Q&A Hero

Q: Colorado Company has provided you the following information: Colorado has decided to use the loss carryback and carryforward provision as a result of the year 2014 loss. The enacted tax rate remains at 40% after year 2014. Colorado has determined that a valuation allowance is not necessary. Requirement: Prepare the journal entry on December 31, 2014 to record the carryback and carryforward decision.

Q: Tyler Company, which began operations at the beginning of 2011, has provided you with the following information: GAAP (book) income before taxes was $1,600,000 during 2011 and $2,000,000 during 2012. Municipal bond interest of $40,000 was earned in both 2011 and 2012. Depreciation expense for tax purposes exceeded depreciation for GAAP (book) purposes by $180,000 during 2011 and by $150,000 during 2012. The depreciation timing difference created during 2011 and 2012 will reverse equally during the next three years ( 2013 - 2015). A three-year insurance policy costing $54,000 was purchased using cash at the beginning of 2011. A reasonable tax deduction of $24,000 was taken in 2011, and $15,000 will be taken in 2012 and in 2013. Gross profit of $600,000 from installment sales was recognized for GAAP (book) purposes during 2011. For tax purposes, $100,000 of the profit was recognized during 2011, the remaining profit will be recognized equally during 2012 and 2013. During 2012, a customer paid $325,000 in advance for services to be provided during 2012 and 2013. Services valued at $120,000 were provided during 2012. The income tax rate was 35% during 2011 and 2012 and 40% for all subsequent years. Requirements: 1. Determine taxable income for 2011. 2. Prepare the journal entry to record income tax expense for the year ended December 31, 2011. 3. Determine taxable income for 2012. 4. Prepare the journal entry to record income tax expense for the year ended December 31, 2012.

Q: On January 1, 2012, Sun Company's balance sheet reported a deferred tax liability of $185,000 and a deferred tax asset of $99,900. The future taxable amounts that existed as of January 1, 2012 will reverse equally over the next four years beginning in 2012, while the future deductible amounts that existed as of January 1, 2012 will reverse equally over the next three years beginning in 2012. The enacted income tax rate for all tax years as of January 1, 2012 was 37%. On February 1, 2012, the tax laws were amended resulting in income tax rates of 38% for 2012 and 2013; the income tax rate will be 40% for tax years 2014 and later. Requirement: Prepare the journal entry on February 1, 2012 to record the impact of the amended income tax rates.

Q: The Sting Company began operations at the beginning of 2012 and had GAAP (book) income of $350,000 and taxable income of $280,000. During 2012, depreciation expense for tax purposes exceeded GAAP (book) depreciation expense by $210,000, while warranty expense for GAAP (book) purposes exceeded warranty expense for tax purposes by $140,000. These two timing differences will reverse as follows: The enacted income tax rate for 2012 and 2013 is 38%, while the enacted income tax rate for 2014 and 2015 is 40%. Sting did not make any income tax payments during 2012. Requirement: Prepare the journal entry to record income tax expense for the year ended December 31, 2012.

Q: On December 31, 2011, the Lilly Corporation reported a deferred tax liability totaling $12,000, resulting from depreciation timing differences pertaining to a depreciable asset purchased during 2011. Lilly uses straight-line depreciation over four years for GAAP (book) purposes; for tax purposes, the depreciation deduction is 40% of cost during 2011, 30% of cost during 2012, 20% of cost during 2013, and 10% of cost during 2014. During 2012, Lilly expensed $75,000 of warranty costs that will be deducted for tax purposes in future years. Lilly also accrued revenue totaling $150,000 which is taxable in 2013. Lilly's GAAP (book) income before taxes during 2012 totaled $397,700. The marginal income tax rate is 40% for all years. Requirement: Prepare the journal entry to record income tax expense for the year ended December 31, 2012.

Q: The Matrix Company began operations as of the beginning of 2012. During 2012, Matrix reported GAAP (book) income before taxes of $789,500. For income tax purposes, depreciation expense was $150,000; for GAAP (book) purposes, depreciation expense was $74,000. Matrix accrued $900,000 of revenue for GAAP (book) purposes during 2012; $600,000 of the accrued revenue was taxable during 2012. Matrix earned interest of $79,800 from a municipal bond investment during 2012. Matrix's marginal income tax rate is 40%. Matrix did not make any income tax payments during 2012. Requirements: 1. Determine Matrix's taxable income for the year ended December 31, 2012. 2. Prepare the 2012 year-end journal entry to record income tax expense.

Q: Income tax expense for 2011 is A. $43,000. B. $45,000. C. $65,000. D. $67,000.

Q: If Taylor paid no estimated taxes, the income tax payable at the end of 2011 is A. $60,000. B. $62,500. C. $65,000. D. $67,000.

Q: The journal entry to record the taxes for Sand Company at December 31, 2011 would be A. Option a B. Option b C. Option c D. Option d

Q: If Sand paid no estimated taxes, what is the amount of income tax payable for Sand at the end of 2011? A. $40,000 B. $45,000 C. $100,000 D. $150,000

Q: What is the total tax expense for Sand for 2011? A. $100,000 B. $150,000 C. $160,000 D. $175,000

Q: What is the current portion of the tax expense for Sand for 2011? A. $100,000 B. $150,000 C. $160,000 D. $165,000

Q: What is the deferred tax liability for Sand at December 31, 2011? A. $10,000 B. $15,000 C. $20,000 D. $40,000

Q: For the year ending December 31, 2011, the RJ Corporation reported book income before taxes of $579,000. During 2011: RJ's book depreciation expense was $25,000 greater than what was allowed for tax purposes due to a reversing difference; RJ accrued $17,750 of warranty expense which is not deductible for tax purposes until 2012; RJ recognized a $29,000 unrealized loss on an investment which is not deductible for tax purposes until the investment is sold; and RJ's book income included municipal bond interest of $19,500. What was the current portion of RJ Corporation's 2011 income tax expense assuming a tax rate of 40%? A. $252,500 B. $215,100 C. $243,800 D. $232,500

Q: During 2011, its first year of operations, a company recorded depreciation expense of $50,000 for book purposes. For tax purposes during 2011, $100,000 of depreciation expense was deducted. The temporary difference created during 2011 will reverse equally during 2012 and 2013. Book income from operations during the first year was $570,000. The income tax rate is 40%. The income tax expense to be reported in the income statement for the first year of operations is A. $228,000. B. $208,000. C. $248,000. D. $188,000.

Q: During its first year of operations a company recorded accrued warranty expense totaling $75,000 for book purposes. For tax purposes, $25,000 of the expenses are deductible during the first year of operations and $50,000 are deductible during the second year of operations. Book income from operations during the first year was $750,000. The income tax rate was 40% during the first year of operations and 45% during the second year of operations. The income tax expense to be reported in the income statement for the first year of operations is A. $297,500. B. $300,000. C. $277,500. D. $280,000.

Q: During its first year of operations a company recorded accrued expenses totaling $375,000 for book purposes. For tax purposes, $175,000 of the expenses are deductible during the first year of operations and $200,000 are deductible during the second year of operations. The income tax rate was 40% during the first year of operations and 45% during the second year of operations. The balance sheet at the end of the first year of operations will report a deferred tax A. asset of $80,000. B. liability of $80,000. C. liability of $90,000. D. asset of $90,000.

Q: During its first year of operations a company recorded revenues totaling $6,000,000 for book purposes. For tax purposes, $2,400,000 of the revenue is taxable during the first year of operations and $3,600,000 is taxable during the second year of operations. The income tax rate for both years is 40%. The balance sheet at the end of the first year of operations will report a deferred tax liability of A. $2,400,000 B. $1,440,000 C. $960,000 D. $480,000

Q: During 2012, a company reported an increase in the deferred tax liability account of $47,790, a decrease in the deferred tax asset account of $17,225, and an income tax liability as per the 2012 income tax return of $198,375. What is the income tax expense to be reported on the income statement for the year ending December 31, 2012? A. $263,390 B. $228,940 C. $167,810 D. $198,375

Q: Income tax expense reported on the income statement for the year ending December 31, 2012 would be A. $100,000. B. $120,000. C. $183,000. D. $210,000.

Q: If Stone paid no estimated taxes, what amount of income taxes payable should Stone report in its December 31, 2012, balance sheet? A. $150,000 B. $160,000 C. $183,000 D. $210,000

Q: What amount of deferred income tax liability should Stone report in its December 31, 2012, balance sheet? A. $5,000 B. $9,000 C. $20,000 D. $27,000

Q: If Smith paid no estimated taxes, what amount of income taxes payable should Smith report in its December 31, 2012, balance sheet? A. $100,000 B. $120,000 C. $128,000 D. $140,000

Q: What amount of deferred income tax liability should Smith report in its December 31, 2012, balance sheet? A. $8,000 B. $9,000 C. $10,000 D. $12,000

Q: When tax expense equals current taxes payable to the IRS plus (minus) the increase (decrease) in deferred tax liabilities, tax expense is properly matched for the A. current period. B. previous period. C. future period. D. tax return.

Q: The accounting principle violated if temporary timing differences are not taken into account is the A. historical cost principle. B. matching principle. C. conservatism principle. D. cost/benefit principle.

Q: Which of the following statements is not correct? A. Temporary differences causing taxable income in future periods to be higher than book income in future periods create deferred tax liabilities. B. Temporary differences causing taxable income in future periods to be lower than book income in future periods create deferred tax assets. C. A permanent difference results when a revenue enters into the determination of book income in one period but affects taxable income in a different period. D. A temporary difference causing book income to be less than taxable income when initially recorded is described as an originating difference.

Q: Which of the following transactions would not create a temporary difference? A. A sale recorded using the installment method for book purposes. B. The cash collection from a life insurance policy on a company executive. C. A cash collection for services to be provided during the next period. D. The use of the percentage-of-completion method for book purposes.

Q: Which of the following transactions would not create a temporary difference? A. The cash payment to acquire a three-year insurance policy. B. The accrual of warranty expense. C. The accrual of bad debts expense. D. The cash collection of interest earned on a municipal bond.

Q: A timing difference created this year causes book income to be greater than taxable income; in future years book income will be less than taxable income. The timing difference in the future years' incomes is referred to as A. reversing timing difference. B. originating timing difference. C. permanent difference. D. minor difference.

Q: A timing difference that causes book income to be greater than or less than taxable income when it is initially recorded is a/an A. reversing timing difference. B. originating timing difference. C. permanent difference. D. minor difference.

Q: Which one of the following is a permanent difference between book and taxable income? A. Interest received on municipal bonds B. Installment sales C. Bad debts expense D. Warranty expense

Q: Temporary differences that will cause taxable income in future periods to be lower than book income in future periods give rise to A. deferred tax assets. B. deferred tax liabilities. C. permanent differences. D. expense.

Q: The two broad categories of differences that result from determining financial income and taxable income are A. temporary differences and originating differences. B. temporary differences and reversing differences. C. temporary differences and permanent differences. D. permanent differences and deferred differences.

Q: The allocation of the tax cost (benefit) across various components of book income within a given period is called A. interperiod tax allocation. B. intraperiod tax allocation. C. current income tax allocation. D. constructive receipt allocation.

Q: The allocation of income tax expense across periods when book and tax income differ is called A. interperiod tax allocation. B. intraperiod tax allocation. C. current income tax allocation. D. constructive receipt allocation.

Q: The GAAP solution for avoiding distortions that would result from setting income tax expense equal to taxes owed is called A. intraperiod tax allocation. B. interperiod tax allocation. C. book income allocation. D. intraperiod book allocation of income.

Q: Under IFRS rules, deferred tax assets and deferred tax liabilities are always reported as noncurrent in a classified balance sheet.

Q: Both IFRS and U.S. GAAP require firms to classify deferred tax assets and liabilities as current or noncurrent depending on the classification of the asset or liability giving rise to the temporary difference.

Q: Both IFRS and U.S. GAAP require a numerical reconciliation that explains the differences between statutory and effective tax rates.

Q: Under IFRS deferred tax assets are recognized only to the extent it is deemed probable that they will be realized.

Q: Both IFRS and U.S. GAAP require that a valuation allowance when it is deemed more likely than not (greater than 50% likelihood) that the deferred tax asset will not be realized.

Q: The earnings conservatism ratio comparisons for a single company over time can be misleading if the tax law has changed over the comparison period.

Q: Most companies do not disclose details of their income tax returns; therefore, the denominator of the earnings conservatism ratio (taxable income per tax return) must be estimated.

Q: A firm's earnings conservatism ratio is computed as Net income (adjusted for permanent differences)/Taxable income per the tax return.

Q: A firm's degree of conservatism can be assessed by comparing the ratio of taxable income to pre-tax book income.

Q: When depreciable assets are sold, the change in the deferred tax liability balance for depreciation reflects only current period book-versus-tax depreciation differences.

Q: When financial statement notes regarding deferred taxes reveal a sudden decrease in deferred tax assets, it can be a potential sign of deteriorating earnings quality.

Q: Companies are required to disclose details about individual temporary differences that give rise to the deferred tax asset and deferred tax liability balances on the balance sheet.

Q: The disclosures with respect to deferred income taxes can be used to analyze the differences in financial reporting choices across firms and therefore enhance interfirm comparisons.

Q: A significant decrease in the deferred tax asset account is relevant with respect to assessing earnings quality.

Q: Analyzing the disclosures pertaining to deferred income taxes can provide relevant insights into the actions that a company's management has taken to manipulate net income.

Q: Financial statement disclosures concerning income taxes provides financial analysts with information regarding the transactions that had an impact on the yearend deferred income taxes balance.

Q: GAAP requires a disclosure that reconciles a company's effective income tax rate and the U.S. statutory income tax rate.

Q: The income tax benefit associated with a loss carryback or carryforward is recorded as an adjustment to income tax expense in the year of the loss.

Q: A corporation that incurs a net operating loss must carry the loss back to earlier years before it can carry the loss forward.

Q: When future income tax rates change, the effect of the change on net income will be consistent across most companies regardless of their deferred tax balances.

Q: When the income tax rate changes, the full change in the amount of future liability for income taxes is recognized as a change to income tax expense in the year that the change is effective.

Q: Once the deferred income tax allowance is established, it can be either increased or decreased in future years.

Q: Creation of the deferred tax asset valuation allowance account is subjective and therefore provides management the opportunity to manipulate income.

Q: The determination of whether or not a valuation allowance is necessary is based on subjective assessment.

Q: A deferred tax asset can be fully recognized without adjustment if management believes that the probability of future taxable income sufficient to fully realize the deferred tax asset is greater than 50%.

Q: If a deferred tax asset may not be fully realized in future periods, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized.

Q: A company reported income taxes payable of $199,200, a decrease in deferred tax assets of $19,900, and a decrease in deferred tax liabilities of $12,450; therefore book income tax expense equals $191,750.

Q: A company reported income taxes payable of $99,700, an increase in deferred tax assets of $19,900, and a decrease in deferred tax liabilities of $9,550; therefore book income tax expense equals $70,250.

Q: Book income tax expense when using interperiod tax allocation results in a proper matching of revenues and expenses in the income statement.

Q: Book income tax expense could equal current taxes payable to the IRS plus the increase in deferred tax liabilities minus the increase in deferred tax assets.

Q: Income tax expense when interperiod tax allocation is used creates a more stable effective tax rate over time relative to using tax payments as income tax expense.

Q: Treating the taxes paid each year as an expense in the income statement could result in an inappropriate matching between pre-tax book income and income tax expense.

Q: The payment of life insurance premiums on company executives is an example of a permanent difference.

Q: The accrual of wages expense for book purposes at year-end creates a deferred tax asset on the year-end balance sheet.

Q: A cash payment received from a customer recorded as unearned revenue for book purposes creates a deferred tax liability.

Q: Statutory depletion in excess of cost depletion is an example of a permanent difference.

Q: Temporary differences that will cause taxable income to be higher than book income in future periods give rise to deferred tax liabilities.

Q: An accrual of warranty expense for book income calculations this year creates a deferred tax liability in the balance sheet.

Q: A revenue item that causes book income to be more (less) than taxable income when it is initially recorded, is called an original timing difference.

Q: An expense that enters into the determination of book income but never affects taxable income is referred to as a permanent difference.

Q: A revenue included in the determination of book income this year but never included in taxable income is an example of a timing difference.

Q: An expense included in the determination of taxable income this year but not included in book income until next year is an example of a timing difference.

Q: Temporary differences this year that will cause taxable income to be higher than book income give rise to a deferred tax asset.