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Exam 17: Accounting for Income Taxes

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Question 21

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Acai Corporation determined that $5,000,000 of its R&D credit on its current year tax return was uncertain. Acai determined that there was a 40 percent chance of the credit being sustained on audit. Management made the following assessment of the company's potential tax benefit from the R&D credit and its probability of occurring. $\begin{array}{lll}\begin{array}{r}\text { Potential Estimated }\\\text { Benefit (000s) } \\\hline \$ \mathbf{5,0 0 0 , 0 0 0} \\\mathbf{3,50 0 , 0 0 0} \\\mathbf{2,00 0 , 0 0 0} \\0\end{array}\begin{array}{c}\text {Individual Probability}\\\text { of Occurring (\%) } \\\hline 05 \\15 \\35 \\25\\\end{array}\begin{array}{c}\text { Cumulative Probability } \\\text { of Occurring } \\\hline 05 \\20 \\55 \\100\end{array}\end{array}$ Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai recognize in calculating its income tax provision in the current year?

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Question 22

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A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.

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B) False

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Question 23

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Tuna Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Tuna subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Book equivalent of taxable income is:

A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet.

Temporary differences that are cumulatively "favorable" are defined as taxable temporary differences.

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

Which of the following statements is true with respect to a company's effective tax rate reconciliation?

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized.

Green Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. 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. Using a tax rate of 34%, Green's cash tax rate is:

A company's effective tax rate can best be described as:

Which of the following statements is true?

Izzo Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $800,000. The favorable book-tax difference of $200,000 was due to a $100,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $50,000 due to accrued vacation pay, and a $150,000 favorable permanent difference from the domestic manufacturing deduction. Izzo Company's applicable tax rate is 34%. a. Compute Izzo Company's current income tax expense. b. Compute Izzo Company's deferred income tax expense or benefit. c. Compute Izzo Company's effective tax rate. d. Provide a reconciliation of Izzo Company's effective tax rate with its hypothetical tax rate of 34%.

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:

Potter, Inc. 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. Using a tax rate of 34%, compute Potter's deferred income tax expense or benefit.

Which of the following taxes would not be accounted for under ASC 740?

Whitman Corporation reported pretax book income of $400,000 in 2014. Book depreciation exceeded tax depreciation by $100,000. In addition, the Company accrued vacation pay of $50,000 that was not deductible until paid in 2015. Whitman has a net operating loss carryforward of $200,000 from 2013. Assuming a tax rate of 34%, compute the Company's deferred income tax expense or benefit for 2014.

The tax effects of permanent differences always show up in a company's computation of its effective tax rate.

Which of the following statements best describes the disclosure of a company's deferred tax assets and liabilities?

ASC 740 applies to accounting for state and local and international income taxes as well as federal income taxes.

Which of the following items does not result in a permanent difference?