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Exam 16: Accounting for Income Taxes

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Question 1

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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. Assuming that Puritan elected a loss carryback, what would be the net loss in 2013 reported in Puritan's income statement?

A) $360,000.
B) $240,000.
C) $460,000.
D) $500,000.

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

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Question 2

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The tax effect of a net operating loss (NOL) carryback usually:

A) Results in a current receivable at the end of the NOL year.
B) Is subject to a valuation allowance.
C) Is reflected as deferred tax asset at the end of the NOL year.
D) Is reflected as a deferred tax liability at the end of the NOL year.

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

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Question 3

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Which of the following usually results in an increase in a deferred tax liability?

At December 31, 2013, Moonlight Bay Resorts had the following deferred income tax items: Deferred tax asset of $54 million related to a current liability Deferred tax asset of $36 million related to a noncurrent liability Deferred tax liability of $120 million related to a noncurrent asset Deferred tax liability of $72 million related to a current asset Moonlight Bay should report in the current section of its December 31, 2013, balance sheet a:

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%?

Financial statement disclosure of the components of income tax expense:

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

Gallo Light began operations in 2013. The company sometimes sells used warehouses on an installment basis. In those cases, Gallo Light reports income in its income statement in the year of the sale. In its income tax return, though, Gallo Light reports installment income by the installment method. Installment income in 2013 was $90,000, which Gallo Light expects to collect equally over the next three years. The tax rate is 30%, but based on an enacted law, is scheduled to become 35% in 2015. Gallo Light's pretax accounting income from the 2013 income statement was $830,000, which includes $40,000 of interest revenue from an investment in municipal bonds. There were no differences between accounting income and taxable income other than those described above. Required: (1.) Prepare the appropriate journal entry to record Gallo Light's 2013 income taxes. Show calculations. (2.) What is Gallo Light's 2013 net income?

What events create permanent differences between accounting income and taxable income? What effect do these events have on the determination of income taxes payable and deferred income taxes?

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:

At the end of the prior year, Doubtful Inc. had a deferred tax asset of $20,000,000 attributable to its only timing difference, a temporary difference of $50,000,000 in a liability for estimated expenses. At that time, a valuation allowance of $4,000,000 was established. At the end of the current year, the temporary difference is $45,000,000, and Doubtful determines that the balance in the valuation account should now be $5,000,000. Taxable income is $15,000,000 and the tax rate is 40% for all years. Required: Prepare journal entries to record Doubtful's income tax expense for the current year. Show well-labeled supporting computations for the income tax payable, the valuation allowance, and the change in the deferred tax asset account.

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 2013. Show well-labeled computations.

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 2012, Sharp elected to carry back its operating loss. The enacted income tax rate was 35% in 2011 and 40% thereafter. In its 2013 balance sheet, what amount should Sharp report as current income tax payable?

Which of the following causes a temporary difference between taxable and pretax accounting income?

A deferred tax asset represents the tax effect of the temporary difference between the financial carrying value of an asset or liability and its tax basis.

The tax benefit of a net operating loss carried back two years represents a current receivable for income tax to be refunded.

A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as current to the extent that the NOL will be recovered in the following year.

On its tax return at the end of the current year Webnet Inc. has $6 million of tax depreciation in excess of depreciation in its income statement. A disclosure note reveals that $1 million of the $6 million difference will reverse itself next year, and the remainder will reverse over the next 4 years. In the absence of other temporary differences, in the balance sheet at the end of the current year Webnet would report:

In its first four years of operations Peridot Jewelers reported the following operating income (loss) amounts: There were no other deferred income taxes in any year. In 2012, Peridot elected to carry back its operating loss. The enacted income tax rate was 40%. In its 2013 income statement, what amount should Peridot report as current income tax payable?

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.