Exam 17: Accounting for Income Taxes

A company's effective tax rate can best be described as:

ASC 740 permits a corporation to net its current and long-term deferred tax liabilities.

Gull Corporation reported pretax book income of $2,000,000. Included in the computation were favorable temporary differences of $300,000, unfavorable temporary differences of $200,000, and favorable permanent differences of $50,000. Assuming a tax rate of 34%, compute Gull's current income tax expense or benefit.

Once determined, an unrecognized tax benefit under ASC 740 is not readjusted for subsequent events.

Frost Corporation reported pretax book income of $3,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $350,000, and unfavorable permanent differences of $50,000. Using a tax rate of 34%, compute Frost's deferred income tax expense or benefit.

A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet.

Izzo 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 domestic manufacturing deduction. Izzo Company's applicable tax rate is 34%. a. Compute Izzo Company's current income tax expense. b. Compute Izzo Company's deferred income tax expense or benefit. c. Compute Izzo Company's effective tax rate. d. Provide a reconciliation of Izzo Company's effective tax rate with its hypothetical tax rate of 34%.

Weber Corporation reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $100,000, unfavorable temporary differences of $300,000, and unfavorable permanent differences of $200,000. Compute the Company's book equivalent of taxable income. Use this number to compute the Company's total income tax provision or benefit, assuming a tax rate of 34%.

Which of the following statements best describes a valuation allowance as it relates to accounting for income taxes?

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. Using a tax rate of 34%, compute Cardinal's current income tax expense or benefit.

Whitman Corporation reported pretax book income of $400,000 in 2014. Book depreciation exceeded tax depreciation by $100,000. In addition, the Company accrued vacation pay of $50,000 that was not deductible until paid in 2015. Whitman has a net operating loss carryforward of $200,000 from 2013. Assuming a tax rate of 34%, compute the Company's deferred income tax expense or benefit for 2014.

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

Which of the following book-tax basis differences results in a deductible temporary difference?

Morgan Corporation determined that $2,000,000 of its domestic production activities deduction on its current year tax return was uncertain, but that it was more likely than not to be sustained on audit. Management made the following assessment of the company's potential tax benefit from the deduction and its probability of occurring. Potential Estimated Benefit (000s) \ 680,000 340,000 0 Individual Probability of Occurring (\%) 20 25 30 15 Cumulative Probability of Occurring 20 55 85 100

Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable temporary difference of $200,000. 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. During the year, the company's tax rate decreased from 34% to 30%. Lynch's deferred income tax expense or benefit for the current year would be:

In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet.

Which of the following items is not a permanent book/tax difference?

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.

Oriole Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $1,200,000. The unfavorable book-tax difference of $200,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $300,000 due to an increase in the reserve for bad debts, and a $100,000 unfavorable permanent difference from the disallowance of compensation expense related to the exercise of incentive stock options. Oriole Company's applicable tax rate is 34%. a. Compute Oriole Company's current income tax expense. b. Compute Oriole Company's deferred income tax expense or benefit. c. Compute Oriole Company's effective tax rate. d. Provide a reconciliation of Oriole Company's effective tax rate with its hypothetical tax rate of 34%.

MAC, Inc. completed its first year of operations with a pretax loss of $300,000. The tax return showed a net operating loss of $500,000, which MAC will carry forward. The $200,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming a tax rate of 34%, prepare the journal entries to record the deferred tax provision and the valuation allowance.