Exam 17: Accounting for Income Taxes

Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded bookdepreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Using a tax rate of 34%, compute Sparrow's current income tax expense or benefit.

ASC 740 is the sole source of rules related to accounting for income taxes.

Farm Corporation reported pretax book loss of $500,000 in 2017. Tax depreciation exceeded book depreciation by $100,000. In addition, Farm received prepaid income of $50,000, which wasincluded on its tax return but was not included in the book loss. Farm had $0 taxable income in2016 and 2015. Assuming a tax rate of 34%, compute the Company's income tax expense or benefit for 2017.

Tax-exempt interest from municipal bonds is an example of a permanent book to taxdifference.

A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet.

A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.

ASC 740 deals with accounting for uncertain tax positions.

Entities no longer have to classify deferred tax assets and liabilities as current or long-term on the balance sheet.

Which of the following statements is true with respect to a company's effective tax rate reconciliation?

Morgan Corporation determined that $2,000,000 of its domestic production activities deduction 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 deduction and its probability ofoccurring. Under ASC 740, what amount of the tax benefit related to the domestic production activities deduction canMorgan recognize in calculating its income tax provision in the current year?

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 depreciationexceeded 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:

Which of the following temporary differences creates a deferred tax asset in the year in which it originates?

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 ofoccurring. 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?

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

Potter, Inc. reported pretax book income of $5,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $300,000. Potter sold a fixed asset and reported book gain of $60,000 and tax gain of $80,000. Finally, thecompany received $50,000 of tax-exempt municipal bond interest. Using a tax rate of 34%, computePotter's deferred income tax expense or benefit.

A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future.

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

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

Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of$20,000, and favorable permanent differences of $40,000. Book equivalent of taxable income is:

Identify the following items as creating a temporary difference, permanent difference, or no difference.