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Exam 3: Tax Determination; Personal and Dependency Exemptions; an Overview of Property Transactions

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Question 1

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The IRS decides upon audit whether the taxpayer can claim the tax deferral benefits of ASC 740-30 (APB 23).

A) True
B) False

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Question 2

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Giant uses the "equity method" to account for the operations of its 40% owned subsidiary Little. A portion of Little's profits for the year are included in Giant's GAAP book income.

A) True
B) False

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Question 3

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You are assisting LipidCo, a U.S. corporation subject to GAAP, to determine its current-year book expense for income taxes. The following represent the steps that you will take in making this computation. Put the steps into the correct order.

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

A CFO probably prefers a tax planning strategy that produces a temporary book-tax savings difference to one that produces a permanent difference.

In the "rate reconciliation" of GAAP tax footnotes, temporary book-tax differences are reconciled between book income as if taxed at U.S. tax rates and the actual book income tax expense.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 35% corporate tax rate and no valuation allowance. ​ ​ Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. ​ ​ Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals and entertainment expense. Determine the net deferred tax asset or net deferred tax liability at year end.

Van Dyke, Inc., hopes to report a total book tax expense of $150,000 in the current year. This amount consists of $200,000 in current tax expense and a $50,000 tax benefit related to the expected future use of an NOL by Van Dyke. If the auditors determine that a valuation allowance of $20,000 must be placed against Van Dyke's deferred tax assets, what is Van Dyke's total book tax expense?

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23) benefits were previously adopted will decrease a corporation's current year effective tax rate.

Healy, Inc., reports an effective tax rate in its income tax footnote of 14%. The only reconciling item with regard to the hypothetical tax at 35% is a valuation allowance reversal of negative 21%. Which of the following statements is true concerning comparing Healy, Inc.'s effective tax rate with its competitors, all of whom have an effective tax rate between 32 and 36%?

Clipp, Inc., earns book net income before tax of $600,000. Clipp puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Clipp has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Clipp's deferred income tax liability reported on its GAAP financial statements?

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 35% corporate tax rate and no valuation allowance. ​ ​ ​ Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. ​ ​ Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals and entertainment expense. Determine the change in Black's deferred tax assets for the current year.

"Permanent differences" include items that appear in the Federal income tax return as income or deduction, and in the GAAP financial statements as revenue or expense, but in different reporting periods.

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 34% corporate tax rate and no valuation allowance. ​ ​ Amelia, Inc.'s, gross deferred tax assets and liabilities at the beginning of Amelia's year are listed below. Amelia, Inc.'s, book income before tax is $25,200. Amelia records two permanent book-tax differences. It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and entertainment expense. Provide the journal entry to record Amelia's current tax expense.

Bryden Corporation is considering two tax planning strategies. Both would produce a $1 million tax savings. One of the strategies would structure the plan so that the $1 million would represent a temporary book-tax difference, while the other would generate a permanent difference. In general, which plan would the Bryden CFO prefer? A stock analyst reviewing the Bryden valuation?

PaintCo Inc., a domestic corporation, owns 100% of BrushCo Ltd., an Irish corporation. Assume that the U.S. corporate tax rate is 35% and the Irish rate is 15%. PaintCo is permanently reinvesting BrushCo's earnings outside the United States under ASC 740-30 (APB 23). The corporations' book income, permanent and temporary book-tax differences, and current tax expense are reported as follows. There is no valuation allowance, and the effective tax rates do not change. Determine PaintCo's total tax expense reported on its GAAP financial statements, its current tax expense (benefit), and its deferred tax expense (benefit).

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 35% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. ​ ​ ​ Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals and entertainment expense. What is Black's total provision for income tax expense reported on its GAAP financial statement and its book net income after tax?

A corporation's taxable income almost never is the same as its GAAP financial accounting income. Explain why this occurs. Use the terms permanent and temporary book-tax differences in you answer. Give at least two examples of each type of book-tax difference.

Phyllis, Inc., earns book net income before tax of $600,000. Phyllis puts into service a depreciable asset this year, and first year tax depreciation exceeds book depreciation by $120,000. Phyllis has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 35%, what is Phyllis's total income tax expense reported on its GAAP financial statements?

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.