Exam 6: Accounting for Income Taxes

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. Under ASC 740, what amount of the tax benefit related to the domestic production activities deduction can Morgan recognize in calculating its income tax provision in the current year?

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 is true?

Irish Corporation reported pretax book income of $1,000,000 in 2016. Included in the computation were favorable temporary differences of $300,000, unfavorable temporary differences of $100,000, and favorable permanent differences of $200,000. Compute Irish's book equivalent of taxable income. Use this number to compute the company's total income tax provision or benefit for 2016, assuming a tax rate of 34%.

The focus of ASC 740 is the income statement. The focus of ASC 740 is the balance sheet.

A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet. Valuation allowances relate to the likelihood of realization of a deferred tax asset.

A valuation allowance can reduce both a deferred tax asset and a deferred tax liability. Only deferred tax assets require the determination of whether a valuation allowance is needed.

The classification of a deferred tax asset as current or long-term usually depends on the balance sheet classification of the asset or liability to which it relates.

ASC 740 permits a corporation to net its current and long-term deferred tax liabilities. Only like-holding period deferred tax accounts from the same jurisdiction can be netted.

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.

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?

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

Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference in the allowance for bad debts account. This basis difference is characterized as:

Kedzie Company determined that the book basis of its liability for "other post-retirement benefits" (OPRB) exceeded the tax basis of this account by $10,000,000. This basis difference is characterized as:

Which of the following items would likely not be included in the computation of a company's structural effective tax rate?

ASC 740 applies to accounting for state and local and international income taxes as well as federal income taxes.

The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements.

Which of the following statements best describes the objective(s) of ASC 740?

Bruin Company received a $100,000 insurance payment on the death of its company president. The company annually paid $1,000 of non-deductible insurance premiums on the policy. Bruin reported the insurance receipt as income and deducted the premium payments on its books. For ASC 740 purposes, the income and deduction are characterized as:

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 carryforward. 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.