Question 1

KER commenced operations in 2013.The company had recorded an accrual for warranty expenses in its books during the year ended December 31, 2013, its first year of operations, amounting to $100,000.During the year 2014, customers required service from goods sold in 2014 amounting to $60,000.There were no similar expenditures made during 2013.KER recorded an amount for possible warranty costs for goods sold during the year in the amount of $95,000.Accounting income amounted to $80,000 and the tax rate is 40%.Assuming that KER has no other differences between accounting and tax what are the current and deferred income tax amounts that will appear on the 2014 statement of financial position?

Accepted Answer

The correct answer is A because the current income tax payable is calculated as the tax rate multiplied by the difference between accounting income and taxable income. The deferred tax asset is calculated as the tax rate multiplied by the difference between the warranty expense recorded for accounting purposes and the warranty expense deducted for tax purposes.

Question 2

At the end of 2014, the only expected future temporary difference is implied by the following account found in the balance sheet: Prepaid rent = $22,000
The footnotes reveal that the prepaid rent applies only to 2015.You would also expect to find which of the following in the balance sheet:

Accepted Answer

Since the prepaid rent applies only to 2015, it will reverse or be settled within one year, making the deferred tax asset current.

Question 3

Which of the following is an example of a temporary difference, which would result in a deferred tax asset?

Accepted Answer

The answer of Which of the following is an example...

Question 4

Ryan Company paid golf dues on behalf of their two top employees.This is an example of a:

Accepted Answer

Paying golf dues on behalf of employees is considered a non-deductible expense for tax purposes, creating a permanent difference between book income and taxable income.

Question 5

A characteristic of the taxes payable method is that:

Accepted Answer

The taxes payable method records income taxes based on the amount of taxes owed for the current period, meaning the tax owed will equal the accounting income tax expense. This method does not involve inter-period tax allocation or adjustments for temporary differences, which distinguishes it from the deferred tax method.

Question 6

Golf dues paid for by a company are:

Accepted Answer

Golf dues paid for by a company are considered a permanent difference because they are expenses that are deductible for accounting purposes but not deductible for tax purposes. This means there will not be a future reversal of the tax effect, making it a permanent difference between the accounting income and taxable income.

Question 7

An example of a "deductible amount" occurs when:

Accepted Answer

The answer of An example of a "deductible amount" occurs...

Question 8

On January 1, Year 2, GHI Inc.had spent $100,000 in capital development costs to date, 50% of which had been capitalized.During Year 2, the company had incurred additional capital development costs of $200,000, 60% of which was capitalized.The income tax rate for Years 2 and prior was 20%.The tax rate for future years was expected to be 25%.This rate was enacted during Year 2.For Year 2, the temporary differences arising from the above would result in:

Accepted Answer

The temporary difference arises from the difference between the amount of capital development costs capitalized for financial reporting purposes and the amount of capital development costs deducted for tax purposes. In this case, the company capitalized 50% of the $100,000 incurred in Year 1 and 60% of the $200,000 incurred in Year 2, for a total of $170,000. However, for tax purposes, the company deducted all of the capital development costs incurred in both years, for a total of $300,000. The temporary difference is therefore $130,000 ($300,000 - $170,000).The effect of the temporary difference is to decrease income tax expense in the current year and increase income tax expense in future years. This is because the company will eventually have to pay taxes on the $130,000 of capital development costs that it deducted for tax purposes but did not capitalize for financial reporting purposes. The amount of the decrease in income tax expense in the current year is $40,000 ($130,000 x 20%). The corresponding deferred tax asset (DTA) that is recorded at the end of the year is $60,000 ($130,000 x 25%).

Question 9

EGR Corporation has one asset worth $450,000.Accumulated Depreciation to date is $190,000 and accumulated CCA is $220,000.The Corporation also recorded warranty expense of $30,000.To date no customers have required warranty service, so no warranty expenditures have been made.Assuming the tax rate is constant at 40%, this will result in:

Accepted Answer

The answer of EGR Corporation has one asset worth $450,000.Accumulated...

Question 10

STR provided the following data related to income tax allocation:  The deferred tax account showed a zero balance at the start of 2009.There was only one temporary difference, a revenue amount, which was taxable in 2009, but was recorded for accounting purposes in 2010.There are no carry backs or carry forwards.The journal entry to record the income tax consequences for 2009 would include a:

Accepted Answer

The answer of STR provided the following data related to...

Question 11

ABC Inc.owns a single capital asset.At the end of its first year, the asset`s UCC is higher than its book value due to the company`s choice of depreciation methods.What will be the effect of this difference over the life of the asset, assuming that this trend continues?

Accepted Answer

When UCC is higher than book value, it indicates that tax depreciation is higher than accounting depreciation, leading to a deferred tax liability. Over time, as the asset depreciates, this liability will reduce, resulting in a deferred income tax benefit.

Question 12

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.From the information provided above, what is the total amount of expenses that will never have an effect on taxable income (and thus never trigger any DTA/DTL amounts)?

Accepted Answer

Golf dues of $5,000 and 50% of meals and entertainment expenses ($6,000) are not deductible for tax purposes, totaling $11,000.

Question 13

KAR Company sold a building resulting in a capital gain of $15,000.Choose the statement below that best describes what the impact of this is:

Accepted Answer

The answer of KAR Company sold a building resulting in...

Question 14

Which of the following would result in a deferred tax asset?

Accepted Answer

The answer of Which of the following would result in...

Question 15

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.Based on this information and a tax rate of 45%, what is taxable income?

Accepted Answer

The answer of The following information is available for Ryan...

Question 16

A firm reported the following in its income statement for the current year: depreciation expense, $4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000.The tax rate is 40% for the current year, and no changes to this rate are foreseen in the near term.For tax purposes, the CCA deduction was $9,000.What amount of deferred income tax (benefit)expense will be recognized for this year? Assume a beginning Deferred Tax asset balance of $4,000.

Accepted Answer

The answer of A firm reported the following in its...

Question 17

ABC Co.in its first year of business has taxable income of $2,000, book depreciation of $3,000 and CCA of $4,600, and recognized $800 of warranty expense but performed no warranty service.ABC's pre-tax accounting income would be:

Accepted Answer

The answer of ABC Co.in its first year of business...

Question 18

Which of the following does not help in explaining why (1)and (2)are different: (1)Income tax expense
(2)The product of pre-tax income and the current tax rate.

Accepted Answer

The fact that future and current tax rates are different is not a reason why (1) and (2) are different.

Question 19

The following information is available for Ryan Corporation: Assets at cost-$260,000; Accumulated depreciation-$80,000; Accumulated CCA-$90,000; meals and entertainment recorded in the books-$12,000; golf dues paid-$5,000.Based on this information and a tax rate of 45%, what is the amount of the temporary difference?

Accepted Answer

The temporary difference is the difference between the tax base and the carrying amount of an asset or liability. Here, the accumulated CCA ($90,000) exceeds the accumulated depreciation ($80,000) by $10,000, creating a temporary difference of $10,000.

Question 20

At most, how many deferred tax accounts will a firm report in its balance sheet?

Accepted Answer

A firm can report up to four deferred tax accounts: deferred tax assets and deferred tax liabilities, each for both current and non-current portions.

Quiz 16: Corporate Income Tax

At the end of 2014, the only expected future temporary difference is implied by the following account found in the balance sheet: Prepaid rent = $22,000 The footnotes reveal that the prepaid rent applies only to 2015.You would also expect to find which of the following in the balance sheet: