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Exam 16: Accounting for Income Taxes

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Question 1

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Due to differences between depreciation reported in the income statement and depreciation deducted for tax purposes Lucas Corp. has two million dollars in temporary differences that will increase taxable income next year. Assuming that Lucas has no other temporary differences, deferred income taxes should be reported in this year's ending balance sheet as a:

A) Current deferred asset.
B) Noncurrent deferred tax liability.
C) Current deferred tax liability.
D) Noncurrent deferred tax asset.

E) A) and B)
F) B) and D)

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Question 2

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For reporting purposes, current deferred tax assets and current deferred tax liabilities are:

A) Netted against one another in the balance sheet.
B) Reported separately in the balance sheet.
C) Reflected only in the footnotes.
D) Combined respectively with noncurrent deferred tax assets and noncurrent deferred tax liabilities in the balance sheet.

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

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Question 3

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For the current year ($ in millions) , Centipede Corp. had $80 in pretax accounting income. This included bad debt expense of $6 based on the allowance method, and $20 in depreciation expense. Two million in receivables were written off as uncollectible, and MACRS depreciation amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income?

In its first year of operations Woodmount Corporation reported pretax accounting income of $500 million for the current year. Depreciation reported in the tax return in excess of depreciation in the income statement was $60 million. The excess tax will reverse itself evenly over the next three years. The current year's tax rate of 40% will be reduced under the current law to 35% next year and 30% for all subsequent years. At the end of the current year, the deferred tax liability related to the excess depreciation will be:

Which of the following causes a permanent difference between taxable income and pretax accounting income?

Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000, and accrued warranty expense of $400 on the books although no warranty work was performed. What is Bumble Bee's pretax accounting income?

Typical Corp. reported a deferred tax liability of $6,000,000 for the year ended December 31, 2008, when the tax rate was 40%. The deferred tax liability was related to a temporary difference of $15,000,000 caused by an installment sale in 2008. The temporary difference is expected to reverse in 2010 when the income deferred from taxation will become taxable. There are no other temporary differences. Assume a new tax law passed in 2009 and the tax rate, which will remain at 40% through December 31, 2009, will become 48% for tax years beginning after December 31, 2009. Pretax accounting income and taxable income for the year 2009 is $30,000,000. Required: Prepare a compound journal entry to record Typical's income tax expense for the year 2009. Show well-labeled computations.

Ignoring operating expenses and additional sales in 2010, what deferred tax liability would Isaac report in its year-end 2010 balance sheet?

At the end of its first year of operations Prince Charming Corporation had a current liability of $300,000 for unearned rent. This was the only difference between pretax accounting income and taxable income. Assume an income tax rate of 40%. Required: The tax liability from the tax return is $750,000. Prepare the journal entry to record income taxes for Prince Charming's first year of operations. Show well-labeled computations.

Which of the following causes a temporary difference between taxable and pretax accounting income?

When a new tax rate is enacted, what adjustment, if any, is made to the retained earnings account as a result of the change?

A deferred tax asset represents a:

Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: Puritan's tax rate is 40% for all years. Assuming that Puritan elected a loss carryback, what would be the net loss in 2009 reported in Puritan's income statement?

What should be the balance in Kent's deferred tax liability account as of December 31, 2009?

What should Kent report as the current portion of its income tax expense in the year 2009?

What should Hobson International report as net income?

Estimated employee compensation expenses earned during the current period but expected to be paid in the next period causes:

Revenues from installment sales of property reported on financial statements in prior years and currently reported in the tax return create deferred tax assets.

Pocus, Inc., reports bad debt expense using the allowance method. For tax purposes the direct write-off method is used. At the end of the current year, Pocus has accounts receivable and an allowance for uncollectible accounts of $5,000,000 and $200,000, respectively, and taxable income of $20,000,000. At the end of the previous year, Pocus reported a deferred tax asset of $80,000 related to the difference in reporting bad debts, its only temporary difference. The enacted tax rate is 30% each year. Required: Prepare the appropriate journal entry for Pocus to record the income tax provision for the current year. Show well-labeled supporting computations.

How are deferred tax assets and deferred tax liabilities reported in a classified balance sheet?