Exam 14: Taxes on the Financial Statements

Under GAAP, a corporation can defer reporting the U.S. tax expense related to the earnings of foreign subsidiaries, by taking into account its repatriation plans for these earnings.

Purple, Inc., a domestic corporation, owns 80% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 50% of Green, Inc., a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities' net income are included in Purple's Federal tax return for the current year assuming Purple elects to include all eligible entities in its consolidated Federal income tax return?

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. Yahr's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

Giant uses the "equity method" to account for the operations of its 40% owned subsidiary Little. A portion of Little's profits for the year are included in Giant's GAAP book income.

If a corporation has no operations outside the U.S., its GAAP book and taxable income are identical.

In the "rate reconciliation" of GAAP tax footnotes, temporary book-tax differences are reconciled between book income as if taxed at U.S. tax rates and the actual book income tax expense.

Create, Inc., a domestic corporation, owns 90% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 60% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's Federal tax return for the current year assuming Create elects to include all eligible entities in its consolidated Federal income tax return?

Phyllis, Inc., earns book net income before tax of $600,000. Phyllis puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Phyllis has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Phyllis's total income tax expense reported on its GAAP financial statements?

Beach, Inc., a domestic corporation, owns 100% of Mountain, Ltd., a manufacturing facility in Erasmus. Mountain has no operations or activities in the United States. The U.S. tax rate is 35% and the applicable Erasmus tax rate is 10%. For the current year, Beach earns $500,000 in taxable income. Mountain earns $300,000 in taxable income from its operations, pays $30,000 in taxes to Erasmus, and makes no distributions to Beach. What is Beach's effective tax rate for GAAP book purposes, assuming that Beach does not make the permanent reinvestment assumption of ASC 740-30 (APB 23)?

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

A CFO probably prefers a tax planning strategy that produces a temporary book-tax savings difference to one that produces a permanent difference.

Which of the following statements best describes considerations regarding a company's tax expense that may be made by users of GAAP financial statements?

Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Gravel has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Gravel's current income tax expense reported on its GAAP financial statements?

Qute, Inc., earns book net income before tax of $500,000. In computing its book income, Qute deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Qute records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35% and no valuation allowance is required, what is Qute's total income tax expense reported on its GAAP financial statements?