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Exam 16: Accounting for Income Taxes

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Question 21

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Theodore Enterprises had the following pretax income (loss) over its first three years of operations: $\begin{array}{rr}2016 & 500,000 \\2017 & (900,000) \\2018 & 1,500,000\end{array}$ For each year there were no deferred income taxes and the tax rate was 30%. In its 2017 tax return, Theodore elected a net operating loss carryback. No valuation account was deemed necessary for the deferred tax asset as of December 31, 2017. What was Theodore's income tax expense for 2018?

A) $450,000.
B) $330,000.
C) $270,000.
D) $180,000.

E) C) and D)
F) None of the above

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Question 22

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Madison Company has taken a position in its tax return to claim a tax credit of $60 million (direct reduction in taxes payable) and has determined that its sustainability is "more likely than not," based on its technical merits. The tax credit would be a direct reduction in current taxes payable. Madison believes the likelihood that a $60 million, $36 million, or $12 million tax benefit will be sustained is 25%, 30%, and 45%, respectively. Madison's taxable income is $510 million for the year. Its effective tax rate is 40%. What is Madison's income tax expense for the year?

A) $24 million.
B) $144 million.
C) $168 million.
D) $204 million.

E) A) and C)
F) B) and D)

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Question 23

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The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars) : The applicable tax rate is 40%. There are no other temporary or permanent differences. -Which of the following must Franklin Freightways disclose related to the income tax expense reported in the income statement ($ in millions) ?

In its first three years of operations Sharp Chairs reported the following operating income (loss) amounts: There were no deferred income taxes in any year. In 2017, Sharp elected to carry back its operating loss. The enacted income tax rate was 35% in 2016 and 40% thereafter. In its 2018 balance sheet, what amount should Sharp report as current income tax payable?

What is a valuation allowance for deferred tax assets and when is it used?

How are deferred tax assets arising from net operating loss carryforwards classified with regard to GAAP accounting for income taxes?

Isaac Inc. began operations in January 2018. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2018, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. - Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2018 balance sheet?

Pretax accounting income for the year ended December 31, 2018, was $50 million for Truffles Company. Truffles' taxable income was $60 million. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The enacted tax rate is 30% for 2018 and 40% thereafter. What amount should Truffles report as the current portion of income tax expense for 2018?

Information for Hobson Corp. for the current year ($ in millions) : The applicable enacted tax rate for all periods is 40%. - What should Hobson report as income from continuing operations?

Valuation allowances reduce deferred tax liabilities to the amount that is more likely than not to be payable in the future.

For the current year ($ in millions) , Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and MACRS depreciation amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's income tax payable currently, assuming a tax rate of 40%?

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

Brook Company has taken a position on its tax return to claim a tax credit of $30 million (direct reduction in taxes payable) and has determined that its sustainability is "more likely than not" based on its technical merits. Brook's management has developed the probability table shown below of all possible material outcomes: Brook's taxable income is $300 million for the year, and its effective tax rate is 40%. The tax credit would be a direct reduction in current taxes payable. Required: 1. At what amount would Brook measure the tax benefit in its income statement? 2. Prepare the appropriate journal entry for Brook to record its income taxes for the year.

In LMC's 2018 annual report to shareholders, it disclosed the following information about its income taxes: INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31 were as follows: -Indicate why LMC lists net operating loss carryforwards as a component of deferred tax assets.

A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31, 2018, its first year of operations. The income tax rate is 40%. What amount(s) should Fieval report related to deferred income taxes in its 2018 balance sheet?

In the current year, Bruno Corporation collected rent of $3,600,000. For income tax reporting, the rent is taxed when collected. For financial reporting, the rent is recognized as income in the period earned. At the end of the current year, the unearned portion of the rent collected in the current year amounted to $400,000. Bruno had no temporary differences at the beginning of the current year. Assume an income tax rate of 30%. Required: The current year's income tax liability from the tax return is $800,000. Prepare the journal entry to record income taxes for the year. Show well-labeled computations.

In the statement of cash flows, by using the indirect method for determining cash flows from operating activities, a decrease in deferred tax liabilities is:

Revenues from installment sales of property reported on financial statements in prior years and currently reported in the tax return create deferred tax assets.

The following information is for Hulk Gyms' first year of operations. Amounts are in millions of dollars. The enacted tax rate is 30%. Required: Prepare a compound journal entry to record the income tax expense for the year 2018. Show well-labeled computations.

Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: Puritan's tax rate is 40% for all years. Puritan elected a loss carryback. - As of December 31, 2018. Puritan was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback. What would Puritan report as net income for 2019?