Exam 17: Accounting for Income Taxes

Manchester Corporation recorded the following deferred tax assets and liabilities: What will be the balances in the deferred tax asset and deferred tax liability accounts on Manchester Corporation's balance sheet?

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Question 1

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Net deferred tax assets of ${{[a(1)]:#,###}} and net deferred tax liabilities of $({{[a(6)]:#,###}}). ASC 740 allows a company to net deferred tax assets and liabilities if they arise in the same tax jurisdiction. Moody nets the deferred tax assets and liabilities related to Canadian operations to have net deferred tax liabilities of $({{[a(6)]:#,###}}). The net deferred assets of ${{[a(5)]:#,###}} related to U.S. operations cannot be netted against the deferred tax liabilities from other jurisdictions.

B-Line Company reported pretax net income from continuing operations of $1,016,000 and taxable income of $814,400. The favorable book-tax difference of $201,600 was due to a $101,600 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $51,600 due to accrued vacation pay, and a $151,600 favorable permanent difference from the dividends received deduction. a. Compute B-Line's current income tax expense. b. Compute B-Line's deferred income tax expense or benefit. c. Compute B-Line's effective tax rate. d. Provide a reconciliation of B-Line's effective tax rate with its hypothetical tax rate of 21 percent.

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Question 2

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$Total income tax provision = ${{[a(8)]:#,###}} + ${{[a(10)]:#,###}} = ${{[a(11)]:#,###}} Effective tax rate = ${{[a(11)]:#,###}} / ${{[a(1)]:#,###}} ={{[a(14)]:#.##}}% *${{[a(1)]:#,###}} × 21% ^$({{[a(6)]:#,###}})× 21% #${{[a(13)]:#,###}} / ${{[a(1)]:#,###}}$ $Total income tax provision = ${{[a(8)]:#,###}} + ${{[a(10)]:#,###}} = ${{[a(11)]:#,###}} Effective tax rate = ${{[a(11)]:#,###}} / ${{[a(1)]:#,###}} ={{[a(14)]:#.##}}% *${{[a(1)]:#,###}} × 21% ^$({{[a(6)]:#,###}})× 21% #${{[a(13)]:#,###}} / ${{[a(1)]:#,###}}$ Total income tax provision = ${{[a(8)]:#,###}} + ${{[a(10)]:#,###}} = ${{[a(11)]:#,###}}
Effective tax rate = ${{[a(11)]:#,###}} / ${{[a(1)]:#,###}} ={{[a(14)]:#.##}}%
$Total income tax provision = ${{[a(8)]:#,###}} + ${{[a(10)]:#,###}} = ${{[a(11)]:#,###}} Effective tax rate = ${{[a(11)]:#,###}} / ${{[a(1)]:#,###}} ={{[a(14)]:#.##}}% *${{[a(1)]:#,###}} × 21% ^$({{[a(6)]:#,###}})× 21% #${{[a(13)]:#,###}} / ${{[a(1)]:#,###}}$ *${{[a(1)]:#,###}} × 21%
^$({{[a(6)]:#,###}})× 21%
$Total income tax provision = ${{[a(8)]:#,###}} + ${{[a(10)]:#,###}} = ${{[a(11)]:#,###}} Effective tax rate = ${{[a(11)]:#,###}} / ${{[a(1)]:#,###}} ={{[a(14)]:#.##}}% *${{[a(1)]:#,###}} × 21% ^$({{[a(6)]:#,###}})× 21% #${{[a(13)]:#,###}} / ${{[a(1)]:#,###}}$ ^#${{[a(13)]:#,###}} / ${{[a(1)]:#,###}}

Weaver Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000 (taxed at 34 percent). During the year, Weaver reported pretax book income of $400,000. Included in the computation were unfavorable temporary differences of $50,000 and favorable temporary differences of $20,000. At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Weaver's deferred income tax expense or benefit for the current year would be:

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Question 3

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Which of the following best describes the focus of ASC 740?

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Question 4

Gull Corporation reported pretax book income of $2,004,000. Included in the computation were favorable temporary differences of $301,200, unfavorable temporary differences of $200,800, and favorable permanent differences of $50,400. Compute Gull's current income tax expense or benefit.

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Question 5

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized.

(True/False)

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Question 6

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

(True/False)

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Question 7

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

(True/False)

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Question 8

A cumulative financial accounting (book)loss over three years (36 consecutive months)likely would be considered significant negative evidence in a valuation allowance analysis.

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Question 9

Farm Corporation reported pretax book loss of $500,000. Tax depreciation exceeded book depreciation by $100,000. In addition, Farm received prepaid income of $50,000, which was included on its tax return but was not included in the book loss. Compute the company's income tax expense or benefit.

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Question 10

The tax effects of permanent differences generally are reported in a company's computation of its effective tax rate.

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Question 11

Heron Corporation reported pretax book income of $4,000,000. Included in the computation were favorable temporary differences of $500,000, unfavorable temporary differences of $700,000, and unfavorable permanent differences of $200,000. Compute Heron's current income tax expense or benefit.

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Question 12

Cardinal Corporation reported pretax book income of $3,000,000. During the current year, the reserve for bad debts increased by $200,000. In addition, book depreciation exceeded tax depreciation by $100,000. Cardinal sold a fixed asset and reported a book gain of $60,000 and a tax gain of $80,000. Finally, Cardinal deducted $50,000 of domestic production activities deduction on its tax return. Compute Cardinal's current income tax expense or benefit.

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Question 13

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 depreciation exceeded 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:

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Question 14

Whitman Corporation reported pretax book income of $406,000. Book depreciation exceeded tax depreciation by $100,600. In addition, the company accrued vacation pay of $53,000 that was not deductible until paid in the next year. Whitman has a net operating loss carryforward of $200,600 from the prior year. Compute the company's deferred income tax expense or benefit for the current year.

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Question 15

Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable deductible difference of $200,000 (taxed at 34 percent). During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000. At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Lynch's deferred income tax expense or benefit for the current year would be:

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Question 16

Tuna Corporation reported pretax book income of $1,006,000. During the current year, the net reserve for warranties increased by $28,000. In addition, book depreciation exceeded tax depreciation by $106,000. Finally, Tuna subtracted a dividends received deduction of $18,000 in computing its current-year taxable income. Book equivalent of taxable income is:

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Question 17

Knollcrest Corporation has a cumulative book loss over the past 36 months. Which of the following statements best describes how this fact enters into the valuation allowance analysis?

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Question 18

B-Line Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $800,000. The favorable book-tax difference of $200,000 was due to a $100,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $50,000 due to accrued vacation pay, and a $150,000 favorable permanent difference from the dividends received deduction. a. Compute B-Line's current income tax expense. b. Compute B-Line's deferred income tax expense or benefit. c. Compute B-Line's effective tax rate. d. Provide a reconciliation of B-Line's effective tax rate with its hypothetical tax rate of 21 percent.

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Question 19

TarHeel Corporation reported pretax book income of $1,020,000. During the current year, the net reserve for warranties increased by $101,000. In addition, tax depreciation exceeded book depreciation by $205,000. Finally, TarHeel subtracted a dividends received deduction of $54,000 in computing its current-year taxable income. TarHeel's accounting effective tax rate is:

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Question 20

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Manchester Corporation recorded the following deferred tax assets and liabilities: What will be the balances in the deferred tax asset and deferred tax liability accounts on Manchester Corporation's balance sheet?

Which of the following best describes the focus of ASC 740?

Gull Corporation reported pretax book income of $2,004,000. Included in the computation were favorable temporary differences of $301,200, unfavorable temporary differences of $200,800, and favorable permanent differences of $50,400. Compute Gull's current income tax expense or benefit.

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized.

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

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

A cumulative financial accounting (book)loss over three years (36 consecutive months)likely would be considered significant negative evidence in a valuation allowance analysis.

Farm Corporation reported pretax book loss of $500,000. Tax depreciation exceeded book depreciation by $100,000. In addition, Farm received prepaid income of $50,000, which was included on its tax return but was not included in the book loss. Compute the company's income tax expense or benefit.

The tax effects of permanent differences generally are reported in a company's computation of its effective tax rate.

Heron Corporation reported pretax book income of $4,000,000. Included in the computation were favorable temporary differences of $500,000, unfavorable temporary differences of $700,000, and unfavorable permanent differences of $200,000. Compute Heron's current income tax expense or benefit.

Knollcrest Corporation has a cumulative book loss over the past 36 months. Which of the following statements best describes how this fact enters into the valuation allowance analysis?

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