Exam 14: Taxes on the Financial Statements

Purple,Inc. ,a domestic corporation,owns 80% of Blue,Ltd. ,a foreign corporation and Yellow,Inc. ,a domestic corporation.Purple also owns 50% of Green,Inc. ,a domestic corporation.Purple receives no distributions from any of these corporations.Which of these entities' net income are included in Purple's Federal tax return for the current year assuming Purple elects to include all eligible entities in its consolidated Federal income tax return?

The taxpayer should use ASC 740-30 (APB 23)income deferral only when the tax rates that apply to the subsidiary are less than those of the applicable U.S.income tax rate.

Black,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance.

The major purpose of ASC 740 (SFAS 109)is to match current-year GAAP income with its corresponding tax expenses.

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23)benefits were previously adopted will decrease a corporation's current year effective tax rate.

Black,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance.

A corporation's taxable income almost never is the same as its GAAP financial accounting income.Explain why this occurs.Use the terms permanent and temporary book-tax differences in you answer.Give at least two examples of each type of book-tax difference.

Amelia,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance.

After applying the balance sheet method to determine the GAAP income tax expense of Cutter Inc. ,the following account balances are found.Determine the balance sheet presentation of these amounts.Hint: Which of the accounts should you combine for the final balance sheet disclosure?

A deferred tax asset is the current tax benefit (savings)associated with income or expense to be reported in future year GAAP financial statements.

The current tax expense reported on the GAAP financial statement generally represents the taxes actually payable to domestic or foreign governmental authorities.

Rochelle,Inc. ,reported the following results for the current year. Determine Rochelle's taxable income for the current year.Identify any temporary or permanent book-tax differences.

A deferred tax asset is the expected future tax benefit (savings)associated with income reported in the current year GAAP financial statements.

ASC 740 (FIN 48)is the GAAP equivalent of the Form 1120 Schedule M-3.

One can describe the benefits of ASC 740-30 (APB 23)as "all or nothing." If it is elected,APB 23 applies to the earnings from all foreign subsidiaries,in the current year and thereafter.

Hot,Inc.'s primary competitor is Cold,Inc.When comparing relative deferred tax asset and liability accounts with Cold,which of the following benchmarking activities should Hot undertake?

Black,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance.

Beach,Inc. ,a domestic corporation,owns 100% of Mountain,Ltd. ,a manufacturing facility in Ireland.Mountain has no operations or activities in the United States.The U.S.tax rate is 35% and the Irish tax rate is 10%.For the current year,Beach earns $500,000 in taxable income.Mountain earns $300,000 in taxable income from its operations,pays $30,000 in taxes to Ireland,and makes no distributions to Beach.What is Beach's effective tax rate for GAAP book purposes,assuming that Beach makes the permanent reinvestment assumption of ASC 740-30 (APB 23)?

Gravel,Inc. ,earns book net income before tax of $600,000.Gravel puts into service a depreciable asset this year,and 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 35%,what is Gravel's current income tax expense reported on its GAAP financial statements?

PaintCo Inc. ,a domestic corporation,owns 100% of BrushCo Ltd. ,an Irish corporation.Assume that the U.S.corporate tax rate is 35% and the Irish rate is 10%.PaintCo is permanently reinvesting BrushCo's earnings outside the United States under ASC 740-30 (APB 23).The corporations' book income,permanent and temporary book-tax differences,and current tax expense are as follows.Determine PaintCo's total tax expense reported on its financial statements,its current tax expense (benefit),and its deferred tax expense (benefit).