Question 1

All of the following are examples of facts that may create temporary book-tax differences except ________.

Accepted Answer

A)  contingent liabilities 
B)  depreciation 
C)  product warranty costs 
D)  payment of premiums for life insurance 
A)  contingent liabilities 
B)  depreciation 
C)  product warranty costs 
D)  payment of premiums for life insurance

Question 2

Illusions Inc. just completed its second year of operations and has a deferred tax asset of $43,700 related to a net operating loss of $115,000 from the previous year. In the current year Illusions generates $390,000 in revenues and incurs $260,000 in expenses. There are no permanent or temporary book-tax differences. Assuming the same tax rate as last year, what amount will Illusions record for Income Tax Payable in the current year?

Accepted Answer

A)  $5,700 
B)  $49,400 
C)  $148,200 
D)  Cannot be determined from the information provided. 
A)  $5,700 
B)  $49,400 
C)  $148,200 
D)  Cannot be determined from the information provided.

Question 3

In 2018 Charmed, Inc. recorded book income of $420,000. The company's only temporary difference relates to a $66,000 installment sale that it recorded for book purposes; there are no permanent differences. Charmed anticipates receiving payments equally over the following three years. The current enacted tax rate in 2018 is 39%. The substantively enacted tax rates for the following three years are 34%, 39%, and 47%, respectively. Under IFRS, what deferred tax amount should Charmed record for this temporary difference?

Accepted Answer

A)  $24,640 
B)  $26,400 
C)  $25,740 
D)  $31,020 
A)  $24,640 
B)  $26,400 
C)  $25,740 
D)  $31,020

Question 4

Muckingjay Inc. opened in 2018. The company reported sales revenue of $486,000 and expenses of $574,000. The revenue is on account, and no cash has been received or paid out for expenses. There are no permanent or temporary differences, so the book loss and taxable loss will be the same. Muckingjay plans to carry forward the net operating loss (NOL). The company has a 38% tax rate, and a valuation allowance is not required.
Prepare the following for 2018:
a) The necessary journal entry to record the NOL carryforward.
b) A partial income statement beginning with sales revenue.

Accepted Answer

a) Journal Entry:
 \[\begin{array} { | c

Question 5

Income tax rate reconciliation under IFRS must begin with the U.S. statutory income tax rate.

Accepted Answer

A) True 
 B)False

Question 6

Under U.S. GAAP, when a firm determines that all or a portion of a deferred tax asset is not realizable, they will use a valuation allowance to reduce the balance.

Accepted Answer

A) True 
 B)False

Question 7

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $720,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}
\text { Year } & \text { MACRS }(\%) \
1 & 20.00 \% \
2 & 32.00 \
3 & 19.20 \
4 & 11.52 \
5 & 11.52 \
6 & 5.76
\end{array}$ 
The company is subject to a 40% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}
&\text { Income before}\
&\text {  Tax and}\
\text { Year } & \text { Depreciation } \
1 & \$ 360,000 \
2 & 410,000 \
3 & 480,000 \
4 & 700,000 \
5 & 820,000 \
6 & 950,000
\end{array}$ 
What is Infinity's book income for year 1?

Accepted Answer

A)  $235,000 
B)  $240,000 
C)  $216,000 
D)  $360,000 
A)  $235,000 
B)  $240,000 
C)  $216,000 
D)  $360,000

Question 8

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $900,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. $\begin{array}{ll}
\underline{\text { Year} } & \underline{\text { MACRS} }(\%) \
1 & 20.00 \% \
2 & 32.00 \
3 & 19.20 \
4 & 11.52 \
5 & 11.52 \
6 & 5.76
\end{array}$

The company is subject to a 25% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:
$\begin{array}{cc}
& \text { Income before}\
& \text { Taxand}\
\text { Year } & \text { Depreciation } \
\hline 1 & \$ 370,000 \
2 & 420,000 \
3 & 490,000 \
4 & 700,000 \
5 & 820,000 \
6 & 950,000
\end{array}$

What is Infinity's income tax expense for year 1?

Accepted Answer

A)  $220,000 
B)  $55,000 
C)  $47,500 
D)  $92,500 
A)  $220,000 
B)  $55,000 
C)  $47,500 
D)  $92,500

Question 9

S & C Company's income before taxes is $410,000, and income tax expense is $115,000. S & C has a deferred tax asset of $100,000 and records a valuation allowance of $25,000. What is S & C's effective tax rate before and after recording the valuation allowance? (Do not round intermediate calculations. Round your final answer to the nearest whole percent.)

Accepted Answer

A)  28% and 22% respectively 
B)  22% and 34% respectively 
C)  28% and 34% respectively 
D)  There would not be a change in ETR because these are due to temporary differences. 
A)  28% and 22% respectively 
B)  22% and 34% respectively 
C)  28% and 34% respectively 
D)  There would not be a change in ETR because these are due to temporary differences.

Question 10

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $580,000. Included in this amount is $60,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $100,000 and are treated the same for book and tax purposes. What is Greenville's book income?

Accepted Answer

A)  $420,000 
B)  $480,000 
C)  $520,000 
D)  $580,000 
A)  $420,000 
B)  $480,000 
C)  $520,000 
D)  $580,000

Question 11

There are questions as to whether or not deferred tax assets and liabilities should be recorded. Based on your understanding of the concepts and accounting terminology, are deferred tax assets and tax liabilities real assets and liabilities?

Accepted Answer

Answers will vary-but should include a d

Question 12

Brown Inc.'s net income is $300,000 and its tax rate is 25%. Assuming no book-tax differences, what is the journal entry to record income tax expense? (Do not round intermediate calculations. Only round your final answer to the nearest whole dollar.)

Accepted Answer

A)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 75,000 & \
\hline \text { Income Tax Payable } & & 75,000 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 400,000 & \
\hline \text { Income Tax Payable } & & 400,000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 300,000 & \
\hline \text { Income Tax Payable } & & 300,000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 100,000 & \
\hline \text { Income Tax Payable } & & 100,000 \
\hline
\end{array}$$ 
A)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 75,000 & \
\hline \text { Income Tax Payable } & & 75,000 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 400,000 & \
\hline \text { Income Tax Payable } & & 400,000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 300,000 & \
\hline \text { Income Tax Payable } & & 300,000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | c | r | r | } 
\hline \text { Income Tax Expense } & 100,000 & \
\hline \text { Income Tax Payable } & & 100,000 \
\hline
\end{array}$$

Question 13

A firm is not required to reconcile the federal statutory tax rate to its effective tax rate.

Accepted Answer

A) True 
 B)False

Question 14

Bach. Co. presents the following information for 2018 and 2019.

2018 information:
Sales on account in the amount of $645,000
Warranty expense and associated liability in the amount of $125,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $225,000
Warranty payments made in the amount of $65,000
No expenses incurred.

Prepare the journal entries for 2018 and 2019 to record the sales, warranty, and income tax transactions, assume a 40% tax rate.

Accepted Answer

2018
* 225,000 × 40%

Question 15

Tetra Corp, an IFRS reporter, has the deferred tax assets and liabilities presented below: $\begin{array}{|c|c|c|}
\hline \text { Item } & \begin{array}{l}
\text { Classification on the } \
\text { Balance Sheet of } \
\text { Related Account }
\end{array} & \begin{array}{c}
\text { Deferred Tax } \
\text { Associated with Item }
\end{array} \
\hline \begin{array}{l}
\text { Excess of warranty expense over } \
\text { warranty deductions }
\end{array} & \text { Current } & \$ 69,000 \text { Asset } \
\hline \begin{array}{l}
\text { Accelerated depreciation for tax } \
\text { burposes }
\end{array} & \text { Noncurrent } & \$ 79,000 \text { Liability } \
\hline \text { Installment sales receivable } & \text { Current } & \$ 39,000 \text { Liability } \
\hline \text { Contingent liability } & \text { Current } & \$ 29,000 \text { Asset } \
\hline
\end{array}$
 
What will the company report for deferred taxes on the balance sheet?

Accepted Answer

A)  current assets: deferred tax asset $59,000; noncurrent liabilities: deferred tax liability $79,000 
B)  noncurrent assets: deferred tax asset $20,000 
C)  noncurrent liabilities: deferred tax liability $20,000 
D)  Companies do not report deferred taxes on the balance sheet under IFRS. 
A)  current assets: deferred tax asset $59,000; noncurrent liabilities: deferred tax liability $79,000 
B)  noncurrent assets: deferred tax asset $20,000 
C)  noncurrent liabilities: deferred tax liability $20,000 
D)  Companies do not report deferred taxes on the balance sheet under IFRS.

Question 16

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $75,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is Greenville's income tax payable?

Accepted Answer

A)  $99,750 
B)  $126,000 
C)  $148,750 
D)  $175,000 
A)  $99,750 
B)  $126,000 
C)  $148,750 
D)  $175,000

Question 17

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 20% for both years.

2018 information:
Sales on account in the amount of $675,000
Warranty expense and associated liability in the amount of $145,000
No other expenses incurred.

2019 information:
Sales on account in the amount of $210,000
Warranty repairs made in the amount of $69,000
No expenses incurred.

What is MK's income tax expense for 2018?

Accepted Answer

A)  $106,000 
B)  $135,000 
C)  $164,000 
D)  $121,200 
A)  $106,000 
B)  $135,000 
C)  $164,000 
D)  $121,200

Question 18

Caesar Corporation reported income before taxes of $220,000 for the years 2016, 2017, and 2018. In 2019 they experienced a loss of $220,000. The company had a tax rate of 35% in 2016 and 2017, and a rate of 45% in 2018 and 2019. Assuming Caesar uses the carryback provisions for the net operating loss, by what amount will the income tax benefit reduce the net loss in 2019?

Accepted Answer

A)  $77,000 
B)  $88,000 
C)  $99,000 
D)  $220,000 
A)  $77,000 
B)  $88,000 
C)  $99,000 
D)  $220,000

Question 19

Tetra Corp. recorded book income of $215,000 in 2018. It does not have any permanent differences and the only temporary difference relates to $36,000 unearned income that it recorded for book purposes. Tetra anticipates satisfying this liability equally over the following three years. The current enacted tax rate is 36%. The enacted tax rates for the following three years are 33%, 38%, and 43%, respectively. Under U.S. GAAP, what deferred tax amount should Tetra Corp. record for this temporary difference?

Accepted Answer

A)  $12,840 
B)  $12,960 
C)  $13,680 
D)  $15,480 
A)  $12,840 
B)  $12,960 
C)  $13,680 
D)  $15,480

Question 20

When defining the portion of a deferred tax asset that a firm will not realize, IFRS uses the term ________.

Accepted Answer

A)  likely 
B)  possible 
C)  more likely than not 
D)  probable 
A)  likely 
B)  possible 
C)  more likely than not 
D)  probable

All of the following are examples of facts that may create temporary book-tax differences except ________.

Income tax rate reconciliation under IFRS must begin with the U.S. statutory income tax rate.

Under U.S. GAAP, when a firm determines that all or a portion of a deferred tax asset is not realizable, they will use a valuation allowance to reduce the balance.

There are questions as to whether or not deferred tax assets and liabilities should be recorded. Based on your understanding of the concepts and accounting terminology, are deferred tax assets and tax liabilities real assets and liabilities?

Brown Inc.'s net income is $300,000 and its tax rate is 25%. Assuming no book-tax differences, what is the journal entry to record income tax expense? (Do not round intermediate calculations. Only round your final answer to the nearest whole dollar.)

A firm is not required to reconcile the federal statutory tax rate to its effective tax rate.

When defining the portion of a deferred tax asset that a firm will not realize, IFRS uses the term ________.

The Financial Reporting Environment

Financial Reporting Theory

Judgment and Applied Financial Accounting Research

Review of the Accounting Cycle

Statements of Net Income and Comprehensive Net Income

Statements of Financial Position and Cash Flows and the Annual Report

Accounting and the Time Value of Money

Revenue Recognition

Extenssion: Ol Revenue Recognition Previous Standard

Short-Term Operating Assets: Cash and Receivables

Short-Term Operating Assets: Inventory

Long-Term Operating Assets: Acquisition, Cost Allocation

Long-Term Operating Assets: Departures From Historical Cost

Operating Liabilities and Contingencies

Financing Liabilities

Accounting for Stockholders Equity

Investing Assets

Accounting for Leases

Extension: Ol Accounting for Leases Current Standard

Accounting for Employee Compensation and Benefits

Earnings Per Share

Accounting Corrections and Error Analysis

The Statement of Cash Flows

Filters

Exam 17: Accounting for Income Taxes

All of the following are examples of facts that may create temporary book-tax differences except ________.

Income tax rate reconciliation under IFRS must begin with the U.S. statutory income tax rate.

Under U.S. GAAP, when a firm determines that all or a portion of a deferred tax asset is not realizable, they will use a valuation allowance to reduce the balance.

There are questions as to whether or not deferred tax assets and liabilities should be recorded. Based on your understanding of the concepts and accounting terminology, are deferred tax assets and tax liabilities real assets and liabilities?

Brown Inc.'s net income is $300,000 and its tax rate is 25%. Assuming no book-tax differences, what is the journal entry to record income tax expense? (Do not round intermediate calculations. Only round your final answer to the nearest whole dollar.)

A firm is not required to reconcile the federal statutory tax rate to its effective tax rate.

When defining the portion of a deferred tax asset that a firm will not realize, IFRS uses the term ________.

The Financial Reporting Environment

Financial Reporting Theory

Judgment and Applied Financial Accounting Research

Review of the Accounting Cycle

Statements of Net Income and Comprehensive Net Income

Statements of Financial Position and Cash Flows and the Annual Report

Accounting and the Time Value of Money

Revenue Recognition

Extenssion: Ol Revenue Recognition Previous Standard

Short-Term Operating Assets: Cash and Receivables

Short-Term Operating Assets: Inventory

Long-Term Operating Assets: Acquisition, Cost Allocation

Long-Term Operating Assets: Departures From Historical Cost

Operating Liabilities and Contingencies

Financing Liabilities

Accounting for Stockholders Equity

Investing Assets

Accounting for Leases

Extension: Ol Accounting for Leases Current Standard

Accounting for Employee Compensation and Benefits

Earnings Per Share

Accounting Corrections and Error Analysis

The Statement of Cash Flows

Filters