Exam 17: Accounting for Income Taxes

Violet, Inc. recorded a deferred tax asset of $43,000 due to a book-tax difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 45% of the deferred tax asset. What is the necessary journal entry to record the valuation allowance?

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $840,000 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. Year MACRS (\%) 1 20.00\% 2 32.00 3 19.20 4 11.52 5 11.52 6 5.76 The company is subject to a 20% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: Income before Taxand Year Depreciation 1 \ 450,000 2 500,000 3 570,000 4 700,000 5 820,000 6 950,000 What is Infinity's deferred tax asset or deferred tax liability at the end of year 1?

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $590,000. Included in this amount is $80,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $180,000 and are treated the same for book and tax purposes. What is Greenville's book basis in the installment sale receivable?

Gustav, Inc. 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 $150,000 and are treated the same for book and tax purposes. Complete the following: a. What is the book basis of the installment sales receivable? b. What is the tax basis of the installment sales receivable? c. Assuming a 30% tax rate, compute income tax expense, the deferred tax provision, and income tax payable for 2018. d. Prepare the journal entry to record the 2018 income tax expense.

When a company adjusts the balance of a deferred tax account to reflect changes in the tax rate, prior-period financial statements will need to be adjusted to reflect this.

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $600,000. Included in this amount is $20,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $200,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is the amount of Greenville's deferred tax asset or liability?

In 2018, its first year of operations, Neuro Inc. experienced a $214,000 net operating loss and recorded a deferred tax asset of $81,320. Neuro decides that it is more likely than not that it will only be able to generate $195,000 of taxable income during the carryforward period. As a result, without generating additional future taxable income it will not be able to fully realize the NOL carryforward benefit. In order to account for this, what amount will Neuro Inc. record as a valuation allowance, assuming that the tax rate is unchanged?

A deferred tax liability is created when ________.

Purrfect Pet Industries' income before taxes is $810,000 and its tax rate is 50%. Purrfect Pet included $50,000 of fully deductible inter-corporate dividends received in the $810,000. There are no other book-tax differences. What is the income tax payable for Purrfect Pet?

An intraperiod tax allocation ________.

Charmed Inc.'s income before taxes is $720,000 and its tax rate is 25%. Charmed included $30,000 in non-deductible life insurance premiums in the $720,000. There are no other book-tax differences. What is the journal entry to record income tax expense?

Under U.S. GAAP, if a firm writes down inventory for obsolescence, which of the following is created?

Danio Inc.'s income before taxes is $550,000 and its tax rate is 30%. Danio included $30,000 of interest from municipal bonds in the $550,000. There are no other book-tax differences. What is the effective tax rate for Danio Inc.? (Do not round intermediate calculations. Only round your final answer to the nearest percent.)

Under U.S. GAAP, companies generally use a balance sheet approach to account for temporary differences between book and tax treatment of transactions.

On December 31, 2018, the Magic Flute Company reports liabilities with a tax basis of $600,000 and a book basis of $400,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: 2019 \ 60,000 2020 \ 50,000 2021 \ 52,000 2022 \ 20,000 2023 \ 18,000 Assuming a tax rate of 25% for 2018 - 2020 and a rate of 30% for 2021 - 2023, The Magic Flute Co. should report a deferred tax ________ in the amount of ________ on December 31, 2018.

A deferred tax asset represents a future reduction in income taxes payable.

If a company chooses to carryback a net operating loss (NOL), but is not able to fully offset the loss, they will ________.

Under U.S. GAAP, companies classify individual deferred tax assets or liabilities as ________.

Lyon Ltd., a U.S. GAAP reporter, provides the following information: Sales on account $800,000 Associated warranty expense/liability $200,000 No warranty repairs made to date; Lyon cannot deduct warranty expense for tax purposes until repairs are made. Management estimates that it is more likely than not that the firm will not realize 25% of the deferred tax asset. Tax rate of 35% Prepare a simplified income statement, including the effective tax rate, both with and without the valuation allowance. Round percentages to the nearest whole number.

Excluding potentially taxable income from a tax return is an example of an uncertain tax position.