Exam 17: Accounting for Income Taxes

Tax-exempt interest from municipal bonds is an example of a permanent difference.

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

Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Book equivalent of taxable income is:

Which of the following statements best describes the disclosure of a company's deferred tax assets and liabilities?

Which of the following items does not result in a permanent difference?

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

Identify the following items as creating a temporary difference, permanent difference, or no difference. Item Temporary Difference Permanent Difference No Difference Reserve for bad debts Accrued other post-employment benefits Domestic production activities deduction Non-deductible fines and penalties Interest from municipal bonds Net operating loss carryover Stock option expense under ASC 718 Deferred compensation

The focus of ASC 740 is the income statement.

Robinson 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. During the year, Robinson reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. During the year, the company's tax rate increased from 34% to 35%. Robinson's deferred income tax expense or benefit for the current year would be:

Smith Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Using a tax rate of 34%, Smith's deferred income tax expense or benefit would be:

The "current income tax expense or benefit" always represents the taxes paid or refunded in the current year.

Acai Corporation determined that $5,000,000 of its R&D credit on its current year tax return was uncertain. Acai determined that there was a 40 percent chance of the credit being sustained on audit. Management made the following assessment of the company's potential tax benefit from the R&D credit and its probability of occurring. Potential Estimated Benefit (000s) \ 5,000,000 2,000,000 0 Individual Probability of Occurring (\%) 05 15 35 25 Cumulative Probability of Occurring 05 20 55 100 Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai recognize in calculating its income tax provision in the current year?

Moody Corporation recorded the following deferred tax assets and liabilities: $\begin{array} { l r } \text { Current deferred tax assets }&\mathbf { \$ 5 0 0 , 0 0 0 }\\\text { Current deferred tax liabilities } & \mathbf { 6 0 0 , 0 0 0 ) } \\ \text { Non-current deferred tax assets } & 8 0 0 , 0 0 0 \\ \text { Non-current deferred tax liabilities } & ( \underline { \mathbf { 2 } , 000,000 } ) \\ \text { Net deferred tax liabilities } & \mathbf { \$( \underline { 1 , 3 0 0 , 0 0 0 } ) } \end{array}$ All of the deferred tax accounts relate to temporary differences that result from the company's U.S. operations. Moody wants to minimize the number of deferred tax accounts it reports on the balance sheet. What is the minimum number of deferred tax accounts Moody can report on its balance sheet and what are the names and dollar amounts in each account?

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

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

Packard Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $10,000, unfavorable temporary differences of $100,000, and unfavorable permanent differences of $90,000. Assuming a tax rate of 34%, the Corporation's current income tax expense or benefit would be:

ASC 740 deals with accounting for uncertain tax positions.

Potter, Inc. 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. Using a tax rate of 34%, compute Potter's deferred income tax expense or benefit.

Which of the following statements best describes the ASC 740 rules related to the disclosure of the components of deferred tax assets and liabilities in the company's income tax note?

ASC 740 governs how a company accounts for all taxes it incurs.