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Exam 16: Accounting for Income Taxes

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Question 51

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A result of inter-period tax allocation is that:

A) Large fluctuations in a company's tax liability are eliminated.
B) The income tax expense is allocated among the income statement items that caused the expense.
C) The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year.
D) The income tax expense shown in the income statement is equal to the deferred taxes for the year.

E) B) and D)
F) All of the above

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Question 52

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Under current tax law a net operating loss may be carried forward up to:

A) 5 years.
B) 10 years.
C) 15 years.
D) 20 years.

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

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Question 53

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Expenditures currently deducted in the tax return but not included with expenses in the income statement until subsequent years create deferred tax liabilities.

A reconciliation of pretax financial statement income to taxable income is shown below for See Shipping for the year ended December 31, 2018, its first year of operations. The income tax rate is 40%. What amount should See report as a noncurrent item related to deferred income taxes in its 2018 balance sheet?

At the end of the preceding year, World Industries had a deferred tax asset of $17,500,000, attributable to its only temporary difference of $50,000,000 for estimated expenses. At the end of the current year, the temporary difference is $45,000,000. At the beginning of the year there was no valuation account for the deferred tax asset. At year-end, World Industries now estimates that it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable income is $12,000,000 for the current year and the tax rate is 30% for all years. Required: Prepare journal entries to record World Industries' income tax expense for the current year. Show well-labeled supporting computations for each component of the journal entries.

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 and additional sales in 2019, what deferred tax liability would Isaac report in its year-end 2019 balance sheet?

Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000, and accrued warranty expense of $400 on the books although no warranty work was performed. What is Bumble Bee's pretax accounting income?

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. -Franklin's taxable income ($ in millions) is:

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. Suppose that, in 2019, legislation revised the income tax rates so that Isaac would be taxed in 2020 and beyond at 40%, rather than 30%. Assume that there were no other differences in income for financial statement and tax purposes. -Ignoring operating expenses and additional sales in 2019, what deferred tax liability would Isaac report in its year-end 2019 balance sheet?

In its 2018 annual report to shareholders, Black Inc. disclosed the following information about income taxes. A reconciliation of income taxes computed at the United States federal statutory income tax rate (35%) to the provision (benefit) for income taxes reflected in the Consolidated Statement of Operations for the years ended December 31, 2018, 2017, and 2016 is as follows ($ in millions): The significant components of the net deferred tax assets at December 31, 2018 and 2017 were as follows ($ in millions): -Estimate the effective tax rate for Black Inc. in 2018. Why is it different from the 35% federal statutory rate?

Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither. -Premiums paid on life insurance policies covering key corporate executives.

A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record:

Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: $\begin{array}{rr}2017 & 350,000 \\2018 & (600,000) \\2019 & 700,000\end{array}$ 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 be the net loss in 2018 reported in Puritan's income statement?

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 net income?

For reporting purposes, current deferred tax assets and current deferred tax liabilities for the same company and tax jurisdiction are:

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term. -Temporary difference

Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither. -Organization costs reported in the income statement but amortized and deducted over five years for tax purposes.

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

Which of the following circumstances creates a future taxable amount?

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. -Franklin's balance sheet at the end of its first year would report: