Practice Quiz: IA Chapter 19

Terms in this set (22)

Ferguson Company has the following cumulative taxable temporary differences:
12/31/13 12/31/12
1,800,000 1,280,000
The tax rate enacted for 2013 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2013 is $3,200,000 and there are no permanent differences. Ferguson's pretax financial income for 2013 is

($3,200,000 + ($1,800,000 - $1,280,000)) = $3,720,000
Taxable Income + (Current taxable temporary differences - previous year cumulative taxable temporary differences)

Hopkins Co. at the end of 2012, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax Financial Income - 900,000
Esitmated Litigation Exp - 1,200,000
Extra Depr for Taxes - (1,800.000)

The estimated litigation expense of $1,200,000 will be deductible in 2013 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $600,000 in each of the next three years. The income tax rate is 30% for all years.

The deferred tax liability to be recognized is

Current Non Current
A. 180,000 360,000
B. 180,000 270,000
C. 0 540,000
D. 0 450,000

($1,800,000 × 30%) = $540,000. (C)

Larsen Corporation reported $100,000 in revenues in its 2012 financial statements, of which $55,000 will not be included in the tax return until 2013. The enacted tax rate is 40% for 2012 and 35% for 2013. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2012?`

($55,000 × .35) = $19,250.

Mathis Co. at the end of 2012, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax Financial Income 600,000
Estimated Litigation Exp 1,500,000
Installment Sales (1,200,000)

Taxable Income 900,000

The estimated litigation expense of $1,500,000 will be deductible in 2014 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $600,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $600,000 current and $600,000 noncurrent. The income tax rate is 30% for all years.

The deferred tax asset to be recognized is

($1,500,000 × 30%) = $450,000 non current

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

Product warranty liabilities.

($840,000 - ($500,000 - $200,000)× .40) = $216,000

Hopkins Co. at the end of 2012, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax Financial Income 900,000
Estimated Litigation Exp 1,200,000
Installment Sales (1,800,000)

Taxable Income 300,000

The estimated litigation expense of $1,200,000 will be deductible in 2013 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $600,000 in each of the next three years. The income tax rate is 30% for all years.

The deferred tax asset to be recognized is

($1,200,000 × 30%) = $360,000 current

Haag Corp.'s 2013 income statement showed pretax accounting income of $1,250,000. To compute the federal income tax liability, the following 2013 data are provided:

Income from an exempt munciple bond 50,000
Deprec deducted for tax purposes
in excess of depr deducted for financ
ial statement purposes 100,000
Estimated federal income taxes paid 250,000
Enacted corp tax rate 30%

What amount of current federal income tax liability should be included in Hagg's December 31, 2013 balance sheet?

(<$1,250,000 - $50,000 - $100,000 > × 30% = $330,000;
$330,000 - $250,000) = $80,000

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

the future tax rates have been enacted into law.

Foltz Corp.'s 2012 income statement had pretax financial income of $250,000 in its first year of operations. Foltz uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2012, and the enacted tax rates for 2012 to 2016 are as follows:

Book Over under tax Tax Rates
2012 (50,000) 35%
2013 (65,000) 30%
2014 (15,000) 30%
2015 60,000 30%
2016 70,000 30%

There are no other temporary differences. In Foltz's December 31, 2012 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be

Non Current Deffered Income Taxes
Income Tax Liab Currently Pay
a. 39,000 50,000
b. 39,000 70,000
c. 15,000 60,000
d. 15,000 70,000

(($50,000 × 30%) = $15,000; ($250,000 - $50,000) × 35%) = $70,000 (D)

Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture.
For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%.
If Ewing's December 31, 2013, balance sheet includes a deferred tax liability of $450,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of

($450,000 ÷ 30%) = $1,500,000 temporary difference
($1,500,000 ÷ 40%) = $3,750,000

Accounting for income taxes can result in the reporting of deferred taxes as any of the following except

contra asset account

Kraft Company made the following journal entry in late 2012 for rent on property it leases to Danford Corporation.

Cash 90,000
Unearned Rent Rev 90,000

The payment represents rent for the years 2013 and 2014, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $138,000 at the end
of 2012, and its tax rate is 35%.
What amount of income tax expense should Kraft Company report at the end of 2012?

($138,000 - ($90,000 × .35)) = $106,500

Uncertain tax positions
I. Are positions for which the tax authorities may disallow a deduction in whole or in part.
II. Include instances in which the tax law is clear and in which the company believes an audit is likely.
III. Give rise to tax expense by increasing payables or increasing a deferred tax liability.

I only.

Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Installment income of $1,500,000 will be collected in the following years when the enacted tax rates are:

Collection of Income Enacted Tax Rates
2012 150,000 35%
2013 300,000 30%
2014 450,000 30%
2015 600,000 25%

The installment income is Dunn's only temporary difference. What amount should be included in the deferred income tax liability in Dunn's December 31, 2012 balance sheet?

($300,000 × 30%) + ($450,000 × 30%) + ($600,000 × 25%) = $375,000.

Kraft Company made the following journal entry in late 2012 for rent on property it leases to Danford Corporation.

Cash 90,000
Unearned Rent Rev 90,000

The payment represents rent for the years 2013 and 2014, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $138,000 at the end of 2012, and its tax rate is 35%.

What amount of income tax expense should Kraft Company report at the end of 2012?

($138,000 - ($90,000 × .35)) = $106,500.

($300,000 × 30%) = $90,000.

Which of the following differences would result in future taxable amounts?

Expenses or losses that are tax deductible before they are recognized in financial income.

Operating income and tax rates for C.J. Company's first three years of operations were as follows:

Income Enacted Tax Rate
2012 200,000 35%
2013 (500,000) 30%
2014 840,000 40%

Assuming that C.J. Company opts only to carryforward its 2013 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2013 balance sheet?

Amount Deferred Tax Asset or Liab
a. 150,000 Deferred Tax Liab
b. 175,000 Deferred Tax liab
c. 200,000 Deferred Tax asset
d. 150,000 Deferred Tax asset

($500,000 × .40) = $200,000.
(C)

At December 31, 2012 Raymond Corporation reported a deferred tax liability of $150,000 which was attributable to a taxable type temporary difference of $500,000. The temporary difference is scheduled to reverse in 2016. During 2013, a new tax law increased the corporate tax rate from 30% to 40%. Raymond should record this change by debiting

($500,000 × (.40 - .30))= $50,000 income tax expense

At the beginning of 2012; Elephant, Inc. had a deferred tax asset of $8,000 and a deferred tax liability of $12,000. Pre-tax accounting income for 2012 was $600,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income:

Interest income from municipal bonds
$ 48,000
Accrued warranty costs, estimated to be paid in 2013
$104,000
Operating loss carryforward
$ 76,000
Installment sales revenue, will be collected in 2013
$ 52,000
Prepaid rent expense, will be used in 2013
$24,000

What is Elephant, Inc.'s taxable income for 2012?

($600,000 - $48,000 + $104,000 - $76,000 - $52,000 - $24,000) = $504,000.

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

the classification of the related asset or liability

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Practice Quiz: IA Chapter 19

Terms in this set (22)

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