Exam 14: Taxes on the Financial Statements

If a valuation allowance is decreased (released) in the current year, the corporation's effective tax rate is lower than if the valuation allowance had not decreased.

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?

A corporation's taxable income almost never is the same as its GAAP financial accounting income. Explain why this occurs. Use the terms permanent and temporary book-tax differences in you answer. Give at least two examples of each type of book-tax difference.

Hot, Inc.'s primary competitor is Cold, Inc. When comparing relative deferred tax asset and liability accounts with Cold, which of the following benchmarking activities should Hot undertake?

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?

ASC 740 (FIN 48) addresses how an entity should report uncertain tax positions in their financial statements.

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

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. What is Black's total provision for income tax expense reported on its GAAP financial statement and its book net income after tax?

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 total income tax expense reported on its GAAP financial statements for year 2?

Budlow, Inc., reported the following results for the current year. Book income (before tax) \ 500,000 Tax depreciation in excess of book 75,000 Warranty expense, not deductible currently 17,500 Municipal bond interest income 10,000 Determine Budlow's taxable income for the current year. Identify any temporary or permanent book-tax differences.

Which of the following taxes are included in the total income tax liability of a corporation reported on its Federal income tax return?

Budlow, Inc., reported the following results for the current year. Book income (before tax) \ 500,000 Tax depreciation in excess of book 75,000 Warranty expense, not deductible currently 17,500 Municipal bond interest income 10,000 Determine Budlow's taxable income for the current year. Identify any temporary or permanent book-tax differences.

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. Determine the net deferred tax asset or net deferred tax liability at year end.

At the beginning of the year, the balance sheet of Schrader, Inc., shows a $500,000 deferred tax asset relating to a net operating loss carryforward, offset by a $90,000 valuation allowance. At the end of the year, Schrader's auditors agree to release $20,000 of the allowance. Develop the journal entry to record this change in the valuation allowance.

How are deferred tax liabilities and assets categorized on the balance sheet?

Bryden Corporation is considering two tax planning strategies. Both would produce a $1 million tax savings. One of the strategies would structure the plan so that the $1 million would represent a temporary book-tax difference, while the other would generate a permanent difference. In general, which plan would the Bryden CFO prefer? A stock analyst reviewing the Bryden valuation?

The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.

A corporation's taxable income almost never is the same as its GAAP financial accounting income. Explain why this occurs. Use the terms permanent and temporary book-tax differences in you answer. Give at least two examples of each type of book-tax difference.

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 net deferred tax asset or net deferred tax liability at year end.

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