Exam 17: Accounting for Income Taxes

Morgan Corporation determined that $2,000,000 of the research credit on its current-year tax return was uncertain,but that it was more likely than not to be sustained on audit.Management made the following assessment of the company's potential tax benefit from the credit and its probability of occurring. Under ASC 740,what amount of the tax benefit related to the research credit can Morgan recognize in calculating its income tax provision in the current year?

Purple Rose Corporation reported pretax book income of $500,000.Tax depreciation exceeded book depreciation by $300,000.In addition,the company received $250,000 of tax-exempt life insurance proceeds.The prior-year tax return showed taxable income of $100,000.Compute Purple Rose's current income tax expense or benefit.

Temporary differences create either a deferred tax asset or a deferred tax liability.

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. 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?

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

Congress reduced the corporate tax rate from 35 percent to 21 percent effective in 2018.The tax rate change will affect only deferred tax assets and liabilities that arise in 2018 and thereafter.

B-Line Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $800,000.The favorable book-tax difference of $200,000 was due to a $100,000 favorable temporary difference relating to depreciation,an unfavorable temporary difference of $50,000 due to accrued vacation pay,and a $150,000 favorable permanent difference from the dividends received deduction. a.Compute B-Line's current income tax expense. b.Compute B-Line's deferred income tax expense or benefit. c.Compute B-Line's effective tax rate. d.Provide a reconciliation of B-Line's effective tax rate with its hypothetical tax rate of 21 percent.

As part of its uncertain tax position assessment,Madison Corporation records interest and penalties related to its unrecognized tax benefits of $1,000,000.Which of the following statements about recording this amount is most correct?

Stone Corporation reported pretax book income of $1,000,000.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.At the beginning of the tax year,Congress reduced the corporate tax rate from 34 percent to 21 percent.Compute the company's current and deferred income tax expense or benefit.

DeWitt Corporation reported pretax book income of $800,000.Tax depreciation exceeded book depreciation by $400,000.In addition,the company received $100,000 of tax-exempt municipal bond interest.DeWitt used a net operating loss carryover of $200,000 to offset taxable income in the current year.Compute DeWitt's book equivalent of taxable income.Use this number to compute DeWitt's total income tax provision or benefit for the current year.

The tax effects of permanent differences generally are reported in a company's computation of its effective tax rate.

Costello Corporation reported pretax book income of $500,000.During the current year,the reserve for bad debts increased by $5,000.In addition,tax depreciation exceeded book depreciation by $40,000.Finally,Costello received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers.Costello's deferred income tax expense or benefit would be:

Lafayette,Inc.,completed its first year of operations with a pretax loss of $800,000.The tax return showed a net operating loss of $750,000.The $50,000 book-tax difference results from a disallowed deduction for business-related meals.Management has determined that they should record a valuation allowance equal to the net deferred tax asset.Prepare the journal entries to record the deferred tax provision and the valuation allowance.

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 (taxed at 34 percent).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,Congress reduced the corporate tax rate to 21 percent.Robinson's deferred income tax expense or benefit for the current year would be:

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

A valuation allowance is recorded against a deferred tax asset when:

Marlin Corporation reported pretax book income of $1,000,000.During the current year,the net reserve for warranties increased by $25,000.In addition,book depreciation exceeded tax depreciation by $100,000.Finally,Marlin subtracted a dividends received deduction of $15,000 in computing its current-year taxable income.Marlin's current income tax expense or benefit would be:

Which of the following statements about ASC 740 as it relates to uncertain tax positions is true?

Tuna Corporation reported pretax book income of $1,000,000.During the current year,the net reserve for warranties increased by $25,000.In addition,book depreciation exceeded tax depreciation by $100,000.Finally,Tuna subtracted a dividends received deduction of $15,000 in computing its current-year taxable income.Book equivalent of taxable income is:

Publicly traded companies usually file their financial statements before they file their federal income tax returns.