Exam 19: Accounting for Income Taxes

Lehman Corporation purchased a machine on January 2, 2013, for $3,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Lehman's balance sheet at December 31, 2014 be

Didde Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, 2015: Didde's effective income tax rate is 34% for 2015. What amount should Didde report in its 2015 income statement as the current provision for income taxes?

22 Taxable income of a corporation differs from pretax financial income because of

On January 1, 2015, Gore, Inc. purchased a machine for $1,350,000 which will be depreciated $135,000 per year for financial statement reporting purposes. For income tax reporting, Gore elected to expense $150,000 and to use straight-line depreciation which will allow a cost recovery deduction of $120,000 for 2015. Assume a present and future enacted income tax rate of 30%. What amount should be added to Gore's deferred income tax liability for this temporary difference at December 31, 2015?

Use the following information for questions 58 through 60. Hopkins Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: The estimated litigation expense of $2,000,000 will be deductible in 2015 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years. -The deferred tax asset to be recognized is

Use the following information for questions 73 and 74. Kraft Company made the following journal entry in late 2014 for rent on property it leases to Danford Corporation. The payment represents rent for the years 2015 and 2016, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $184,000 at the end of 2014, and its tax rate is 35%. -What amount of income tax expense should Kraft Company report at the end of 2014?

Watson Corporation prepared the following reconciliation for its first year of operations: The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2015 is 28%. What amount should be reported in its 2015 income statement as the current portion of its provision for income taxes?

Use the following information for questions 76-78. At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: -Which of the following is required to adjust Elephant, Inc.'s deferred tax asset to its correct balance at December 31, 2015?

Pretax financial income is the amount used to compute income taxes payable.

Eckert Corporation's partial income statement after its first year of operations is as follows: Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $2,400,000. No other differences existed between book income and taxable income except for the amount of depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year?

In its 2014 income statement, Cohen Corp. reported depreciation of $1,850,000 and interest revenue on municipal obligations of $350,000. Cohen reported depreciation of $2,750,000 on its 2014 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2014, 30% for 2015, and 25% for 2016 and 2017. What amount should be included in the deferred income tax liability in Hertz's December 31, 2014 balance sheet?

Use the following information for questions 70 through 72. Lyons Company deducts insurance expense of $126,000 for tax purposes in 2014, but the expense is not yet recognized for accounting purposes. In 2015, 2016, and 2017, no insurance expense will be deducted for tax purposes, but $42,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $108,000 at the end of 2014. There were no deferred taxes at the beginning of 2014. -What is the amount of the deferred tax liability at the end of 2014?

The following information is available for the first three years of operations for Cooper Company: 3. On January 2, 2015, $300,000 was collected in advance for rental of a building for a three-year period. The entire $300,000 was reported as taxable income in 2015, but $200,000 of the $300,000 was reported as unearned revenue at December 31, 2015 for book purposes."4. The enacted tax rates are 40% for all years. Instructions (a) Prepare a schedule comparing depreciation for financial reporting and tax purposes. (b) Determine the deferred tax (asset) or liability at the end of 2014. (c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2015.(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2015.(e) Compute the net deferred tax expense (benefit) for 2015.(f) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2015."

The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2014, its first year of operations. The enacted income tax rate is 30% for all years. 1. Excess tax depreciation will reverse equally over a four-year period, 2015-2018.2. It is estimated that the litigation liability will be paid in 2018.3. Rent revenue will be recognized during the last year of the lease, 2018."4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2018. Instructions (a) Prepare a schedule of future taxable and (deductible) amounts. (b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2014. (c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).(d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2014."

Khan, Inc. reports a taxable and financial loss of $1,950,000 for 2015. Its pretax financial income for the last two years was as follows: The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2015, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is

At December 31, 2014 Raymond Corporation reported a deferred tax liability of $180,000 which was attributable to a taxable type temporary difference of $600,000. The temporary difference is scheduled to reverse in 2018. During 2015, a new tax law increased the corporate tax rate from 30% to 40%. Raymond should record this change by debiting

Under IFRS an affirmative judgment approach is used for recognizing deferred tax assets up to the amount that is probable to be realized.

The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

Duncan Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Profits of $600,000 recognized for books in 2014 will be collected in the following years: The enacted tax rates are: 40% for 2014, 35% for 2015, and 30% for 2016 and 2017. Taxable income is expected in all future years. What amount should be included in the December 31, 2014, balance sheet for the deferred tax liability related to the above temporary difference?

Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.