Exam 6: Accounting for Income Taxes

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?

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

Lafayette, Incorporated, completed its first year of operations with a pretax loss of $808,000. The tax return showed a net operating loss of $766,000. The $42,000 book-tax difference results from a disallowed deduction for business-related meals. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Prepare the journal entries to record the deferred tax provision and the valuation allowance.

Green Corporation reported pretax book income of $1,024,000. During the current year, the net reserve for warranties increased by $51,200. In addition, tax depreciation exceeded book depreciation by $106,000. Finally, Green subtracted a dividends received deduction of $25,600 in computing its current-year taxable income. Green's cash tax rate is:

Which of the following groups does not issue rules that apply to accounting for income taxes?

Which of the following items is not a temporary difference?

Potter, Incorporated 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, the company received $50,000 of tax-exempt municipal bond interest. Compute Potter's deferred income tax expense or benefit.

Brown Corporation reports $100,000 of gain from the sale of land on its income statement. For tax purposes, Brown uses the installment method and reports gain of $10,000. The $90,000 difference in the gain reported is a deductible temporary difference.

Potential interest and penalties that would be assessed on a disallowed unrecognized tax benefit must be recorded in a company's income tax expense under ASC 740.

Which of the following items is not considered evidence in determining if a valuation allowance is necessary?

As part of its uncertain tax position assessment, Madison Corporation records interest and penalties related to its unrecognized tax benefits of $1,000,000. Which of the following statements about recording this amount is most correct?

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:

Which of the following items is not a reconciling item in the income tax footnote?

Price Corporation reported pretax book income of $600,000. Tax depreciation exceeded book depreciation by $100,000. In addition, the reserve for warranties increased by $40,000. Price had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000. At the beginning of the year, Congress reduced the corporate tax rate from 34 percent to 21 percent. Compute the company's current and deferred income tax expense or benefit.

Temporary differences that are cumulatively "favorable" are referred to as taxable temporary differences.

Which of the following temporary differences creates a deferred tax liability?

Which of the following statements about ASC 740 as it relates to uncertain tax positions is true?

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

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

Lafayette, Incorporated, completed its first year of operations with a pretax loss of $800,000. The tax return showed a net operating loss of $750,000. The $50,000 book-tax difference results from a disallowed deduction forbusiness-related meals. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Prepare the journal entries to record the deferred tax provision and the valuation allowance.