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Exam 17: Accounting for Income Taxes

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Question 31

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Morgan Corporation determined that $1,100,000 of the research credit on its current-year tax return was uncertain, but that it was more likely than not to be sustained on audit. Management made the following assessment of the company's potential tax benefit from the credit and its probability of occurring. Under ASC 740, what amount of the tax benefit related to the research credit can Morgan recognize in calculating its income tax provision in the current year?

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Question 32

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Which of the following statements best describes a valuation allowance as it relates to accounting for income taxes?

A) A valuation allowance is a contra account to deferred tax assets only.
B) A valuation allowance is a contra account to deferred tax liabilities only.
C) A valuation allowance is a contra account to deferred tax assets and liabilities.
D) A valuation allowance is a contra account to noncurrent deferred tax assets only.

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

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Question 33

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Which of the following statements best describes " book equivalent of taxable income" (BETI) ?

Frost Corporation reported pretax book income of $3,080,000. Included in the computation were favorable temporary differences of $216,000, unfavorable temporary differences of $358,000, and unfavorable permanent differences of $50,800. Compute Frost's deferred income tax expense or benefit.

Stone Corporation reported pretax book income of $1,006,000. Tax depreciation exceeded book depreciation by $300,600. In addition, the reserve for bad debts decreased by $53,000. Stone had a net deferred tax asset of $34,204 at the beginning of the year, representing a net deductible temporary difference of $100,600. At the beginning of the tax year, Congress reduced the corporate tax rate from 34 percent to 21 percent. Compute the company's current and deferred income tax expense or benefit.

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

The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year.

Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference in the allowance for bad debts account. This basis difference is characterized as:

Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Compute Sparrow's current income tax expense or benefit.

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. Abbot's current income tax expense or benefit would be:

Potter, Incorporated reported pretax book income of $5,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $300,000. Potter sold a fixed asset and reported book gain of $60,000 and tax gain of $80,000. Finally, the company received $50,000 of tax-exempt municipal bond interest. Compute Potter's deferred income tax expense or benefit.

Morgan Corporation determined that $2,000,000 of the research credit on its current-year tax return was uncertain, but that it was more likely than not to be sustained on audit. Management made the following assessment of the company's potential tax benefit from the credit and its probability of occurring. Under ASC 740, what amount of the tax benefit related to theresearch credit can Morgan recognize in calculating its income tax provision in the current year?

Angel Corporation reported pretax book income of $1,032,000. During the current year, the net reserve for warranties increased by $29,800. In addition, tax depreciation exceeded book depreciation by $108,000. Finally, Angel subtracted a dividends received deduction of $31,400 in computing its current-year taxable income. Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

Manchester Corporation recorded the following deferred tax assets and liabilities: What will be the balances in the deferred tax asset and deferred tax liability accounts on Manchester Corporation's balance sheet?

Purple Rose Corporation reported pretax book income of $500,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the company received $250,000 of tax-exempt life insurance proceeds. The prior-year tax return showed taxable income of $100,000. Compute Purple Rose's current income tax expense or benefit.

Green Corporation reported pretax book income of $1,024,000. During the current year, the net reserve for warranties increased by $51,200. In addition, tax depreciation exceeded book depreciation by $106,000. Finally, Green subtracted a dividends received deduction of $25,600 in computing its current-year taxable income. Green's cash tax rate is:

Temporary differences that are cumulatively "favorable" are referred to as taxable temporary differences.

Which of the following statements is true?

Green Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $50,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Green subtracted a dividends received deduction of $25,000 in computing its current-year taxable income. Green's cash tax rate is:

Weaver Company had a net deferred tax liability of $34,408 at the beginning of the year, representing a net taxable temporary difference of $101,200 (taxed at 34 percent) . During the year, Weaver reported pretax book income of $404,800. Included in the computation were unfavorable temporary differences of $51,200 and favorable temporary differences of $22,400. At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Weaver's deferred income tax expense or benefit for the current year would be: