Deferred Tax-Practice questions- part 1

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1 Deferred Tax-Practice questions- part 1 1. Justification for the method of determining periodic deferred tax expense is based on the concept of a. Matching of periodic expense to periodic revenue. (also, correct) b. Objectivity in the calculation of periodic expense. c. Recognition of assets and liabilities. d. Consistency of tax expense measurements with actual tax planning strategies. 2. Among the items reported on Cord, Inc.'s income statement for the year ended December 31, X1, were the following: Payment of penalty $5,000 Insurance premium on life of an officer with Cord as owner and beneficiary 10,000 Temporary differences amount to a. $0 b. $5,000 c. $10,000 d. $15, Caleb Corporation has three financial statement elements for which the December 31, 2002, book value is different than the December 31, 2002, tax basis Book value Tax basis Difference Equipment $200,000 $120,000 $80,000 Prepaid officers insurance policy 75, ,000 Warranty liability 50, ,000 As a result of these differences, future taxable amounts are a. $50,000 b. $80,000 c. $155,000 d. $205, Temporary differences arise when revenues are taxable After they are recognized Before they are recognized in financial income Financial income a. Yes Yes b. Yes No c. No No d. No Yes 5. Which of the following differences would result in future taxable amounts? a. Expenses or losses that are deductible after they are recognized in financial income. b. Revenues or gains that are taxable before they are recognized in financial income. c. Expenses or losses that are deductible before they are recognized in financial income. d. Revenues or gains that are recognized in financial income but are never included in taxable income. 6. Dunn Co.'s X1 income statement reported $90,000 income before provision for income taxes. To compute the provision for federal income taxes, the following X1 data are provided: Rent received in advance $16,000 Income from exempt municipal bonds 20,000 Depreciation deducted for income tax purposes in excess of depreciation reported for financial statements purposes 10,000

2 Enacted corporate income tax rate 30% If the alternative minimum tax provisions are ignored, what amount of current federal income tax liability should be reported in Dunn's December 31, X1, balance sheet? a. $18,000 b. $22,800 c. $25,800 d. $28, Pine Corp.'s books showed pretax income of $800,000 for the year ended December 31, x1. In the computation of federal income taxes, the following data were considered: Gain on an involuntary conversion (Pine has elected to replace the property within the statutory period using total proceeds.) $350,000 Depreciation deducted for tax purposes in excess of depreciation deducted for book purposes 50,000 Federal estimated tax payments, ,000 Enacted federal tax rates, % What amount should Pine report as its current federal income tax liability on its December 31, X1, balance sheet? a. $50,000 b. $65,000 c. $120,000 d. $135, For the year ended December 31, 2002, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income was $650,000. The difference is due to accelerated depreciation for income tax purposes. Tyre`s effective c income tax rate is 30%, and Tyre made estimated tax payments during 2002 for $90,000. What amount should Tyre report as current income tax expense for 2002? a. $105,000 b. $135,000 c. $195,000 d. $225, Tower Corp. began operations on January 1, X1. For financial reporting, Tower recognizes revenues from all sales under the accrual method. However, in its income tax returns, Tower reports qualifying sales under the installment method. Tower's gross profit on these installment sales under each method was as follows: Year Accrual method Installment method X1 $1,600,000 $ 600,000 X2 2,600,000 1,400,000 The income tax rate is 30% for X1 and future years. There are no other temporary or permanent differences. In its December 31, X2, balance sheet, what amount should Tower report as a liability for deferred income taxes? a. $840,000 b. $660,000 c. $600,000 (hint: cumulative approach of calculating a DTL) d. $360, On June 30, X1, Ank Corp. prepaid a $19,000 premium on an annual insurance policy. The premium payment was a tax deductible expense in Ank's X1 cash basis tax return. The accrual basis income statement will report a $9,500 insurance expense in X1 and X2. Ank's income tax rate is 30% in X1 and 25% thereafter. In Ank's December 31, X1, balance sheet, what amount related to the insurance should be reported as a deferred income tax liability? a. $5,700 b. $4,750

3 c. $2,850 d. $2, Mill, which began operations on January 1, X1, recognizes income from long-term construction contracts under the percentage-of-completion method in its financial statements and under the completed-contract method for income tax reporting. Income under each method follows: Year Completed contract Percentage-of-completion X1 $ -- $300,000 X2 400, ,000 X3 700, ,000 The income tax rate was 30% for X1 through X3. For years after X3, the enacted tax rate is 25%. There are no other temporary differences. Mill should report in its December 31, X3, balance sheet, a deferred income tax liability of a. $87,500 b. $105,000 c. $162,500 d. $195,000 Items 12 and 13are based on the following: Zeff Co. prepared the following reconciliation of its pretax financial statement income for the year ended December 31, X1, its first year of operations: Pretax financial income $160,000 Nontaxable interest received on municipal securities (5,000) Long-term loss accrual in excess of deductible amount 10,000 --DTA Depreciation in excess of financial statement amount (25,000) --DTL Taxable income $140,000 Zeff`s tax rate for X1 is 40%. 12. On its X1 income statement, what amount should Zeff report as income tax expense- current portion? a. $52,000 b. $56,000 c. $62,000 d. $64, In its December 31, X1 balance sheet, what should Zeff report as deferred income tax liability? (this question is asking a B/S presentation also) a. $2,000 b. $4,000 c. $6,000 (net of non-current DTA and non-current DTA) d. $8, West Corp. leased a building and received the $36,000 annual rental payment on June 15, X1. The beginning of the lease was July 1, X1. Rental income is taxable when received. West's tax rates are 30% for X1 and 40% thereafter. West had no other permanent of temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should West report in its December 31, X1, balance sheet? a. $5,400 b. $7,200 c. $10,800 d. $14, Black Co., organized on January 2, X1, had pretax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, X1. The only temporary difference is accrued product warranty costs which are expected to be paid as follows: X2 $100,000 X3 50,000 X4 50,000

4 X5 100,000 Black has never had any net operating losses (book or tax) and does not expect any in the future. There were no temporary differences in prior years. The enacted income tax rates are 35% for X1, 30% for X2 through X4, and 25% for X5. In Black's December 31, X1, balance sheet, the deferred income tax asset should be a. $60,000 b. $70,000 c. $85,000 d. $105, A temporary difference that would result in a deferred tax liability is a. Interest revenue on municipal bonds. b. Accrual of warranty expense. c. Excess of tax depreciation over financial accounting depreciation. d. Subscriptions received in advance. 17. Orleans Co., a cash basis taxpayer, prepares accrual basis financial statements. In its X2 balance sheet, Orleans' deferred income tax liabilities increased compared to X1. Which of the following changes would cause this increase in deferred income tax liabilities? I. An increase in prepaid insurance. II. An increase in rent receivable. III. An increase in warranty obligations. a. I only. b. I and II. c. II and III. d. III only. 18. At the end of year 1, Cody Co. reported a profit on a partially completed construction contract by applying the percentage-of-completion method. By the end of year 2, the total estimated profit on the contract at completion in year 3 had been drastically reduced from the amount estimated at the end of year 1. Consequently, in year 2, a loss equal to one-half of the year 1 profit was recognized. Cody used the completed-contract method for income tax purposes and had no other contracts. The year 2 balance sheet should include a deferred tax Asset Liability a. Yes Yes b. No Yes c. Yes No d. No No 19. A deferred tax liability is computed using a. The current tax laws, regardless of expected or enacted future tax laws. b. Expected future tax laws, regardless of whether those expected laws have been enacted. c. Current tax laws, unless enacted future tax laws are different. d. Either current or expected future tax laws, regardless of whether those expected laws have been enacted. 20. For the year ended December 31, X1, Grim Co.'s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following: Interest on municipal bonds $70,000 Premium expense on keyman life insurance (20,000) Total $50,000 Grim's enacted income tax rate is 30%. In its X1 income statement, what amount should Grim report as current provision for income tax expense? a. $45,000 b. $51,000 c. $60,000 d. $66,000 Items 21 and 22 are based on the following: Venus Corp.'s worksheet for calculating current and deferred income taxes for X1 follows:

5 Pretax income $1,400 X1 X2 X3 Temporary differences: Depreciation (800) ($1,200) $2,000 Warranty costs 400 (100) (300) Taxable income $1,000 Enacted rate 30% 30% 25% Deferred tax liability(asset): Current $ (30) Noncurrent (before netting) $ (75) $140 Venus had no prior deferred tax balances. In its X1 income statement, what amount should Venus report as: 21. Current income tax expense? a. $420 b. $350 c. $300 d. $0 22. Deferred income tax expense? a. $350 b. $300 c. $120 d. $ Shear, Inc. began operations in X1. Included in Shear's X1financial statements were bad debt expenses of $1,400 and profit from an installment sale of $2,600. For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in X2. The enacted tax rates are 30% in X1 and 25% in X2. In its X1 income statement, what amount should Shear report as deferred income tax expense? a. $300 b. $360 c. $650 d. $780

Chapter 6 Supplemental Homework. Part 2. Problems

Chapter 6 Supplemental Homework 1 A Which of the items represent temporary book tax differences? 2 C What amounts enter into computation of effective tax rate? 3 C How are deferred tax liabilities and