Exam 17: Accounting for Income Taxes

Which of the following temporary differences creates a deferred tax asset in the year in which it originates?

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

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%.

Identify the following items as creating a temporary difference, permanent difference, or no difference.

Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Using a tax rate of 34%, compute Sparrow's current income tax expense or benefit.

Temporary differences that are cumulatively "favorable" are defined as taxable temporary differences.

Purple Rose Corporation reported pretax book income of $500,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the company received $250,000 of tax-exempt life insurance proceeds. The prior year tax return showed taxable income of $100,000. Using a tax rate of 34%, compute Purple Rose's current income tax expense or benefit.

Which of the following statements best describes the ASC 740 process for evaluating a company's uncertain tax positions?

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

Tuna Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Tuna subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Book equivalent of taxable income is:

Angel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Angel subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Using a tax rate of 34%, Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

Marlin Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Marlin subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Using a tax rate of 34%, Marlin's current income tax expense or benefit would be:

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:

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

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

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?

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

The focus of ASC 740 is the income statement.

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.

Temporary differences create either a deferred tax asset or a deferred tax liability.