Exam 14: Taxes on the Financial Statements

Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 12% 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 income statement for current year financial reporting purposes?

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 income tax return for the current year, assuming that Purple elects to include all eligible entities in its consolidated Federal income tax return?

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 35% corporate tax rate and no valuation allowance. Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals and entertainment expense. Provide the income tax footnote rate reconciliation for Black.

"Temporary differences" are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return, but not in the same reporting period.

Healy, Inc., reports an effective tax rate in its income tax footnote of 14%. The only reconciling item with regard to the hypothetical tax at 35% is a valuation allowance reversal of negative 21%. Which of the following statements is true concerning comparing Healy, Inc.'s effective tax rate with its competitors, all of whom have an effective tax rate between 32 and 36%?

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200. Amelia records two permanent book-tax differences. It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and entertainment expense. Determine the change in Amelia's deferred tax liabilities for the current year.

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 income tax return for the current year, assuming that Create elects to include all eligible entities in its consolidated Federal income tax return?

You are the tax adviser to a publicly traded U.S. corporation. How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?

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)?

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200. Amelia records two permanent book-tax differences. It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and entertainment expense. Provide the journal entry to record Amelia's current tax expense.

Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 12% 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 income statement for current year financial reporting purposes?

After applying the balance sheet method to determine the GAAP income tax expense of Poppert Inc., the following account balances are found. Determine the balance sheet presentation of these amounts. Hint: Which of the accounts should you combine for the final balance sheet disclosure? Deferred tax assets, current \ 500,000 Deferred tax assets, noncurrent 145,000 Deferred tax liabilities, current 80,000 Deferred tax liabilities, noncurrent 310,000

Which of the following items is not included in the income tax footnote for a publicly traded company?

PaintCo Inc., a domestic corporation, owns 100% of BrushCo Ltd., an Irish corporation. Assume that the U.S. corporate tax rate is 35% and the Irish rate is 15%. PaintCo is permanently reinvesting BrushCo's earnings outside the United States under ASC 740-30 (APB 23). The corporations' book income, permanent and temporary book-tax differences, and current tax expense are reported as follows. There is no valuation allowance, and the effective tax rates do not change. Determine PaintCo's total tax expense reported on its GAAP financial statements, its current tax expense (benefit), and its deferred tax expense (benefit). PaintCo BrushCo Book income before tax \ 600,000 \ 400,000 Permanent differences Meals \& entertainment expense 40,000 -0- Municipal bond interest income (10,000) -0- Temporary differences Tax > book depreciation (100,000) -0- Book > tax bad debt expense 20,000 -0-

Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.

Never, Inc., earns book net income before tax of $500,000. In computing its book income, Never deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Never 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 Never's deferred income tax asset reported on its GAAP financial statements?

South, Inc., earns book net income before tax of $400,000 in year 1. South acquires a depreciable asset in year 1, and first year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $17,500. In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000. South records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is South's balance in its deferred tax liability account at the end of year 2?

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance. Amelia, Inc.'s, book income before tax is $25,200. Amelia records two permanent book-tax differences. It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and entertainment expense. Determine the change in Amelia's deferred tax assets for the current year.

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

Which of the following items are not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?