Exam 14: Taxes on the Financial Statements

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?

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

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. Provide the journal entry to record this change in the valuation allowance.

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.

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. It's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

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 is 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?

JiangCo constructs the following table in determining how to apply ASC 740-10 to its filing position for a transfer pricing issue. Its book-tax provision for the year, including $3 million for the uncertain transfer pricing issue, is $10 million. Resulting Estimated Tax Benefit Probability of Agreement between JiangCo and IRS Cumulative Probability of Agreement \3 million 10\% 10\% \2 million 35\% 45\% \1 .6 million 40\% 85\% \1 .1 million 15\% 100\% Under ASC 740-10, JiangCo's book income tax expense for this item is:

Cold, Inc., reported a $100,000 total tax expense for financial statement purposes in year 1. This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000. The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000. In year 2, Cold reports $600,000 in book net income before tax. Cold records no other permanent or temporary book-tax differences. At the end of year 2, Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero. What is Cold's total tax expense 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.

The release of a valuation allowance may relate to a tax planning strategy adopted by the taxpayer that will produce taxable income in the future.

Van Dyke, Inc., hopes to report a total book-tax expense of $150,000 in the current year. This amount consists of $200,000 in current tax expense and a $50,000 tax benefit related to the expected future use of an NOL by Van Dyke. If the auditors determine that a valuation allowance of $20,000 must be placed against Van Dyke's deferred tax Assets, what is Van Dyke's total book-tax expense?

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

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

Jacobsen Corporation has determined the appropriate changes to its deferred tax accounts. Its auditor now is discussing whether to place a valuation allowance against the deferred tax asset on the balance sheet. List some of the factors that the Jacobsen auditor will consider in this regard.

Healy, Inc., reports an effective tax rate in its income tax footnote of 6%. The only reconciling item with regard to the hypothetical tax at 21% is a valuation allowance reversal of negative 15%. Which of the following statements is true concerning comparing Healy's effective tax rate with its competitors, all of whom have an effective tax rate between 20 and 24%?

Permanent differences include items that appear in the Federal income tax return as income or deduction and in the GAAP financial statements as revenue or expense but in different reporting periods.

Book-tax differences can be explained in part by examining the objectives underlying financial accounting and taxable income computations. Evaluate this statement.

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

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

A chief financial officer CFO) probably prefers a tax planning strategy that produces a temporary book-tax savings difference to one that produces a permanent difference.