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Exam 3: Taxes on the Financial Statements

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Question 31

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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.

A) True
B) False

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Question 32

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South, Inc., earns book net income before tax of $400,000 in year 1.It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000.At the end of year 1, South's deferred tax liability account balance is $10,500.In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000.South records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21%, what is South's total provision for income tax expense reported on its GAAP financial statements for year 2?

A) $4,200
B) $94,500
C) $105,000
D) $109,200

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

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Question 33

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A chief financial officer (CFO) probably prefers a tax planning strategy that produces a temporary book-tax savings difference to one that produces a permanent difference.

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. A.Compute the deferred tax provision. B.Determine book income before income tax effects.C.Determine the current tax provision. D.Determine whether a valuation allowance is required, and apply or release it.E.Identify and measure temporary book-tax differences. F.Prepare the disclosures for the financial statement footnotes.G.Add/Subtract any permanent book-tax differences.

South, Inc., earns book net income before tax of $400,000 in year 1.It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000.At the end of year 1, South's deferred tax liability account balance is $10,500.In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000.South records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21% in both years, what is South's balance in its deferred tax liability account at the end of year 2?

Yahr, Inc., is a domestic corporation with no subsidiaries.It operates in almost every U.S.state.Yahr records no permanent or temporary book-tax differences this year.It's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

JuarezCo constructs the following table in determining how to apply ASC 740-10 to its filing position for its domestic production activities deduction.Its book-tax provision for the year, including $3 million for the uncertain transfer pricing issue, is $10 million. Under ASC 740-10, JuarezCo's book income tax expense for this item is:

Phyllis, Inc., earns book net income before tax of $600,000.Phyllis puts into service a depreciable asset this year, and its 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 21%, what is Phyllis's total income tax expense 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 21% corporate tax rate and no valuation allowance. 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 business meals expense.Calculate Black's current tax expense.

Hot, Inc.'s primary competitor is Cold, Inc.When comparing relative deferred tax asset and liability accounts with Cold, which of the following benchmarking activities should Hot undertake?

Which of the following items represents a temporary book-tax difference?

Cold, Inc., reported a $100,000 total tax expense for financial statement purposes in year 1.This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000.The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000.In year 2, Cold reports $600,000 in book net income before tax.Cold records no other permanent or temporary book-tax differences.At the end of year 2, Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero.What is Cold's total tax expense for year 2?

South, Inc., earns book net income before tax of $400,000 in year 1.It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by $50,000.At the end of year 1, South's deferred tax liability account balance is $10,500.In year 2, South earns $500,000 book net income before tax, and its book depreciation exceeds tax depreciation by $20,000.South records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21% in both years, what is South's current income tax expense reported on its GAAP financial statements for year 2?

Jacobsen Corporation has determined the appropriate changes to its deferred tax accounts.Its auditor now is discussing whether to place a valuation allowance against the deferred tax asset on the balance sheet.List some of the factors that the Jacobsen auditor will consider in this regard.

The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.

A valuation allowance expresses on the GAAP balance sheet that there exists uncertainty that the taxpayer will be able to recover a deferred tax asset.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 21% corporate tax rate and no valuation allowance. Assets Tax Debit/(Credit) Book Debit/(Credit) 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 business meals expense.Determine the change in Black's deferred tax assets for the current year.

Morrisson, Inc., earns book net income before tax of $500,000.In computing its book income, Morrisson deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes.Morrisson records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21% and no valuation allowance is required, what is Morrisson's current income tax expense 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 21% corporate tax rate and no valuation allowance. 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 business meals expense.Determine the net deferred tax asset or net deferred tax liability at year-end.

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current-year GAAP financial statements.