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Exam 17: Accounting for Income Taxes

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Question 1

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DeWitt Corporation reported pretax book income of $800,000. Tax depreciation exceeded book depreciation by $400,000. In addition, the company received $100,000 of tax-exempt municipalbond interest. DeWitt used a net operating loss carryover of $200,000 to offset taxable income in the current year. Compute DeWitt's book equivalent of taxable income. Use this number to compute DeWitt's total income tax provision or benefit for the current year, assuming a tax rate of 34%.

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Question 2

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Which of the following items is not a reconciling item in the income tax footnote?

A) Compensation deduction related to nonqualified stock options that were expensed for financial accounting purposes.
B) State and local income taxes.
C) Domestic production activities deduction.
D) Compensation deduction related to incentive stock options.

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

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Question 3

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Abbot Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Abbot received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Using a tax rate of 34%, Abbot's current income tax expense or benefit would be:

In 2017, Moody Corporation recorded the following deferred tax assets and liabilities: All of the deferred tax accounts relate to temporary differences that result from the company's U.S. operations. Moody wants to minimize the number of deferred tax accounts it reports on the balance sheet. What is the minimum number of deferred tax accounts Moody can report on its balance sheet and what are the names and dollar amounts in each account?

The tax effects of permanent differences are always reported solely in a company's computation of its effective tax rate.

Smith Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of$20,000, and favorable permanent differences of $40,000. Using a tax rate of 34%, Smith's deferred income tax expense or benefit would be:

ASC 740 governs how a company accounts for all taxes it incurs.

Which of the following statements about uncertain tax position disclosures is false?

MAC, Inc. completed its first year of operations with a pretax loss of $300,000. The tax return showed a net operating loss of $500,000, which MAC will carryforward. The $200,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming a tax rate of 34%, prepare the journal entries to record the deferred tax provision and the valuation allowance.

Which of the following statements is true?

Lafayette, Inc. completed its first year of operations with a pretax loss of $800,000. The tax return showed a net operating loss of $750,000, which the company will carryforward. The $50,000book-tax difference results from a disallowed deduction for meals and entertainment. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming a tax rate of 34%, prepare the journal entries to record the deferred tax provision and the valuation allowance.

In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet.

Which of the following temporary differences creates a deferred tax liability?

For 2017, Manchester Corporation recorded the following deferred tax assets and liabilities: The current deferred tax accounts and the noncurrent deferred tax liabilities result from temporary differences that relate to the company's U.S. operations. The noncurrent deferred tax asset relates to the company's German operations. Manchester wants to minimize the number of deferred taxaccounts it reports on the balance sheet. What is the minimum number of deferred tax accounts Manchester can report on its balance sheet and what are the names and dollar amounts in each account?

Which of the following items is not a permanent book/tax difference?

The Emerging Issues Task Force assists the FASB by providing guidance on theimplementation of ASC 740 and other accounting pronouncements.

ASC 740 requires a publicly traded company to disclose the components of its deferred tax assets and liabilities only if the amounts are considered to be:

Temporary differences create either a deferred tax asset or a deferred tax liability.

What confidence level must management have that a tax position will be sustained on audit before it can recognize any portion of the related deferred tax asset under ASC740?

Yellow Rose Corporation reported pretax book income of $1,000,000. Tax depreciation exceeded book depreciation by $100,000. During the year Yellow Rose capitalized $50,000 into endinginventory under §263A. Capitalized inventory costs of $75,000 in beginning inventory were deducted as part of cost of goods sold on the tax return. Using a tax rate of 34%, compute Yellow Rose's taxes payable or refundable.