Exam 14: Taxes on the Financial Statements

South, Inc., earns book net income before tax of $400,000 in year 1. It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000. At the end of year 1, South's deferred tax liability account balance is $10,500. 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 21% in both years, what is South's current income tax expense reported on its GAAP financial statements for year 2?

Which of the following items is not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return if a proper election is made.

At the beginning of the year, Schrader, Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000. At the end of the year, the balance in the deferred tax asset account has not changed, but Schrader's auditors want to record a $90,000 valuation allowance against this amount, because of a persistent downturn in Schrader's profitability. Provide the journal entry to record the valuation allowance.

Ursula, Inc. is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation; 100% of Paris, a foreign corporation and 45% of Iowa, Inc., a domestic corporation. a. Which entities' incomes are included in Ursula's combined GAAP financial statements? b. How would your answer change if Ursula instead owned 15% of Iowa?

Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 12% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income is included in Create's income statement for current-year financial reporting purposes?

Gravel, Inc., earns book net income before tax of $600,000. Gravel puts into service a depreciable asset this year, and its 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 21%, what is Gravel's current income tax expense reported on its GAAP financial statements?

Qute, Inc., earns book net income before tax of $500,000. In computing its book income, Qute deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Qute records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21% and no valuation allowance is required, what is Qute's total income tax expense reported on its GAAP financial statements?

In general, the purpose of ASC 740 is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments for the current year and all future years.

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

If a corporation has no operations outside the United States, its GAAP book and taxable income are identical.