Exam 18: Accounting for Income Taxes

Temporary differences cause a company's effective tax rate to be different from the enacted tax rate.

On January 1, 2016, Bedrock Company began recognizing revenues from all sales under the accrual method for financial reporting purposes and under the installment sales method for income tax purposes. Bedrock reported the following gross margin on sales for 2016 and 2017: The enacted tax rate for both 2016 and 2017 was 30%. Assuming there are no other temporary differences, 2017 what is the amount of deferred tax liability that Bedrock should report on its December 31, 2017 balance sheet?

A deferred tax asset would result if

Differences between pretax financial income and taxable income in an accounting period that will not reverse in a later accounting period are called

In 2016, its first year of operations, Wilber Company reported pretax accounting income of $60,000. Included in the $60,000 was an expense for accrued, unpaid warranty costs of $8,000, which are not deductible until paid for income tax purposes. Wilber's income tax rate was 20%. The entry to record the income tax expense would include a

Rice, Inc. began operations on January 1, 2016. Depreciation temporary differences were the only differences between pretax financial income loss) and taxable income loss) in any year. The income tax rate was 35% in each year and no changes in income tax rates were expected. Pretax financial income loss) and the temporary differences due to depreciation were as follows: Required: Prepare the income tax journal entry for Rice, Inc. for December 31, 2019? assuming no valuation allowance is required for Rice's deferred tax assets.

Identify the three essential characteristics of an asset and explain how deferred tax assets meet these characteristics.

During its first year of operations, 2016, the Cocoa Company reported both a pretax financial and a taxable loss of $300,000. The income tax rate is 30% for the current and future years. Due to a sufficient backlog of sales orders, Cocoa did not establish a valuation allowance to reduce the $90,000 deferred tax asset. However, early in 2017, one major customer, representing 60% of the 2017 year-end sales backlog, went bankrupt. Cocoa now believes that it is more likely than not that 75% of the deferred tax asset will not be realized. The entry to record the valuation allowance would be

In 2016, the Puerto Rios Company received insurance proceeds of $300,000 payable upon the death of its previous top executive officer. For financial reporting purposes, Puerto Rios included the $300,000 in pretax accounting income. The life insurance proceeds are exempt from income taxes. Assuming an income tax rate of 35%, what should Puerto Rios report for this event as deferred income taxes in the 2016 income statement of ?

An operating loss carryforward occurs when

All of the following involve a temporary difference for purposes of income tax allocation except

Permanent differences arise due to timing differences between the corporation's pretax financial income and taxable income.

The value of deferred tax assets and liabilities should be measured using the enacted tax rates that will be in existence when the temporary differences reverse.

Thorn Corporation has deductible and taxable temporary differences. At the beginning of 2016, its deferred tax asset was $12,000, and its deferred tax liability was $17,500. The company expects its future deductible amounts to be "deductible" in 2017 and its future taxable amount to be "taxable" in 2018. In 2015, Congress enacted revised tax rates for future years as follows: 2016, 30%, 2017, 32%, and 2018, 35%. At the end of 2016 Thorn had income taxes payable of $23,500, and increase in deferred tax liability of $3,000, and an ending balance in its deferred tax asset of $13,300. Required: Assist Thorn in completing the schedule by filling in the blanks for items related to its income taxes for 2016. Show your computation.

Describe the process for determining deferred tax liability when future tax rates are different than current tax rates,

James Company reports the following information related to their deferred tax items at the end of 2017: Required: Show how the information would be reported on James's December 31, 2017, balance sheet.

Bourne Company received rent in advance of $9,000 on December 31, 2016, which was taxable when received for income tax purposes. The company's effective tax rate was 30%, and this was the only temporary difference. Which of the following should be reported on the December 31, 2016 balance sheet?

Beare Company claims a $2,000,000 R&D tax credit. These credits are often challenged by the IRS. Based on analysis of probability distributions of possible outcomes, Beare attorneys determine they can recognize $1,800,000 as a current tax benefit. This means that as a result of claiming this tax credit, Beare Company will

An operating loss must be carried back two years, starting with the earliest of the two years, before it can be carried forward.

During its first year of operations ending on December 31, 2016, the Dakota Company reported pretax accounting income of $600,000. The only difference between taxable income and accounting income was $80,000 of accrued warranty costs. These warranty costs are expected to be paid as follows: Assuming an income tax rate of 30% in 2016, what amount of income tax expense should Dakota report on its 2016 income statement?