are correct with regard to the asset/liability method.

based on the tax rates in effect during the period in which the temporary differences originate.

ignored, with the amount of income tax expense reported on the income statement being equal to the amount of income taxes computed for income tax purposes.

Answer 53

based on the tax rates currently enacted for the future periods in which the temporary differences are expected to reverse.

The asset/liability method bases the accounting for deferred income taxes on the tax rates currently enacted for the future periods in which the temporary differences are expected to reverse.

Thus, from the standpoint of the tax rates used, the deferred tax balance represents the amount of income tax expected to be paid or refunded when the temporary differences reverse.

All deferred tax assets or liabilities are classified as long term on the balance sheet.

Question 54

Fontenot Company had an increase in its deferred tax liability account of $182,000 during 20X2. The deferred tax asset account decreased by $104,000 during the same year. Fontenot has a tax rate of 32%. Which of the following should Fontenot report in the income tax expense section of its 20X2 income statement?

Deferred income tax benefit of $91,520

Deferred income tax expense of $286,000

Deferred income tax expense of $91,520

Deferred income tax benefit of $286,000

Answer 54

Deferred income tax expense of $286,000

The amount to be reported in the income tax section of the income statement is the deferred income tax expense based on the changes in the deferred tax accounts.

The result is deferred income tax expense of $286,000 ($104,000 + $182,000).

Income tax expense 286,000
Deferred tax liability 182,000
Deferred tax asset 104,000

Question 55

A deferred tax asset of $100,000 was recognized in the Year 1 financial statements by the Chaise Company when a loss from discontinued segments was carried forward for tax purposes.

A valuation allowance of $100,000 was also recognized in the Year 1 statements because it was considered more likely than not that the deferred tax asset would not be realized.

Chaise had no temporary differences. The tax benefit of the loss carried forward reduced current taxes payable on Year 3 continuing operations. The Year 3 income statement would include the tax benefit from the loss brought forward in:

1. cumulative effect of accounting changes.
2. income from continuing operations.
3. gain or loss from discontinued segments.
4. extraordinary gains.

Answer 55

income from continuing operations.

When a loss is recognized for financial accounting, it usually generates an income tax benefit at the same time, as long as it is true that prior income and income taxes paid could be refunded or if it is expected that there will be future income to deduct the loss against.

If there was no income to deduct the loss against, then the tax benefit was valued at zero for the year (using the valuation allowance specified).

When later income is earned and the tax benefit can be used, then the tax benefit is recognized in the later year when the income is earned, and is caused by the later income.

(The income tax benefit is thus allocated to the later year when the income arises to allow the deduction, and is allocated to the income from continuing operations from the later year.)

Question 56

A company reported the following financial information:

Taxable income for current year $120,000
Deferred income tax liability, beginning of year 50,000
Deferred income tax liability, end of year 55,000
Deferred income tax asset, beginning of year 10,000
Deferred income tax asset, end of year 16,000
Current and future years’ tax rate 35%

The current year’s income tax expense is what amount?

$42,000

$41,000

$43,000

$53,000

Answer 56

$41,000

Question 57

Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, 20X1, balance sheet. For 20X2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for 20X2.

At December 31, 20X2, Quinn had cumulative taxable differences of $70,000. Quinn’s effective income tax rate is 30%. In its December 31, 20X2, income statement, what should Quinn report as deferred income tax expense?

$21,000

$60,000

$12,000

$30,000

Answer 57

The temporary difference generated in the year is the noncurrent part of the tax expense.

Deferred income tax exp = temp diff x effective tax rate
= $100,000 x 0.30
= $30,000

Note: The temporary difference of $100,000 for 20X2 offset by the temporary asset difference ($9,000 ÷ .30 = $30,000) as of January 1, 20X2, resulted in a cumulative taxable difference of $70,000 on the December 31, 20X2, balance sheet.

Question 58

Answer 58

$167,900

Total income tax expense is the combination of current income tax expense, deferred income tax benefit and deferred income tax expense. For this case, it is computed as follows: $151,000 – $27,400 + $44,300 = $167,900.

Question 59

Answer 59

$39,000

The life insurance proceeds will not be taxed ever, but the depreciation is taxed at a different times than when it is reported on the financial records. The tax depreciation is taken first, so later years will have fewer deductions and more taxes due. The amounts due in the future are based on the times of reversal and the rates in effect at the time.

1. For Year 2, $50,000 × 0.35 = $17,500.
2. For Year 3, $40,000 × 0.35 = $14,000.
3. For Year 4, $20,000 × 0.25 = $5,000.
4. For Year 5, $10,000 × 0.25 = $2,500.

Adding these amounts results in the total deferred income tax liability for Year 1:

$17,500 + $14,000 + $5,000 + $2,500 = $39,000

Question 60

For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There were no other differences between its taxable and financial statement income. Cable’s effective tax rate for the current year is 45%, but a 40% rate has already been passed into law for next year. In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability)?

$45,000 asset

$45,000 liability

$40,000 liability

$40,000 asset

Answer 60

$40,000 liability

The GAAP rules for measuring the amount of the liability are designed to report the “best” estimate of the amount of tax that actually will be paid in the future on this income. Therefore, the amount of the liability is measured using enacted tax rates.

Because the 40% rate has been enacted into law by year-end, it will be used to measure the deferred tax liability. This makes the balance a $40,000 liability ($100,000 × 40%).

An expense on a tax return that has not yet been recorded on the books is the result of a temporary difference that results in a deferred tax liability. Because the give the tax rate for next year (40%) use that to calculate the $ amount of the liability. 40% x 100k = $40k

Question 61

Senlo Co. uses a 1-year operating cycle and recognizes profits for financial statement and tax pur­poses during its two years of operation. Depreciation for tax purposes exceeded depreciation for financial statement purposes each year. These temporary differences are expected to reverse in Years 3, 4, and 5. At the end of Year 2, the deferred tax liability shown as a noncurrent liability is based on the:

enacted tax rates for Years 4 and 5.

enacted tax rates for Years 3, 4, and 5.

enacted tax rate for Year 3.

tax rates for Years 1 and 2.

Answer 61

enacted tax rates for Years 3, 4, and 5.

Deferred tax liabilities are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Question 62

Rowe Corporation prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, 20X6, its first year of operations:

Pre-tax financial income $245,000
Nontaxable interest received on municipal securities (10,000)
Long-term loss accrual in excess of deductible amount 48,000
Depreciation in excess of financial statement amount (30,000)
Taxable income $253,000

Rowe’s average tax rate for 20X6 is 15% and the future average tax rate is estimated to be 20%.

In its December 31, 20X6, balance sheet, what should Rowe report for deferred income taxes?

1. $2,700 deferred tax liability
2. $2,700 deferred tax asset
3. $3,600 deferred tax asset
4. $3,600 deferred tax liability

Answer 62

$3,600 deferred tax asset

Deferred amounts created by temporary differences will be taxed (deducted) in the future and they are measured employing the tax rates expected to apply to them.

Deferred income tax asset = Temporary differences × Tax rate
= ($48,000 – $30,000) × 0.20 = $3,600

For a particular tax-paying component of an enterprise and within a particular tax jurisdiction, all deferred tax liabilities and assets are offset and presented as a single noncurrent amount on the balance sheet. An enterprise cannot offset deferred tax liabilities and assets attributable to different tax-paying components of the enterprise or to different tax jurisdictions.

Question 63

Answer 63

$51,600

The current portion of the income tax expense is the year’s taxable income multiplied by the tax rate. The remaining part of the income tax expense is the deferred or noncurrent part.

Current portion of Taxable Current
income tax expense = income x tax rate
= $129,000 x 40%
= $51,600

Question 64

Answer 64

$153,000

The current provision for income taxes (the current portion of the income tax expense) is simply the taxable income times the tax rate:

$450,000 × 0.34 = $153,000

Question 65

Leer Corp.’s pretax income in the current year was $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows:

1. Depreciation in the financial statements was $8,000 more than tax depreciation.
2. The equity method of accounting resulted in financial statement income of $35,000. A $25,000 dividend was received during the year, which is eligible for the 65% dividends-received deduction.

Leer’s effective income tax rate was 20%. In its current-year income statement, Leer should report a cur­rent provision for income taxes of:

$17,850.

$21,900.

$16,350.

$23,350.

Answer 65

$16,350.

Start with the pretax income of $100,000, and add $8,000 to it because tax depreciation expense was less than book depreciation. The $35,000 equity method income for financial accounting needs to be subtracted since it is not the taxed amount:

$100,000 + $8,000 – $35,000 = $73,000

The dividends that are taxable are subject to a dividends-received deduction of 65%. Thus, only add in $8,750 of the dividends ($25,000 × 0.35 (1 − .65)), because the dividends, though taxable in part, are not financial accounting income when applying the equity method:

$73,000 + $8,750 = $81,750

Thus, taxable income is $81,750 ($100,000 + $8,000 – $35,000 + $8,750) and the current income tax due is $16,350:

$81,750 × 0.20 = $16,350

Question 66

Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes, Jab has temporary differences that will reverse during the next year and add to taxable income. Deferred income taxes that are based on these temporary differences should be classified in Jab’s bal­ance sheet as a:

1. contra account to current assets.
2. noncurrent liability.
3. contra account to noncurrent assets.
4. current liability.

Answer 66

noncurrent liability..

The temporary difference here is related to a different amount taken on the taxes for depreciation on the equipment. The tax depreciation is more in earlier years, and will require that more taxes be paid in future years. The temporary differences relate to future additional taxable amounts.

This is therefore a deferred tax liability, and it is noncurrent because all deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Question 67

Hut Co. has temporary taxable differences that will reverse during the next year and add to taxable income. These differences relate to noncurrent assets. Deferred income taxes based on these temporary differences should be classified in Hut’s balance sheet as a:

noncurrent asset.

current liability.

noncurrent liability.

current asset.

Answer 67

noncurrent liability.

Temporary differences that will add to taxable income relate to future taxable amounts. Future taxable amounts are associated with deferred tax liabilities. All deferred tax assets and liabilities are classified as noncurrent.

Question 68

When accounting for income taxes, a temporary difference occurs in which of the following scenarios?

The accrual method of accounting is used.

An item is no longer taxable due to a change in the tax law.

An item is included in the calculation of net income in one year and in taxable income in a different year.

An item is included in the calculation of net income, but is neither taxable nor deductible.

Answer 68

An item is included in the calculation of net income in one year and in taxable income in a different year.

An item is included in the calculation of net income in one year and in taxable income in a different year. Temporary differences arise when items are treated differently in financial statements than they are on income tax returns in the same year. The difference will reverse in the future.

Question 69

Which of the following statements is a primary objective of accounting for income taxes?

To compare an enterprise’s federal tax liability to its state tax liability

To estimate the effect of the tax consequences of future events

To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences

To identify all of the permanent and temporary differences of an enterprise

Answer 69

To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences

Accounting for income taxes under FASB rules is based on the “liability method.” Under the liability method, accounting for income taxes has two primary objectives: to recognize the amount of taxes currently payable or refundable, and to recognize deferred tax liabilities and assets for the future tax consequences of temporary differences.

Question 70

Black Co., organized on January 2, Year 1, had pretax financial statement income of $500,000 and tax­able income of $800,000 for the year ended December 31, Year 1. The only temporary differences are accrued product warranty costs, which Black expects to pay as follows:

1. Year 2 $100,000
2. Year 3 50,000
3. Year 4 50,000
4. Year 5 100,000

The enacted income tax rates are 25% for Year 1, 30% for Years 2 through 4, and 35% for Year 5. Black believes that future years’ operations will produce profits. In its December 31, Year 1, balance sheet, what amount should Black report as deferred tax asset?

$90,000

$50,000

$95,000

$75,000

Answer 70

$95,000

Deferred tax assets are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent. The total temporary differences are the $300,000 of warranty costs, which will lower future taxable income.

The time when the differences unwind is Years 2 through 5, and the tax asset is measured by the amounts and the rates for these years.

1. The Year 2 amount is $100,000 × 0.30 (30%) = $30,000.
2. For Year 3, the amount is $50,000 × 0.30 = $15,000.
3. Year 4: $50,000 × 0.30 = $15,000
4. Year 5: $100,000 × 0.35 = $35,000

The total of these amounts is the total deferred tax asset of $95,000:

$30,000 + $15,000 + $15,000 + $35,000 = $95,000

Question 71

The FASB requires that an entity must initially recognize the effects of a tax position when it is more likely than not that the position will be sustained upon examination. Which of the following is the definition of “more likely than not”?

None of the answer choices are definitions of “more likely than not.”

There is a greater than 75% chance that the taxing authority will agree with the entity taking the tax position.

The tax position has been examined and the position was sustained.

There is a greater than 50% chance that the taxing authority will agree with the entity taking the tax position.

Answer 71

There is a greater than 50% chance that the taxing authority will agree with the entity taking the tax position.

Question 72

Which of the following statements is correct regarding valuation allowances in accounting for income taxes?

1. The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
2. A valuation allowance is necessary when the realistic probability standard of evidence is satisfied.
3. Both deferred tax assets and deferred tax liabilities can be reduced by a valuation allowance.
4. Only negative evidence, not positive evidence, should be considered when determining whether a valuation allowance is needed

Answer 72

The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.

1. GAAP provides that only deferred tax assets (not deferred tax liabilities) be reduced by a valuation allowance, but only if it is more likely than not (i.e., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized.
2. The valuation allowance should reduce the deferred tax asset to the amount that is more likely than not to be realized, considering both positive and negative evidence.
3. The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
4. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Question 73

Orleans Co., a cash-basis taxpayer, prepares accrual-basis financial statements. In its current-year bal­ance sheet, Orleans’ deferred income tax liabilities increased compared to the previous year. Which of the following changes would cause this increase in deferred income tax liabilities?

1. An increase in prepaid insurance
2. An increase in rent receivable
3. An increase in warranty obligations

I only

II and III

III only

I and II

Answer 73

I and II

Deferred income tax liabilities are caused by items that defer payment of taxes, which cause more taxes to be paid in later years than the income tax expense taken currently. An increase in prepaid insurance can lower taxes now by adding to the expenses deductible, and cause deferral of taxes to the future, so it would qualify a change that would increase deferred tax liabilities.

An increase in rent receivable, a pushing forward of the receipt of the rent in cash (when it will be taxed), can also defer taxes to the future and add to later taxes due, so it would also increase deferred tax liabilities.

An increase in warranty obligations means one is pushing forward the paying of the expense in cash (which allows the deduction), and this would lower taxes in the future, not add to the future liabilities.

All deferred tax assets and liabilities are classified as noncurrent on the balance sheet.

Question 74

West Corp. leased a building and received the $40,000 annual rental payment on June 15, 20X1. The beginning of the lease was July 1, 20X1. West reports rental income as taxable when received. West’s average tax rates are 27% for 20X1 and 30% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of noncurrent deferred tax asset should West report in its December 31, 20X1, balance sheet, assuming a 30% tax rate?

$14,400

$6,000

$10,800

$4,800

Answer 74

$6,000

A noncurrent deferred tax asset is recognized for a future deductible difference and is measured at the amount of the difference multiplied by the tax rates that are expected to apply to it.

Taxable amount of rental payment $40,000
Less book amount of rental payment
(6/12 x $40,000) 20,000
Temporary difference $20,000
Times tax rate applicable to future period(s) x 0.30
Deferred tax asset, noncurrent $ 6,000

Question 75

In its 20X1 income statement, Cere Co. reported income before income taxes of $300,000. Cere estimated that, because of permanent differences, taxable income for 20X1 would be $280,000. During 20X1, Cere made estimated tax payments of $50,000, which were debited to income tax expense. Cere is subject to a 30% tax rate. What amount should Cere report as income tax expense?

$90,000

$50,000

$34,000

$84,000

Answer 75

$84,000

Because no temporary differences exist, income tax expense is the same as income tax due on the tax return.
20X1 income Taxable Current
tax expense = income x tax rate
= $280,000 x 30%
= $84,000