Quiz 17: Accounting for Income Taxes

Book income refers to the amount of income reported on a company's tax return.

Taxable income refers to the amount of income reported on a company's tax return.

The amount of income a company reports in its financial statements is known as ________. A) book income B) net operable income C) taxable income D) revenue income

The amount of income that a company reports on its tax return is known as ________. A) refundable income B) taxable income C) deductible income D) net income

Greene Co. has book income of $425,000, and a tax rate of 30%. Assuming there are no book-tax differences, what will the journal entry be to record the income tax expense? A) B) C) D)

TLR Productions has book income of $450,000, and a tax rate of 35%. Assuming there are no book-tax differences, what is TLR's income tax expense? A) $144,000 B) $157,500 C) $189,000 D) $292,500

TNT Corporation's income tax payable is $230,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's income before taxes? (Round your answer to the nearest whole dollar.) A) $69,000 B) $230,000 C) $766,667 D) $328,571

TNT Corporation's income tax payable is $240,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's net income? (Round your answer to the nearest whole dollar.) A) $72,000 B) $240,000 C) $800,000 D) $560,000

S & C Inc.'s income tax payable is $290,000 and its tax rate is 30%. Assuming no book-tax differences, what is S & C's net income? (Round your answer to the nearest whole dollar.) A) $676,667 B) $87,000 C) $377,000 D) $966,667

Betta Group's net income is $400,000 and its tax rate is 25%. Assuming no book-tax differences, what is Betta's taxes payable? (Round your answer to the nearest whole dollar.) A) $100,000 B) $133,333 C) $1,600,000 D) $533,333

Brown Inc.'s net income is $300,000 and its tax rate is 25%. Assuming no book-tax differences, what is the journal entry to record income tax expense? (Do not round intermediate calculations. Only round your final answer to the nearest whole dollar.) A) B) C) D)

The effective tax rate is the legally imposed rate in a given taxing jurisdiction.

The statutory tax rate is the legally imposed rate in a given taxing jurisdiction.

U.S. GAAP requires companies to reconcile the federal statutory income tax rate to the effective tax rate.

________ differences between book income and taxable income result in an effective tax rate that differs from the statutory tax rate. A) Temporary B) Permanent C) Short-term D) Long-term

Which of the following statements best describes the effective tax rate? A) It is the legally imposed rate in a given taxing jurisdiction. B) It can be calculated by dividing income tax expense by book income before taxes. C) It changes annually based on provisions from Congress. D) It is calculated as book income divided by taxable income.

Caesar Corporation reports municipal interest income on their financial statements. What (if any) book-tax difference will result? A) Temporary difference; book income greater than taxable income. B) Temporary difference; taxable income greater than book income. C) Permanent difference; book income greater than taxable income. D) No difference; municipal interest is taxable income.

Dante Inc. reported fines and penalties on their income statement this year. What (if any) book-tax difference will result? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income greater than taxable income. C) Permanent difference; book income less than taxable income. D) No difference; fines and penalties are tax deductible.

Olympics Inc. recorded a dividends received deduction on their tax return this year. What (if any) book-tax difference will result? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income less than taxable income. C) Permanent difference; book income greater than taxable income. D) Temporary difference; book income greater than taxable income.

Media Corporation incurred $25,000 in expenses associated with tax-exempt income this year. What (if any) book-tax difference will result? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income less than taxable income. C) Permanent difference; book income greater than taxable income. D) Temporary difference; book income greater than taxable income.

Charmed Inc.'s income before taxes is $720,000 and its tax rate is 25%. Charmed included $30,000 in non-deductible life insurance premiums in the $720,000. There are no other book-tax differences. What is the journal entry to record income tax expense? A) B) C) D)

Lyon Group's income before taxes is $420,000 and its tax rate is 40%. Lyon included $30,000 in fines and penalties in the $420,000. There are no other book-tax differences. What is income tax payable for Lyon Group? A) $168,000 B) $180,000 C) $156,000 D) $12,000

Tom-Kat Inc.'s income before taxes is $360,000 and its tax rate is 30%. Tom-Kat included $60,000 of interest from municipal bonds in the $360,000. There are no other book-tax differences. What is the journal entry to record income tax expense? A) B) C) D)

Purrfect Pet Industries' income before taxes is $810,000 and its tax rate is 50%. Purrfect Pet included $50,000 of fully deductible inter-corporate dividends received in the $810,000. There are no other book-tax differences. What is the income tax payable for Purrfect Pet? A) $405,000 B) $430,000 C) $25,000 D) $380,000

Danio Inc.'s income before taxes is $550,000 and its tax rate is 30%. Danio included $30,000 of interest from municipal bonds in the $550,000. There are no other book-tax differences. What is the effective tax rate for Danio Inc.? (Do not round intermediate calculations. Only round your final answer to the nearest percent.) A) 27% B) 28% C) 30% D) 32%

Blue Company's income before taxes is $410,000 and its tax rate is 40%. Blue included $50,000 of fines and penalties in the $410,000. There are no other book-tax differences. What is the effective tax rate for Blue Company? (Do not round intermediate calculations. Only round your final answer to the nearest percent.) A) 35% B) 40% C) 45% D) 51%

Kravitz Corporation had income before taxes of $900,000 and a tax rate of 25%. Included in the income are $70,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is the net amount of Kravitz's book-tax difference? A) Book income that is $60,000 greater than taxable income B) Book income that is $70,000 greater than taxable income C) Taxable income that is $10,000 greater than book income D) Taxable income that is $60,000 greater than book income

Kravitz Corporation had income before taxes of $900,000 and a tax rate of 45%. Included in the income are $80,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is Kravitz's taxable income? A) $910,000 B) $820,000 C) $830,000 D) $900,000

Kravitz Corporation had income before taxes of $890,000 and a tax rate of 45%. Included in the income are $40,000 in municipal bond interest and $20,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is Kravitz's effective income tax rate? (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.) A) 44% B) 46% C) 45% D) 48%

Piper Inc.'s income before taxes is $550,000 and its tax rate is 40%. Piper included $30,000 of interest from municipal bonds in the $550,000. There are no other book-tax differences. Prepare the journal entry to record income tax expense and a reconciliation of the statutory tax rate to the effective tax rate. (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.)

Gallagher Corporation's book income before taxes is $600,000 and its tax rate is 35%. Included in the income before taxes is $50,000 in fines and penalties. There are no other book-tax differences. Prepare the journal entry to record income tax expense and a reconciliation of the statutory tax rate to the effective tax rate. (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.)

Betz Corporation's income before taxes is $725,000 and its tax rate is 40%. Included in this amount is $50,000 in municipal bond interest and $15,000 in officers' life insurance. There are no other book-tax differences. Prepare the journal entry to record income tax expense and a reconciliation of the statutory tax rate to the effective tax rate. (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.)

Under U.S. GAAP, companies generally use a cash flow approach to account for temporary differences between book and tax treatment of transactions.

Under U.S. GAAP, companies generally use a balance sheet approach to account for temporary differences between book and tax treatment of transactions.

Temporary differences between the book and tax treatment of transactions create deferred tax assets or deferred tax liabilities.

A deferred tax asset represents a future reduction in income taxes payable.

Temporary differences cause the effective income tax rate to vary from the statutory rate.

A deferred tax asset exists when ________. A) the book basis of assets is greater than the tax basis of assets B) the book basis of liabilities is greater than the tax basis of liabilities C) the book basis of assets is equal to the tax basis of assets D) the book basis of liabilities is less than the tax basis of liabilities

A deferred tax liability is created when ________. A) the book basis of assets is greater than the tax basis of assets B) the book basis of liabilities is greater than the tax basis of liabilities C) the book basis of assets is equal to the tax basis of assets D) the book basis of assets is less than the tax basis of liabilities

Under U.S. GAAP, if a firm writes down inventory for obsolescence, which of the following is created? A) a deferred tax asset B) a deferred tax liability C) a book basis of assets that is greater than the tax basis D) a book basis of liabilities that is less than the tax basis

When a company depreciates a fixed asset at a faster rate for tax purposes than book purposes, this creates a ________. A) deferred tax asset B) higher tax basis than book basis of assets in the early years C) deferred tax liability D) lower tax basis than book basis of liabilities in the early years

When a company pays taxes that were previously recorded as a deferred tax liability, the temporary difference ________. A) originates B) reverses C) increases D) decreases

All of the following are examples of facts that may create temporary book-tax differences except ________. A) contingent liabilities B) depreciation C) product warranty costs D) payment of premiums for life insurance

All of the following are examples of situations that may create temporary book-tax differences except ________. A) amortization of goodwill B) writing off bad debt C) installment sales D) receipt of municipal bond interest

Greene Co. has pretax book income for the year ended December 31, 2018 in the amount of $285,000 and has a tax rate of 40%. Depreciation for tax purposes exceeded book depreciation by $13,500. What should Greene Co. record as its federal income tax liability for 2018? A) $114,000 B) $78,750 C) $108,600 D) $119,400

Greene Co. has pretax book income for the year ended December 31, 2018 in the amount of $315,000 and has a tax rate of 30%. Depreciation for tax purposes exceeded book depreciation by $10,500. What should Greene Co. record as its deferred tax liability for 2018? A) $0 B) $3,150 C) $91,350 D) $94,500

Inferno Inc. is embroiled in a lawsuit. In 2018, they recognize that a loss of $65,000 is probable. Given a tax rate of 40%, how will this be treated in the accounting records? A) deferred tax asset of $26,000 B) deferred tax liability of $26,000 C) deferred tax asset of $65,000 D) deferred tax liability of $65,000

S & C Company reported $220,000 depreciation on its 2018 tax return. However, they reported $40,000 depreciation expense on their 2018 income statement. The difference in depreciation is a temporary difference that will reverse over time. Assuming S & C's tax rate is constant at 20%, what amount should be added to the deferred income tax liability in S & C's December 31, 2018, balance sheet? A) $8,000 B) $36,000 C) $44,000 D) $52,000

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 25% for both years. 2018 information: Sales on account in the amount of $660,000 Warranty expense and associated liability in the amount of $110,000 No other expenses incurred. 2019 information: Sales on account in the amount of $205,000 Warranty repairs made in the amount of $63,000 No expenses incurred. What is MK's book income for 2018? A) $550,000 B) $660,000 C) $770,000 D) $597,000

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 30% for both years. 2018 information: Sales on account in the amount of $650,000 Warranty expense and associated liability in the amount of $105,000 No other expenses incurred. 2019 information: Sales on account in the amount of $225,000 Warranty repairs made in the amount of $68,000 No expenses incurred. What is MK's taxable income for 2018? A) $545,000 B) $650,000 C) $755,000 D) $582,000

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 20% for both years. 2018 information: Sales on account in the amount of $675,000 Warranty expense and associated liability in the amount of $145,000 No other expenses incurred. 2019 information: Sales on account in the amount of $210,000 Warranty repairs made in the amount of $69,000 No expenses incurred. What is MK's income tax expense for 2018? A) $106,000 B) $135,000 C) $164,000 D) $121,200

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 25% for both years. 2018 information: Sales on account in the amount of $675,000 Warranty expense and associated liability in the amount of $135,000 No other expenses incurred. 2019 information: Sales on account in the amount of $215,000 Warranty repairs made in the amount of $60,000 No expenses incurred. What is MK's income tax payable for 2018? A) $135,000 B) $168,750 C) $202,500 D) $153,750

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 30% for both years. 2018 information: Sales on account in the amount of $700,000 Warranty expense and associated liability in the amount of $130,000 No other expenses incurred. 2019 information: Sales on account in the amount of $230,000 Warranty repairs made in the amount of $61,000 No expenses incurred. What is the amount of MK's deferred tax asset or deferred tax liability for 2018? A) $11,700 B) $39,000 C) $91,000 D) $18,300

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $590,000. Included in this amount is $80,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $180,000 and are treated the same for book and tax purposes. What is Greenville's book basis in the installment sale receivable? A) $80,000 B) $0 C) $40,000 D) $180,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $560,000. Included in this amount is $25,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $120,000 and are treated the same for book and tax purposes. What is Greenville's tax basis in the installment sale receivable? A) $25,000 B) $0 C) $12,500 D) $120,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $580,000. Included in this amount is $60,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $100,000 and are treated the same for book and tax purposes. What is Greenville's book income? A) $420,000 B) $480,000 C) $520,000 D) $580,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $540,000. Included in this amount is $15,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. What is Greenville's taxable income? A) $385,000 B) $400,000 C) $525,000 D) $540,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $85,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $170,000 and are treated the same for book and tax purposes. Assuming a 40% tax rate, what is Greenville's income tax expense? A) $98,000 B) $132,000 C) $166,000 D) $200,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $75,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is Greenville's income tax payable? A) $99,750 B) $126,000 C) $148,750 D) $175,000

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $600,000. Included in this amount is $20,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $200,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is the amount of Greenville's deferred tax asset or liability? A) $7,000 deferred tax asset B) $7,000 deferred tax liability C) $4,000 deferred tax asset D) $4,000 deferred tax liability

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $720,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 40% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: What is Infinity's book income for year 1? A) $235,000 B) $240,000 C) $216,000 D) $360,000

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $840,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 30% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: What is Infinity's taxable income for year 1? A) $265,000 B) $270,000 C) $242,000 D) $410,000

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $840,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 20% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: What is Infinity's deferred tax asset or deferred tax liability at the end of year 1? A) $5,600 deferred tax liability B) $28,000 deferred tax liability C) $672,000 deferred tax asset D) $28,000 deferred tax asset

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $900,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 20% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: What is Infinity's deferred tax asset or deferred tax liability at the end of year 3? A) $2,760 deferred tax liability B) $38,160 deferred tax liability C) $38,160 deferred tax asset D) $2,760 deferred tax asset

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $900,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 25% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: What is Infinity's income tax expense for year 1? A) $220,000 B) $55,000 C) $47,500 D) $92,500

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $780,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 25% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: What is Infinity's income tax payable for year 1? A) $234,000 B) $65,000 C) $58,500 D) $97,500

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $600,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 20% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: What is the increase or decrease in the deferred tax liability for year 3? A) $3,040 increase B) $25,440 increase C) $14,560 decrease D) $37,600 increase

Discuss the relationship between temporary differences, and the statutory and effective tax rates.

There are questions as to whether or not deferred tax assets and liabilities should be recorded. Based on your understanding of the concepts and accounting terminology, are deferred tax assets and tax liabilities real assets and liabilities?

Gustav, Inc. uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $75,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $150,000 and are treated the same for book and tax purposes. Complete the following: a. What is the book basis of the installment sales receivable? b. What is the tax basis of the installment sales receivable? c. Assuming a 30% tax rate, compute income tax expense, the deferred tax provision, and income tax payable for 2018. d. Prepare the journal entry to record the 2018 income tax expense.

Bach. Co. presents the following information for 2018 and 2019. 2018 information: Sales on account in the amount of $645,000 Warranty expense and associated liability in the amount of $125,000 No other expenses incurred. 2019 information: Sales on account in the amount of $225,000 Warranty payments made in the amount of $65,000 No expenses incurred. Prepare the journal entries for 2018 and 2019 to record the sales, warranty, and income tax transactions, assume a 40% tax rate.

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $720,000 with no residual value expected. Infinity uses the straight-line method for financial reporting, assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The company is subject to a 40% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below: Complete the following table for Infinity Production.

IFRS uses a two-step process in recording the realizability of deferred tax assets.

Under U.S. GAAP, when a firm determines that all or a portion of a deferred tax asset is not realizable, they will use a valuation allowance to reduce the balance.

When assessing realizability of deferred tax assets, management must consider positive and negative evidence. All of the following would be considered positive evidence except ________. A) taxable income in prior carryback year(s) if carryback is permitted under the tax law B) future reversals of existing taxable temporary differences C) unsettled circumstances that could adversely affect future operations D) an excess of appreciated asset value over the tax basis of the entity's net assets

When assessing realizability of deferred tax assets, management must consider positive and negative evidence. Which of the following would be considered negative evidence? A) existing contracts or firm sales backlog B) a carryback or carryforward period that is so brief it could limit realization of tax benefits C) taxable income in prior carryback year(s) if carryback is permitted under the tax law D) a strong earnings history exclusive of the loss that created the future deductible amount

If the valuation allowance for a deferred tax asset is decreased, there is a(n) ________ to income tax expense, which is a(n) ________ to income tax benefit. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease

When defining the portion of a deferred tax asset that a firm will not realize, IFRS uses the term ________. A) likely B) possible C) more likely than not D) probable

The contra-asset to the Deferred Tax Asset account is called ________. A) Income Tax Benefit B) Valuation Allowance for Deferred Tax Asset C) Deferred Tax Liability D) Allowance for Doubtful Accounts

Violet, Inc. recorded a deferred tax asset of $43,000 due to a book-tax difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 45% of the deferred tax asset. What is the necessary journal entry to record the valuation allowance? A) B) C) D)

The Wolf Group recorded a deferred tax asset of $60,000 due to a book-tax difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 30% of the deferred tax asset. After recording the valuation allowance, Wolf's net income will ________ and assets will ________. A) increase by $18,000; decrease by $60,000 B) increase by $18,000; increase by $18,000 C) decrease by $60,000; increase by $18,000 D) decrease by $18,000; decrease by $18,000

Cougar, Inc., an IFRS reporter, estimates a deferred tax asset of $80,000 due to a book-tax difference in warranty liabilities. Management has assessed that it is probable that the firm will not realize 20% of the deferred tax asset. After recording the net deferred tax asset, Cougar's net income will ________ and assets will ________. A) increase by $16,000; increase by $16,000 B) decrease by $16,000; decrease by $16,000 C) increase by $80,000; decrease by $80,000 D) decrease by $80,000; increase by $80,000

Blue Corporation is an IFRS reporter. Blue's taxable income is $700,000 and the company estimates a deferred tax asset of $45,000 due to a book-tax difference in warranty liabilities. Management has assessed that it is probable that it will not realize 30% of the deferred tax asset. Assuming a 40% tax rate, how should the realizable deferred tax asset be recorded? A) B) C) D)

S & C Company's income before taxes is $410,000, and income tax expense is $115,000. S & C has a deferred tax asset of $100,000 and records a valuation allowance of $25,000. What is S & C's effective tax rate before and after recording the valuation allowance? (Do not round intermediate calculations. Round your final answer to the nearest whole percent.) A) 28% and 22% respectively B) 22% and 34% respectively C) 28% and 34% respectively D) There would not be a change in ETR because these are due to temporary differences.

List the four possible sources of taxable income that a company should consider when assessing the realizability of a deferred tax asset under U. S. GAAP.

The Betta Group reports taxable income in the amount of $625,000 and has a 30% tax rate. Additionally, the company estimates a deferred tax asset of $45,000 due to a book-tax difference in warranty liabilities. After reviewing all available evidence, management determines that only 60% of this amount will ultimately result in tax-deductible expenses over the warranty period. Prepare the necessary journal entries to record the tax provision and valuation allowance for Betta Group under (a) U.S. GAAP and (b) IFRS.

Lyon Ltd., a U.S. GAAP reporter, provides the following information: Sales on account $800,000 Associated warranty expense/liability $200,000 No warranty repairs made to date; Lyon cannot deduct warranty expense for tax purposes until repairs are made. Management estimates that it is more likely than not that the firm will not realize 25% of the deferred tax asset. Tax rate of 35% Prepare a simplified income statement, including the effective tax rate, both with and without the valuation allowance. Round percentages to the nearest whole number.

When a company adjusts the balance of a deferred tax account to reflect changes in the tax rate, prior-period financial statements will need to be adjusted to reflect this.

The adjustment for a change in tax rates is treated as a change in accounting estimate.

On December 31, 2018, Big Bear Corporation reports liabilities with a tax basis of $1,200,000 and a book basis of $1,700,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: Assuming a tax rate of 40% for 2018 - 2021 and a rate of 45% for 2022 - 2023, what should Big Bear report on its balance sheet on December 31, 2018? A) deferred tax liability of $200,000 B) deferred tax asset of $200,000 C) deferred tax liability of $207,900 D) deferred tax asset of $207,900

On December 31, 2018, the Magic Flute Company reports liabilities with a tax basis of $600,000 and a book basis of $400,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: Assuming a tax rate of 25% for 2018 - 2020 and a rate of 30% for 2021 - 2023, The Magic Flute Co. should report a deferred tax ________ in the amount of ________ on December 31, 2018. A) liability; $51,900 B) asset; $50,000 C) liability; $54,500 D) asset; $60,000

When a company adjusts the balance of a deferred tax account to reflect changes in their tax rate, this impacts ________. A) income tax expense B) income tax payable C) effective tax rate D) both A and C

How will a change in statutory tax rates affect prior period financial statements and current year income tax expense? A) Changes in statutory tax rates affect current year income tax expense but do not affect prior period financial statements. B) Changes in statutory tax rates affect both current year income tax expense and prior period financial statements. C) Changes in statutory tax rates do not affect current year income tax expense or prior period financial statements. D) Changes in statutory tax rates do not affect current year income tax expense but do affect prior period financial statements.

Tetra Corp. recorded book income of $215,000 in 2018. It does not have any permanent differences and the only temporary difference relates to $36,000 unearned income that it recorded for book purposes. Tetra anticipates satisfying this liability equally over the following three years. The current enacted tax rate is 36%. The enacted tax rates for the following three years are 33%, 38%, and 43%, respectively. Under U.S. GAAP, what deferred tax amount should Tetra Corp. record for this temporary difference? A) $12,840 B) $12,960 C) $13,680 D) $15,480

In 2017, Squirrel Corp. recorded book income of $165,000. It has one temporary difference which relates to a $30,000 warranty expense that it recorded for book purposes, and no permanent differences. Squirrel anticipates satisfying this liability equally over the following two years. The current enacted tax rate is 36%. The enacted tax rates for the following years are 2017: 26%, 2018: 31%, 2019: 26% and 2020: 36%, respectively. Under U.S. GAAP, what deferred tax amount should Squirrel Corp. record for this temporary difference? A) $8,550 B) $7,800 C) $9,300 D) $10,050

Piper, Inc. reported a net deferred tax asset balance of $166,650 resulting from an estimated warranty expense accrual for book purposes. The total book-tax difference related to the bases of the estimated warranty liability is $505,000. The enacted statutory tax rate related to this balance changed from 33% to 28%, effective immediately. What journal entry will Piper need to make to adjust for this change in tax rates? A) B) C) D)

Tommy Corp. reported a net deferred tax asset balance of $176,400 resulting from an estimated warranty expense accrual for book purposes. The total book-tax difference related to the bases of the estimated warranty liability is $490,000. The enacted statutory tax rate related to this balance changed from 36% to 31%, effective immediately. By what amount will the deferred asset balance change? A) increase by $33,320 B) decrease by $24,500 C) increase by $24,500 D) decrease by $33,320

In 2018 Charmed, Inc. recorded book income of $390,000. The company's only temporary difference relates to a $66,000 installment sale that it recorded for book purposes; there are no permanent differences. Charmed anticipates receiving payments equally over the following three years. The current enacted tax rate in 2018 is 40%. The substantively enacted tax rates for the following three years are 35%, 40%, and 48%, respectively. Under U.S. GAAP, what deferred tax amount should Charmed record for this temporary difference? A) $25,300 B) $27,060 C) $26,400 D) $31,680

In 2018 Charmed, Inc. recorded book income of $420,000. The company's only temporary difference relates to a $66,000 installment sale that it recorded for book purposes; there are no permanent differences. Charmed anticipates receiving payments equally over the following three years. The current enacted tax rate in 2018 is 39%. The substantively enacted tax rates for the following three years are 34%, 39%, and 47%, respectively. Under IFRS, what deferred tax amount should Charmed record for this temporary difference? A) $24,640 B) $26,400 C) $25,740 D) $31,020

Red Lantern Corp. reported a net deferred tax asset balance of $247,000 resulting from an estimated warranty expense accrual for book purposes. The enacted statutory tax rate related to this balance changed from 38% to 32%, effective immediately. Prepare the necessary journal entry to account for this change in tax rates if Red Lantern is an IFRS reporter.

Clunker Car Corporation reported a $3 million contingent liability on its 2018 financial statements from a lawsuit over faulty ignition switches. The tax rate for 2018 is 40% However the enacted tax rates for the following three years are 37%, 35%, and 33% respectively. How will the deferred tax asset be measured if the case is expected to be resolved in 2019? How will it be measured if the case is expected to be resolved in 2021? What accounts for this difference?

When a company carries forward a net operating loss (NOL), the income tax expense will be reduced in future years, but not income tax payable.

In which of the following instances would a company most likely choose the carryforward option for a net operating loss? A) The company expects lower tax rates in the future compared to the past. B) The company expects higher tax rates in the future compared to the past. C) The company expects lower earnings in the future compared to the past. D) The company expects higher losses in the future compared to the past.

If a company chooses to carryback a net operating loss (NOL), but is not able to fully offset the loss, they will ________. A) forgo the carryback option and carryforward the entire NOL B) forfeit the unused amount C) carry forward the remaining balance D) both A & C are viable options

A company may carry back a tax loss for ________ years and carry forward a tax loss for ________ years. A) 20; 2 B) 1; 15 C) 2; 20 D) 15; 1

Caesar Corporation reported income before taxes of $220,000 for the years 2016, 2017, and 2018. In 2019 they experienced a loss of $220,000. The company had a tax rate of 35% in 2016 and 2017, and a rate of 45% in 2018 and 2019. Assuming Caesar uses the carryback provisions for the net operating loss, by what amount will the income tax benefit reduce the net loss in 2019? A) $77,000 B) $88,000 C) $99,000 D) $220,000

TLR Productions reported income before taxes of $205,000 for the years 2016, 2017, and 2018. In 2019 they experienced a loss of $500,000. TLR had a tax rate of 35% in 2016 and 2017, and a rate of 45% in 2018 and 2019. Assuming the company uses the carryback provisions for the net operating loss, what amount should be reported as Income Tax Refund Receivable in 2019? A) $71,750 B) $164,000 C) $204,500 D) $225,000

S & C Company reported income before taxes of $91,000 for the years 2016, 2017, and 2018. In 2019 they experienced a loss of $182,000. S & C had a tax rate of 30% in 2016 and 2017, and a rate of 40% is 2018 and 2019. The company elects to carry back the loss. What is the necessary journal entry to record the NOL carryback in the year of the loss? A) B) C) D)

Big Bear Sporting Goods opened in 2018. They reported sales revenue of $375,000 and expenses of $460,000. There are no permanent or temporary differences, so the book loss and taxable loss will be the same. Big Bear plans on carrying forward the net operating loss (NOL). Assuming a 32% tax rate, what is the necessary journal entry in 2018 to record the NOL carryforward? A) B) C) D)

Illusions Inc. just completed its second year of operations and has a deferred tax asset of $43,700 related to a net operating loss of $115,000 from the previous year. In the current year Illusions generates $390,000 in revenues and incurs $260,000 in expenses. There are no permanent or temporary book-tax differences. Assuming the same tax rate as last year, what amount will Illusions record for Income Tax Payable in the current year? A) $5,700 B) $49,400 C) $148,200 D) Cannot be determined from the information provided.

Betta Group just completed its second year of operations and has a deferred tax asset of $82,000 related to a net operating loss of $205,000 from the previous year. In the current year Betta generates $635,000 in revenues and incurs $341,000 in expenses. There are no permanent or temporary book-tax differences. Assuming the same tax rate as last year, what is the tax related journal entry for the current year? A) B) C) D)

Violet Corporation reported a loss in 2018 of $630,000. The company reported taxable income of $189,000 in 2016 and $205,000 in 2017. It has no permanent or temporary differences and its tax rate is 30%. If Violet Corporation carries back and forward the loss from 2018 to appropriate years, what is the necessary journal entry for 2018? A) B) C) D)

Violet Corporation reported a loss in 2018 of $610,000 and carried back the loss to the extent allowed. The company reported taxable income of $215,000 in 2016 and $245,000 in 2017. It has no permanent or temporary differences and its tax rate is 30%. Violet reported taxable income of $345,000 in 2019. What is the necessary journal entry for 2019? A) B) C) D)

In 2018, its first year of operations, Neuro Inc. experienced a $214,000 net operating loss and recorded a deferred tax asset of $81,320. Neuro decides that it is more likely than not that it will only be able to generate $195,000 of taxable income during the carryforward period. As a result, without generating additional future taxable income it will not be able to fully realize the NOL carryforward benefit. In order to account for this, what amount will Neuro Inc. record as a valuation allowance, assuming that the tax rate is unchanged? A) $7,220 B) $4,476 C) $30,902 D) Cannot be determined with the information provided.

What purpose does a carryback or carryforward serve to a company with a volatile earnings stream?

Red Lantern Company experienced a net operating loss of $654,000 in 2018. The company reported taxable income of $543,000 in 2016 and $321,000 in 2017. The tax rate for all years is 35%. Assuming the company uses the carryback provisions for the net operating loss, prepare the following for the year of the loss: a) The necessary journal entry to record the NOL carryback. b) A partial income statement beginning with the net loss before benefit.

Muckingjay Inc. opened in 2018. The company reported sales revenue of $486,000 and expenses of $574,000. The revenue is on account, and no cash has been received or paid out for expenses. There are no permanent or temporary differences, so the book loss and taxable loss will be the same. Muckingjay plans to carry forward the net operating loss (NOL). The company has a 38% tax rate, and a valuation allowance is not required. Prepare the following for 2018: a) The necessary journal entry to record the NOL carryforward. b) A partial income statement beginning with sales revenue.

In 2018 Tetra Corp. generated $583,000 in revenues and incurs $276,000 in expenses. There are no permanent or temporary book-tax differences. Tetra has a deferred tax asset of $61,250 related to a net operating loss of $175,000 from the previous year. Assuming a 35% tax rate, prepare the tax related journal entry for the current year.

Greene Co. reported a loss in 2018 of $595,000 and carried the loss back is allowed. The company reported taxable income of $183,000 in 2016 and $200,000 in 2017. It has no permanent or temporary differences and its tax rate is 40%. Greene reported taxable income of $287,000 in 2019. Prepare the necessary journal entries for 2018 and 2019.

In 2018, its first year of operations, Moulin & Company experienced a $326,000 net operating loss and recorded a deferred tax asset of $117,360. Moulin decides that it is more likely than not that it will only be able to generate $250,000 of taxable income during the carryforward period. As a result, without generating additional future taxable income it will not be able to fully realize the NOL carryforward benefit. Prepare the necessary journal entries to record the net deferred tax asset in 2018.

Excluding potentially taxable income from a tax return is an example of an uncertain tax position.

Uncertain tax positions may result in a ________. A) tax deferral B) tax contingency C) tax refund D) tax asset

Accounting for uncertain tax positions under U.S. GAAP involves a two-step approach: ________. A) measurement and classification B) recognition and qualification C) classification and computation D) recognition and measurement

Accounting for uncertain tax positions under IFRS involves all of the following except ________. A) measuring tax assets at the amount expected to be paid B) assessing if a present obligation exists and is the result of a past event C) utilizing a two-step approach which involves classification and measurement D) reliance on standards for accounting for contingencies for guidance

Sonic Speaker Co. took an aggressive tax position in its current year's tax return, claiming a $400,000 deduction. The company reported $750,000 in taxable income before considering the tax deduction, and is subject to a 28% income tax rate. Tax authorities have challenged this type of tax deduction in the past and Sonic Speaker Co. is now concerned about the realizability of this tax deduction in the future. However, management believes that it is more likely than not that the firm will sustain the tax benefits upon examination by tax authorities. The company provides the following analysis regarding the probabilities of sustaining the tax deduction: Refer to Sonic Speaker Company. What is the largest amount of tax benefit allowed? A) $84,000 B) $112,000 C) $49,000 D) $107,800

Sonic Speaker Co. took an aggressive tax position in its current year's tax return, claiming a $500,000 deduction. The company reported $950,000 in taxable income before considering the tax deduction, and is subject to a 38% income tax rate. Tax authorities have challenged this type of tax deduction in the past and Sonic Speaker Co. is now concerned about the realizability of this tax deduction in the future. However, management believes that it is more likely than not that the firm will sustain the tax benefits upon examination by tax authorities. The company provides the following analysis regarding the probabilities of sustaining the tax deduction: Refer to Sonic Speaker Company. What is the journal entry to record the current year's tax provision and the liability for the uncertain tax provision? A) B) C) D)

Identify and explain the steps in U.S. GAAP's approach to accounting for uncertain tax positions.

How does IFRS account for uncertain tax positions?

Kramerica Corporation took an aggressive tax position in its current year's tax return, claiming a $370,000 deduction. The company reported $770,000 in taxable income before considering the tax deduction, and is subject to a 33% income tax rate. Tax authorities have challenged this type of tax deduction in the past and Kramerica is now concerned about the realizability of this tax deduction in the future. However, management believes that it is more likely than not that the firm will sustain the tax benefits upon examination by tax authorities. The company provides the following analysis regarding the probabilities of sustaining the tax deduction: Prepare the journal entry to record the current year's tax provision and the liability for the uncertain tax provision.

Under IFRS, the balance sheet presentation for deferred taxes is to report them as either current or non-current.

Under GAAP, the balance sheet presentation for deferred taxes is to report them as either current or non-current.

Netting deferred tax assets and liabilities is permitted as long as the right to offset exists.

Under U.S. GAAP, companies classify individual deferred tax assets or liabilities as ________. A) current or noncurrent based on the underlying asset or liability B) noncurrent only C) current only D) current or noncurrent based on the reversal date

An intraperiod tax allocation ________. A) results when different income statement items are taxed at different rates B) occurs when certain revenues and expenses appear in the financial statements either before or after they are included in the income tax return C) allocates income tax expense to different sections of the comprehensive income statement D) deals with allocation of taxes between current and future periods

Crystal Critters, Inc., a U.S. GAAP reporter, has the deferred tax assets and liabilities presented below: Assuming it meets the conditions to net assets and liabilities, how will the company report deferred taxes on the balance sheet? A) current liability: deferred tax liability $64,000; noncurrent liability: deferred tax liability $84,000 B) noncurrent liability: deferred tax liability $20,000 C) current asset: deferred tax asset $108,000; noncurrent liability: deferred tax liability $128,000 D) current liability: deferred tax liability $44,000; noncurrent asset: deferred tax asset $84,000

Tetra Corp, an IFRS reporter, has the deferred tax assets and liabilities presented below: What will the company report for deferred taxes on the balance sheet? A) current assets: deferred tax asset $59,000; noncurrent liabilities: deferred tax liability $79,000 B) noncurrent assets: deferred tax asset $20,000 C) noncurrent liabilities: deferred tax liability $20,000 D) Companies do not report deferred taxes on the balance sheet under IFRS.

Ivy Group reported income from continuing operations before taxes of $648,000 and income from discontinued operations of $224,000. Ivy also reported $78,000 of unrealized gains from available-for-sale debt investments (fair value accounting adjustments) recorded as other comprehensive income. The company is subject to a 28% tax rate and reports no permanent differences. How much income tax expense does Ivy report as a line item directly below "Income from Continuing Operations before Taxes"? A) $266,000 B) $244,160 C) $203,280 D) $181,440

Lyon Corp reported income from continuing operations before taxes of $774,000 and income from discontinued operations of $198,000. Lyon also reported $77,000 of unrealized gains from available-for-sale debt investments (fair value accounting adjustments) recorded as other comprehensive income. The company is subject to a 35% tax rate and reports no permanent differences. Prepare a partial income statement including comprehensive income.

In 2018, the MoosePants Corporation reported income from continuing operations before taxes of $865,500 and income from discontinued operations of $213,000. MoosePants also reported $82,000 of unrealized gains from available-for-sale debt investments (fair value accounting adjustments) recorded as other comprehensive income. The company is subject to a 34% tax rate and reports no permanent differences. Prepare a partial income statement including comprehensive income.

A firm is not required to reconcile the federal statutory tax rate to its effective tax rate.

Income tax rate reconciliation under IFRS must begin with the U.S. statutory income tax rate.

Moose Company has a high conservatism ratio. This could indicate that the company will have to pay higher taxes in the future relative to the present.

Companies are required to disclose the amount of income tax expense that is ________. A) current B) noncurrent C) allocated to financial statement elements that are not part of income from continuing operations D) All of the above are disclosed.

With regard to deferred tax items, a company must disclose all of the following except ________. A) the amount and expiration of carryforwards for net operating losses and unused tax credits B) the amount of the valuation allowance or any change in valuation allowance C) the individual components of all significant deferred tax assets and deferred tax liabilities D) All of the above must be disclosed.

Woods Company reports income before taxes in the amount of $925,000. The current tax expense is $365,375 and the effective tax rate is 27%. What is the conservatism ratio for Woods Company? A) 0.68 B) 0.19 C) 0.45 D) 0.40

Explain the conflicting incentives that relate to reporting of taxes. What might the related strategies signal to investors?