Verified Test Bank Ch16 Accounting For Income Taxes

Intermediate Accounting, 10e (Spiceland)

Chapter 16 Accounting for Income Taxes

1) A temporary difference originates in one period and reverses, or turns around, in one or more later periods.

Difficulty: 1 Easy

Topic: Distinguish type of temporary difference

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

2) Expenditures currently deducted in the tax return but not included with expenses in the income statement until subsequent years create deferred tax liabilities.

Difficulty: 1 Easy

Topic: Distinguish type of temporary difference

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

3) Deferred tax assets and deferred tax liabilities represent the tax effect of the temporary difference between the financial carrying value of an asset or liability and its tax basis.

Difficulty: 1 Easy

Topic: Deferred tax assets

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

Difficulty: 2 Medium

Topic: Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

5) Rent collected in advance results in deferred tax assets.

Difficulty: 1 Easy

Topic: Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

6) MACRS depreciation typically creates deferred tax liabilities early in the life of an asset.

Difficulty: 1 Easy

Topic: Distinguish items causing deferred tax

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

7) An unrealized gain from marking an investment to fair value typically creates a deferred tax asset.

Difficulty: 2 Medium

Topic: Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

8) Future taxable amounts result in deferred tax assets.

Difficulty: 1 Easy

Topic: Distinguish type of temporary difference

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

9) The classification of deferred tax assets is sometimes dependent on when the benefit will be realized.

Difficulty: 2 Medium

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

10) The basic issue in deciding whether to record a valuation allowance for a deferred tax asset is determining whether it is more likely than not if future taxable income will be sufficient to realize the tax benefit.

Difficulty: 1 Easy

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

11) Valuation allowances reduce deferred tax liabilities to the amount that is more likely than not to be payable in the future.

Difficulty: 1 Easy

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

12) Changes in enacted tax rates that do not become effective in the current period affect deferred tax accounts only after the new rates take effect.

Difficulty: 1 Easy

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

13) Changes in enacted tax rates only affect income tax expense in the years those changes affect tax payable.

Difficulty: 2 Medium

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

14) A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as current to the extent that the NOL will be recovered in the following year.

Difficulty: 2 Medium

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

15) The tax benefit of a net operating loss carried back two years represents a current receivable for income tax to be refunded.

Difficulty: 2 Medium

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

16) Deferred tax assets and liabilities typically are classified as current or long term according to when the underlying temporary difference is expected to reverse.

Difficulty: 1 Easy

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

17) GAAP regarding accounting for income taxes requires which of the following procedures?

A) Computation of deferred tax assets and liabilities based on temporary differences.

B) Computation of deferred income tax based on permanent differences.

C) Computation of income tax expense based on taxable income.

D) Computation of deferred income tax based on temporary and permanent differences.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

18) A result of inter-period tax allocation is that:

A) Large fluctuations in a company's tax liability are eliminated.

B) The income tax expense is allocated among the income statement items that caused the expense.

C) The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year.

D) The income tax expense shown in the income statement is equal to the deferred taxes for the year.

Difficulty: 2 Medium

Topic: Determine tax expense

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) Investment expenses incurred to generate tax-exempt income.

B) MACRS used for depreciating equipment.

C) The dividends received deduction.

D) Life insurance proceeds received due to the death of an executive.

Difficulty: 1 Easy

Topic: Distinguish items causing deferred tax

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

20) Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

A) Interest income on municipal bonds.

B) Proceeds from life insurance received due to death of an executive.

C) Prepaid utilities.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Temporary differences; Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

21) Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

A) Depreciation early in the life of an asset.

B) Unrealized losses from recording investments at fair value.

C) Rent collected in advance.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Distinguish items causing deferred tax; Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

22) Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

A) Depreciation early in the life of an asset.

B) Unrealized gain from recording investments at fair value.

C) Subscriptions collected in advance.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Deferred tax assets; Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

23) Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

A) Unrealized loss from recording inventory impairments.

B) Prepaid expenses.

C) Installment sales for which taxable income recognized when cash is collected.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Deferred tax assets; Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

24) Which of the following creates a deferred tax liability?

A) An unrealized loss from recording inventory at lower of cost or market.

B) Accelerated depreciation in the tax return.

C) Estimated warranty expense.

D) Subscriptions collected in advance.

Difficulty: 2 Medium

Topic: Distinguish items causing deferred tax; Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

25) Which of the following circumstances creates a future taxable amount?

A) Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned.

B) Accrued compensation costs for future payments.

C) Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting.

D) Investment expenses incurred to obtain tax-exempt income (not tax deductible).

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

26) Which of the following usually results in an increase in a deferred tax liability?

A) Accrual of estimated operating expenses.

B) Revenue collected in advance.

C) Prepaid operating expenses, currently deductible.

D) All of these answer choices are correct.

Difficulty: 2 Medium

Topic: Distinguish items causing deferred tax; Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

27) For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows:

Tringali's tax rate is 25%. Assume that no estimated taxes have been paid.

What should Tringali report as income tax payable for its first year of operations?

A) $75,000.

B) $71,250.

C) $66,250.

D) $5,000.

Difficulty: 1 Easy

Topic: Permanent differences; Determine tax payable

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

28) For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows:

Tringali's tax rate is 25%. Assume that no estimated taxes have been paid.

What should Tringali report as its deferred income tax liability as of the end of its first year of operations?

A) $35,000.

B) $20,000.

C) $8,750

D) $5,000.

Difficulty: 1 Easy

Topic: Deferred tax liabilities; Permanent differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

29) For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows:

Tringali's tax rate is 25%. Assume that no estimated taxes have been paid.

What should Tringali report as its income tax expense for its first year of operations?

A) $75,000.

B) $66,250.

C) $71,250

D) $5,000.

Difficulty: 2 Medium

Topic: Determine tax expense; Deferred tax liabilities; Permanent differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

30) Isaac Inc. began operations in January 2021. For some property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.

In 2021, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows:

Assume that Isaac has a 25% income tax rate and that there were no other differences in income for financial statement and tax purposes.

Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2021 balance sheet?

A) $18 million.

B) $135 million.

C) $112.5 million.

D) $540 million.

Difficulty: 2 Medium

Topic: Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

31) Isaac Inc. began operations in January 2021. For some property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.

In 2021, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows:

Assume that Isaac has a 25% income tax rate and that there were no other differences in income for financial statement and tax purposes.

Ignoring operating expenses and additional sales in 2022, what deferred tax liability would Isaac report in its year-end 2022 balance sheet?

A) $54 million.

B) $90 million.

C) $105 million.

D) $112.5 million.

Difficulty: 2 Medium

Topic: Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

32) Isaac Inc. began operations in January 2021. For some property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.

In 2021, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows:

Assume that Isaac has a 25% income tax rate and that there were no other differences in income for financial statement and tax purposes.

Suppose that, in 2022, legislation revised the income tax rates so that Isaac would be taxed in 2023 and beyond at 30%, rather than 25%. Assume that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses and additional sales in 2022, what deferred tax liability would Isaac report in its year-end 2022 balance sheet?

A) $105 million.

B) $144 million.

C) $126 million.

D) $180 million.

Difficulty: 2 Medium

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

33) In the statement of cash flows, by using the indirect method for determining cash flows from operating activities, a decrease in deferred tax liabilities is:

A) Added to net income.

B) Subtracted from net income.

C) Ignored.

D) Included under financing activities.

Difficulty: 2 Medium

Topic: Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

34) Which of the following statements is true as to GAAP regarding accounting for income taxes, and its use of the asset and liability approach?

A) Considerable flexibility is permitted in the balance sheet classification of deferred tax amounts.

B) The approach recognizes the time value of money.

C) The approach is consistent with a balance sheet emphasis of U.S. GAAP and the International Financial Reporting Standards (IFRS).

D) The approach is consistent with cash basis accounting.

Difficulty: 2 Medium

Topic: IFRS Income tax accounting

Learning Objective: 16-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for income taxes.

Bloom's: Understand

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation

35) The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars):

The applicable tax rate is 25%. There are no other temporary or permanent differences.

Franklin's taxable income ($ in millions) is:

A) $40.

B) $155.

C) $110.

D) $160.

Difficulty: 2 Medium

Topic: Permanent differences; Determine taxable income

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

36) The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars):

The applicable tax rate is 25%. There are no other temporary or permanent differences.

Franklin Freightways should have recorded ($ in millions):

A) Tax payable of $40.

B) Tax payable of $22.5.

C) Tax payable of $48.75.

D) Tax benefit of $10 due to the NOL.

Difficulty: 3 Hard

Topic: Permanent differences; Determine tax payable

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

37) The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars):

The applicable tax rate is 25%. There are no other temporary or permanent differences.

Franklin's net income ($ in millions) is:

A) $134.

B) $147.5.

C) $156.25.

D) $145.

Difficulty: 3 Hard

Topic: Permanent differences; Intraperiod tax allocation

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-05 Explain why permanent differences have no deferred tax consequences.; 16-10 Explain intraperiod tax allocation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

38) The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars):

The applicable tax rate is 25%. There are no other temporary or permanent differences.

Which of the following must Franklin Freightways disclose related to the income tax expense reported in the income statement ($ in millions)?

A) Only the current portion of tax expense of $40.

B) Only the total tax expense of $50.

C) Both the current portion of the tax expense of $40 and the deferred portion of the tax expense of $10.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Disclosure notes

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

39) The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars):

The applicable tax rate is 25%. There are no other temporary or permanent differences.

Franklin's balance sheet at the end of its first year would report:

A) A deferred tax liability of $10 million among noncurrent liabilities.

B) A deferred tax liability of $10 million among current liabilities.

C) A deferred tax asset of $10 million among noncurrent assets.

D) A deferred tax asset of $10 million among current assets.

Difficulty: 2 Medium

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

40) Brady's listing of deferred tax assets and liabilities includes the following for operations in the tax jurisdictions of Tambura and Nileboo:

Brady files separate tax returns in Tambura and Nileboo.  Brady's balance sheet would include the following disclosure of deferred tax assets and liabilities:

A) A deferred tax asset of $4 million.

B) A deferred tax liability of $17 million and a deferred tax asset of $21 million.

C) A deferred tax liability of $11 million and a deferred tax asset of $15 million.

D) A deferred tax liability of $19 million and a deferred tax asset of $23 million.

Difficulty: 2 Medium

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

41) Woody Corp. had taxable income of $8,000 in the current year. The amount of depreciation reported in the tax return was $3,000, while the amount of depreciation reported in the income statement was $1,000. Assuming no other differences between tax and accounting income, Woody's pretax accounting income was:

A) $5,000.

B) $6,000.

C) $10,000.

D) $11,000.

Difficulty: 3 Hard

Topic: Determine taxable income

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

42) Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 25%. The total income tax expense for the year was:

A) $390 million.

B) $165 million.

C) $105 million.

D) $135 million.

Difficulty: 3 Hard

Topic: Determine taxable income

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.; 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

43) Wayne Co. had a decrease in deferred tax liability of $20 million, a decrease in deferred tax assets of $10 million, and an increase in tax payable of $100 million. The company is subject to a tax rate of 25%. The total income tax expense for the year was:

A) $90 million.

B) $100 million.

C) $110 million.

D) $130 million.

Difficulty: 2 Medium

Topic: Determine taxable income

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.; 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

44) Plutonic Inc. had $400 million in taxable income for the current year. Plutonic also had an increase in deferred tax liabilities of $50 million and recognized tax expense of $80 million. The company is subject to a tax rate of 25%. The change in deferred tax assets (ignoring any valuation allowance) was a(n):

A) increase of $30 million.

B) increase of $70 million.

C) decrease of $30 million.

D) decrease of $70 million.

Difficulty: 3 Hard

Topic: Deferred tax assets

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

45) During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $15 million. Stern's taxable income for the year would be:

A) $30 million.

B) $60 million.

C) $50 million.

D) $45 million.

Difficulty: 2 Medium

Topic: Determine taxable income

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

46) Information for Kent Corp. for the year 2021:

Reconciliation of pretax accounting income and taxable income:

Cumulative future taxable amounts all from depreciation temporary differences:

The enacted tax rate was 25% for 2020 and thereafter.

What should be the balance in Kent's deferred tax liability account as of December 31, 2021?

A) $5,200.

B) $6,250

C) $25,000.

D) None of these answer choices are correct.

Difficulty: 3 Hard

Topic: Deferred tax liabilities; Permanent differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

47) Information for Kent Corp. for the year 2021:

Reconciliation of pretax accounting income and taxable income:

Cumulative future taxable amounts all from depreciation temporary differences:

The enacted tax rate was 25% for 2020 and thereafter.

What should Kent report as the current portion of its income tax expense in the year 2021?

A) $38,250.

B) $41,250.

C) $45,000.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Determine tax payable

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

48) Information for Kent Corp. for the year 2021:

Reconciliation of pretax accounting income and taxable income:

Cumulative future taxable amounts all from depreciation temporary differences:

The enacted tax rate was 25% for 2020 and thereafter.

What would Kent's income tax expense be in the year 2021?

A) $35,250.

B) $38,250.

C) $41,250.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Determine tax expense

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.; 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

49) Of the following temporary differences, which one ordinarily creates a deferred tax asset?

A) Completed-contract method for long-term construction contracts for tax reporting.

B) Installment sales for tax reporting.

C) Accrued warranty expense.

D) Accelerated depreciation for tax reporting.

Difficulty: 2 Medium

Topic: Deferred tax assets; Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

50) Using straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes in the first year of an asset's life creates a:

A) Future deductible amount.

B) Permanent difference not requiring inter-period tax allocation.

C) Deferred tax asset.

D) Deferred tax liability.

Difficulty: 1 Easy

Topic: Distinguish type of temporary difference; Deferred tax liabilities

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

51) A deferred tax asset represents a:

A) Future income tax benefit.

B) Future cash collection.

C) Future tax refund.

D) Future amount of money to be paid out.

Difficulty: 1 Easy

Topic: Deferred tax assets

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

52) Of the following common types of temporary differences, which one ordinarily creates a deferred tax asset?

A) Intangible drilling costs.

B) Depreciation.

C) Rent received in advance.

D) Installment sales.

Difficulty: 2 Medium

Topic: Deferred tax assets; Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

53) Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

A) Tax depreciation in excess of book depreciation.

B) Revenue collected in advance.

C) The installment sales method for tax purposes.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Deferred tax assets; Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

54) Which of the following creates a deferred tax asset?

A) An unrealized loss from recording investments at fair value.

B) Prepaid insurance.

C) An unrealized gain from recording investments at fair value.

D) Accelerated depreciation in the tax return.

Difficulty: 3 Hard

Topic: Deferred tax assets; Distinguish items causing deferred tax

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

55) Which of the following circumstances creates a future deductible amount?

A) Earning of non-taxable interest on municipal bonds.

B) Sales of property (installment method for tax purposes).

C) Prepaid advertising expense.

D) Accrued warranty expenses.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) An increase in a deferred tax asset.

B) A decrease in a deferred tax asset.

C) An increase in a deferred tax liability.

D) A decrease in a deferred tax liability.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference; Deferred tax assets

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

57) A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record:

A) An increase in a deferred tax asset.

B) A decrease in a deferred tax asset.

C) An increase in a deferred tax liability.

D) A decrease in a deferred tax liability.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference; Deferred tax assets

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

58) In 2021, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2021, Magic Table Inc incurs:

A) An increase in a deferred tax asset.

B) A decrease in a deferred tax asset.

C) An increase in a deferred tax liability.

D) A decrease in a deferred tax liability.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference; Deferred tax assets

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

59) Which of the following usually results in an increase in a deferred tax asset?

A) Accelerated depreciation for tax reporting and straight-line depreciation for financial reporting.

B) Prepaid insurance.

C) Subscriptions delivered for which customers had paid in advance.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference; Deferred tax assets

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

60) At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A disclosure note reveals that the entire $400,000 will be recognized in the income statement in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:

A) Noncurrent deferred tax liability.

B) Noncurrent deferred tax asset.

C) Current deferred tax liability.

D) Current deferred tax asset.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference; Balance sheet classification

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.; 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

61) The valuation allowance account that is used in conjunction with deferred tax assets is a(n):

A) Liability.

B) Component of shareholders' equity.

C) Asset.

D) Contra asset.

Difficulty: 1 Easy

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

62) The valuation allowance account that is used in conjunction with deferred taxes relates:

A) Only to deferred tax liabilities.

B) To both deferred tax assets and liabilities.

C) Only to deferred tax assets.

D) Only to income taxes receivable due to net operating loss carrybacks.

Difficulty: 1 Easy

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

63) In 2020, HD had reported a deferred tax asset of $90 million with no valuation allowance. At December 31, 2021, the account balances of HD Services showed a deferred tax asset of $120 million before assessing the need for a valuation allowance and income taxes payable of $80 million. HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. HD made no estimated tax payments during 2021. What amount should HD report as income tax expense in its 2021 income statement?

A) $50 million.

B) $80 million.

C) $86 million.

D) $116 million.

Difficulty: 3 Hard

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

64) For classification purposes, a valuation allowance:

A) Is allocated proportionately between deferred tax assets and deferred tax liabilities.

B) Is allocated proportionately between the current and noncurrent portions of the deferred tax asset.

C) Is contra to the deferred tax asset and classified as noncurrent.

D) Is added to the deferred tax asset and classified as current.

Difficulty: 2 Medium

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

65) If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is:

A) Probable that sufficient taxable income will be generated in future years to realize the full tax benefit.

B) Probable that sufficient financial income will be generated in future years to realize the full tax benefit.

C) More likely than not that sufficient taxable income will be generated in future years to realize the full tax benefit.

D) More likely than not that sufficient financial income will be generated in future years to realize the full tax benefit.

Difficulty: 1 Easy

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) The installment method used for sales of property.

B) The depreciation method used for equipment.

C) Interest income on municipal bonds.

D) Percentage-of-completion method for long-term construction contracts.

Difficulty: 1 Easy

Topic: Permanent differences

Learning Objective: 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

67) In reconciling net income to taxable income, interest earned on municipal bonds is:

A) Ignored.

B) A temporary difference.

C) A reversing difference.

D) A permanent difference.

Difficulty: 1 Easy

Topic: Permanent differences

Learning Objective: 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

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

A) Investment expenses incurred to obtain tax-exempt income.

B) Unrealized gains from recording investments at fair value.

C) Rent collected in advance.

D) Prepaid expenses.

Difficulty: 1 Easy

Topic: Permanent differences

Learning Objective: 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

69) Which of the following would never require reporting deferred tax assets or deferred tax liabilities?

A) Depreciation on equipment.

B) Accrual of warranty expense.

C) Life insurance premiums for the payer's benefit.

D) Rent revenue received in advance.

Difficulty: 2 Medium

Topic: Permanent differences

Learning Objective: 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

70) When tax rates are changed subsequent to the creation of a deferred tax asset or liability, GAAP requires that:

A) All deferred tax accounts be adjusted to reflect the new tax rates.

B) The beginning deferred tax accounts are left unchanged.

C) Only the deferred tax asset accounts are adjusted to reflect the new tax rates.

D) Only the deferred tax liability accounts are adjusted to reflect the new tax rates.

Difficulty: 1 Easy

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

71) Pretax accounting income for the year ended December 31, 2021, was $50 million for Truffles Company. Truffles' taxable income was $60 million. This was a result of differences between straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The enacted tax rate is 25% for 2021 and 30% thereafter. What amount should Truffles report as the current portion of income tax expense for 2021?

A) $15 million.

B) $18 million.

C) $12.5 million.

D) $24 million.

Difficulty: 2 Medium

Topic: Tax rate considerations; Determine tax payable

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

72) The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $150,000 at December 31, 2021. This was a result of differences between straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 25% for 2021 and 30% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2021, balance sheet as:

A) A liability of $45,000.

B) A liability of $37,500.

C) An asset of $45,000.

D) An asset of $37,500.

Difficulty: 2 Medium

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

73) The effect of a change in tax rates:

A) Results in a prior period adjustment.

B) Is allocated between discontinued operations and continuing operations.

C) Is reported separately after discontinued operations.

D) Is reflected in income from continuing operations.

Difficulty: 2 Medium

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

74) Giada Foods reported $940 million in income before income taxes for 2021, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for 2021 was 25%, but the enacted rate for years after 2021 is 30%. The balance in the deferred tax liability in the December 31, 2021, balance sheet is:

A) $16 million.

B) $25 million.

C) $30 million.

D) $54 million.

Difficulty: 3 Hard

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

75) 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 25% will be reduced under the current law to 30% next year and 35% for all subsequent years. At the end of the current year, the deferred tax liability related to the excess depreciation will be:

A) $21 million.

B) $24 million.

C) $18 million.

D) $20 million.

Difficulty: 3 Hard

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

76) Bumble Bee Co. had taxable income of $7,000, tax 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?

A) $4,400.

B) $3,600.

C) $9,600.

D) $2,600.

Difficulty: 3 Hard

Topic: Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

77) For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $7 and $20 in depreciation expense. Two million of warranty costs were incurred, and depreciation deductions in the tax return amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's income tax payable currently, assuming a tax rate of 25%?

A) 14.5 million.

B) 25.2 million.

C) 17.5 million.

D) 15.75 million.

Difficulty: 3 Hard

Topic: Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

78) For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $7 and $20 in depreciation expense. Two million of warranty costs were incurred, and depreciation deductions in the tax return amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income?

A) $74 million.

B) $70 million.

C) $64 million.

D) $50 million.

Difficulty: 3 Hard

Topic: Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

79) Under current tax law for an industry where NOL carryback is allowed, generally a net operating loss may be carried back:

A) 2 years.

B) 5 years.

C) 15 years.

D) 20 years.

Difficulty: 1 Easy

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

80) Under current tax law a net operating loss typically may be carried forward up to:

A) 5 years.

B) 10 years.

C) 15 years.

D) indefinitely.

Difficulty: 1 Easy

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

81) If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is more likely than not that:

A) Sufficient accounting income will be generated in future years to realize the full tax benefit.

B) Sufficient accounting and taxable income will exist in future years to realize the full tax benefit.

C) Sufficient taxable income will be generated in future years to realize the full tax benefit.

D) Tax rates will not change in future years.

Difficulty: 3 Hard

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

82) Assuming no other deferred tax items exist in a particular year, a net operating loss (NOL) carryforward will be shown in the balance sheet at the end of the NOL year as:

A) A receivable under current assets for an income tax refund.

B) A current deferred tax asset.

C) A noncurrent deferred tax asset.

D) Both a current and a noncurrent deferred tax asset.

Difficulty: 2 Medium

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

83) If a net operating loss (NOL) carryback is allowed to be recognized, it usually:

A) Results in a current receivable in the NOL year.

B) Is subject to a valuation allowance.

C) Is reflected as deferred tax asset at the end of the NOL year.

D) Is reflected as a deferred tax liability at the end of the NOL year.

Difficulty: 2 Medium

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

84) Recognizing tax benefits in a loss year due to a net operating loss carryforward requires:

A) Creating a tax refund receivable.

B) Note disclosure only.

C) Creating a deferred tax asset.

D) Creating a deferred tax liability.

Difficulty: 1 Easy

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

85) Assume that Peridot operates in an industry for which NOL carryback is allowed.

In its first four years of operations Peridot reported the following operating income (loss) amounts:

There were no other items affecting deferred income taxes in any year. In 2020, Peridot elected to carry back its operating loss. The enacted income tax rate was 25%. In its 2021 income statement, what amount should Peridot report as income tax expense?

A) $80,000.

B) $110,000.

C) $170,000.

D) $112,500.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

86) Assume that the Kelso Company operates in an industry for which NOL carryback is allowed. The Kelso Company had the following operating results:

What is the income tax refund receivable?

A) $18,000.

B) $19,500.

C) $18,750.

D) $24,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: Keyboard Navigation

87) In 2021, Bodily Corporation reported $300,000 pretax accounting income. The income tax rate for that year was 25%. Bodily had an unused $120,000 net operating loss carryforward from 2019 when the tax rate was 30%. Bodily's income tax payable for 2021 would be:

A) $54,000.

B) $45,000.

C) $90,000.

D) $72,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

88) Assume that Sharp operates in an industry for which NOL carryback is allowed. In its first three years of operations Sharp reported the following operating income (loss) amounts:

There were no deferred income taxes in any year. In 2020, Sharp elected to carry back its operating loss. The enacted income tax rate was 25% in 2019 and 30% thereafter. In its 2021 balance sheet, what amount should Sharp report as current income tax payable?

A) $900,000.

B) $1,260,000.

C) $1,080,000.

D) $2,160,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

89) Assume that Peridot operates in an industry for which NOL carryback is not allowed. In its first four years of operations Peridot Jewelers reported the following operating income (loss) amounts:

There were no other deferred income taxes in any year. The enacted income tax rate was 25%. In its 2021 income statement, what amount should Peridot report as current income tax payable?

A) $22,500.

B) $106,250.

C) $6,250.

D) $112,500.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

90) According to GAAP for accounting for income taxes, when a company has a net operating loss carryforward:

A) A deferred tax liability is recognized.

B) A receivable is created.

C) A deferred tax equity account is created.

D) A deferred tax asset is recorded along with any applicable valuation allowance.

Difficulty: 1 Easy

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Remember; Apply

AACSB: Reflective Thinking; Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

91) Assume that Puritan Corp. operates in an industry for which NOL carryback is allowed. Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations:

Puritan's tax rate is 25% for all years. Puritan elected a loss carryback.

As of December 31, 2021. Puritan was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback.

What did Puritan report on December 31, 2021, as the deferred tax asset for the NOL carryforward?

A) $280,000.

B) $200,000.

C) $62,500

D) $0.

Difficulty: 2 Medium

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

92) Assume that Puritan Corp. operates in an industry for which NOL carryback is allowed. Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations:

Puritan's tax rate is 25% for all years. Puritan elected a loss carryback.

As of December 31, 2021. Puritan was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback.

What would be the net loss in 2021 reported in Puritan's income statement?

A) $450,000.

B) $240,000.

C) $460,000.

D) $500,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

93) Assume that Puritan Corp. operates in an industry for which NOL carryback is allowed. Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations:

Puritan's tax rate is 25% for all years. Puritan elected a loss carryback.

As of December 31, 2021. Puritan was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback.

What would Puritan report as net income for 2022?

A) $620,000.

B) $525,000.

C) $270,000.

D) $460,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

94) Before considering a net operating loss carryforward of $80 million, Fama Corporation reported $200 million of pretax accounting and taxable income in the current year. The income tax rate for all previous years was 30%. On January 1 of the current year, a new tax law was enacted, reducing the rate to 25% effective immediately. Fama's income tax payable for the current year would be:

A) $48 million.

B) $28 million.

C) $30 million.

D) $36 million.

Difficulty: 2 Medium

Topic: Tax rate considerations; Net operating losses

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.; 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

95) Assume that Reliable Corp. operates in an industry for which NOL carryback is allowed. Reliable Corp. had a pretax accounting income of $30 million this year. This included the collection of $40 million of life insurance proceeds when several key executives died in a plane crash. Temporary differences for the current year netted out to zero. Reliable has had a 25% tax rate and taxable income of $120 million over the previous two years and plans to elect a net operating loss carryback for tax purposes. In the current year financial statements, Reliable would report:

A) Net income of $32.5 million.

B) A tax benefit of $10 million.

C) Net income of $26 million.

D) A deferred tax asset of $2.5 million.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

96) Assume that Theodore Enterprises operates in an industry for which NOL carryback is allowed. Theodore Enterprises had the following pretax income (loss) over its first three years of operations:

For each year there were no deferred income taxes and the tax rate was 25%. In its 2020 tax return, Theodore elected a net operating loss carryback. No valuation account was deemed necessary for the deferred tax asset as of December 31, 2020. What was Theodore's income tax expense for 2021?

A) $375,000.

B) $330,000.

C) $270,000.

D) $180,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

97) Clinton Corp. operates in an industry for which NOL carryback is not allowed, and had the following pretax income (loss) over its first three years of operations

For each year there were no deferred income taxes and the tax rate was 25%. No valuation account was deemed necessary for the deferred tax asset as of December 31, 2020. What was Clinton's income tax expense in 2021?

A) 375,000

B) 480,000.

C) 240,000.

D) 160,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

98) Assume that The Bell Company operates in an industry for which NOL carryback is allowed. The Bell Company had the following operating results:

What is the income tax refund receivable?

A) $27,000.

B) $24,000.

C) $17,000

D) $21,000.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

99) For reporting purposes, current deferred tax assets and current deferred tax liabilities for the same company and tax jurisdiction are:

A) Netted against one another and shown as a net current asset or liability in the balance sheet.

B) Reported separately in the balance sheet.

C) Reflected only in the notes to the financial statements.

D) Combined with noncurrent deferred tax assets and noncurrent deferred tax liabilities in the balance sheet to show a single net noncurrent amount.

Difficulty: 1 Easy

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

100) Financial statement disclosure of the components of income tax expense:

A) Must be made on the face of the income statement.

B) Usually is included in the disclosure notes.

C) Is not necessary when only permanent differences exist.

D) Must include the amount of cash paid for taxes.

Difficulty: 1 Easy

Topic: Disclosure notes

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

101) At December 31, 2021, Moonlight Bay Resorts had the following deferred income tax items:

Deferred tax asset of $54 million related to a current liability

Deferred tax asset of $36 million related to a noncurrent liability

Deferred tax liability of $120 million related to a noncurrent asset

Deferred tax liability of $72 million related to a current asset

Moonlight Bay should report in its December 31, 2021, balance sheet a:

A) Noncurrent deferred tax asset of $90 million and a non-current deferred tax liability of $192 million.

B) Current deferred tax liability of $18 million.

C) Noncurrent deferred tax asset of $84,000 and a non-current deferred tax liability of $45 million.

D) Noncurrent deferred tax liability of $102 million.

Difficulty: 2 Medium

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

102) Due to differences between depreciation reported in the income statement and depreciation deducted for tax purposes, Lucas Corp. has $2 million 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.

Difficulty: 2 Medium

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

103) A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31, 2021, its first year of operations. The income tax rate is 25%.

What amount(s) should Fieval report related to deferred income taxes in its 2021 balance sheet?

A) Current deferred tax asset of $6,250 and noncurrent deferred tax liability of $17,500.

B) Noncurrent deferred tax liability of $11,250.

C) Current deferred tax asset of $4,000 and noncurrent deferred tax liability of $17,500.

D) Noncurrent deferred tax liability of $24,000.

Difficulty: 3 Hard

Topic: Balance sheet classification; Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.; 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

104) A reconciliation of pretax financial statement income to taxable income is shown below for Chan Inc. for the year ended December 31, 2021, its first year of operations. The income tax rate is 25%. 

The inventory impairments relate to Chan's Columbian tax return. The depreciation relates to Chan's U.S. tax return. What amount(s) should Chan report related to deferred income taxes in its 2021 balance sheet? 

A) Current deferred tax asset of $10,000 and noncurrent deferred tax liability of $30,000.

B) Noncurrent deferred tax liability of $20,000.

C) Noncurrent deferred tax asset of $10,000 and noncurrent deferred tax liability of $30,000.

D) Noncurrent deferred tax asset of $20,000.

Difficulty: 2 Medium

Topic: Balance sheet classification; Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.; 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.; 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

105) A reconciliation of pretax financial statement income to taxable income is shown below for See Shipping for the year ended December 31, 2021, its first year of operations. The income tax rate is 25%.

What amount should See report as a noncurrent item related to deferred income taxes in its 2021 balance sheet?

A) Deferred income tax asset of $11,250.

B) Deferred income tax liability of $12,500.

C) Deferred income tax liability of $45,000.

D) Deferred income tax liability of $11,250.

Difficulty: 3 Hard

Topic: Balance sheet classification; Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.; 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.; 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

106) On its tax return at the end of the current year Webnet Inc. has $6 million of tax depreciation in excess of depreciation in its income statement. A disclosure note reveals that $1 million of the $6 million difference will reverse itself next year, and the remainder will reverse over the next 4 years. In the absence of other temporary differences, in the balance sheet at the end of the current year Webnet would report:

A) Both a current deferred tax asset and a noncurrent deferred tax asset.

B) A noncurrent deferred tax asset.

C) Both a current deferred tax liability and a noncurrent deferred tax liability.

D) A noncurrent deferred tax liability.

Difficulty: 2 Medium

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

107) Madison Company has taken a position in its tax return to claim a tax credit of $60 million (direct reduction in taxes payable) and has determined that its sustainability is "more likely than not," based on its technical merits. The tax credit would be a direct reduction in current taxes payable. Madison believes the likelihood that a $60 million, $36 million, or $12 million tax benefit will be sustained is 25%, 30%, and 45%, respectively. Madison's taxable income is $520 million for the year. Its effective tax rate is 25%. What is Madison's income tax expense for the year?

A) $24 million.

B) $70 million.

C) $94 million.

D) $130 million.

Difficulty: 3 Hard

Topic: Uncertainty in income taxes

Learning Objective: 16-09 Demonstrate how to account for uncertainty in income tax decisions.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

108) Information for Hobson Corp. for the current year ($ in millions):

The applicable enacted tax rate for all periods is 25%.

How much tax expense on income from continuing operations would be reported in Hobson's income statement?

A) $36.25 million.

B) $38.75 million.

C) $40.0 million.

D) $32.5 million.

Difficulty: 3 Hard

Topic: Intraperiod tax allocation

Learning Objective: 16-10 Explain intraperiod tax allocation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

109) Information for Hobson Corp. for the current year ($ in millions):

The applicable enacted tax rate for all periods is 25%.

What should Hobson report as income from continuing operations?

A) $118.75 million.

B) $115.0 million.

C) $116.25 million.

D) $155.0 million.

Difficulty: 3 Hard

Topic: Intraperiod tax allocation

Learning Objective: 16-10 Explain intraperiod tax allocation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

110) Information for Hobson Corp. for the current year ($ in millions):

The applicable enacted tax rate for all periods is 25%.

What should Hobson report as net income?

A) $91.0 million.

B) $46.75 million.

C) $83.0 million.

D) $115.0 million.

Difficulty: 3 Hard

Topic: Intraperiod tax allocation

Learning Objective: 16-10 Explain intraperiod tax allocation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

111) Information for Hobson Corp. for the current year ($ in millions):

The applicable enacted tax rate for all periods is 25%.

What is Hobson's income tax payable for the current year?

A) $33.75 million.

B) $32.50 million.

C) $33.25 million.

D) $28.25 million.

Difficulty: 3 Hard

Topic: Intraperiod tax allocation

Learning Objective: 16-10 Explain intraperiod tax allocation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

112) Information for Hobson Corp. for the current year ($ in millions):

The applicable enacted tax rate for all periods is 25%.

How should Hobson report tax on the discontinued operation?

A) A tax receivable of $8 million in the balance sheet.

B) A tax benefit of $8 million to net against the $32 million pretax loss.

C) A deferred tax asset of $8 million in the balance sheet.

D) None of these answer choices are correct.

Difficulty: 2 Medium

Topic: Intraperiod tax allocation

Learning Objective: 16-10 Explain intraperiod tax allocation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

113) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.

_____ 1. Valuation allowance

_____ 2. Operating loss carryback

_____ 3. Taxable income

_____ 4. Deferred tax asset

_____ 5. Intraperiod tax allocation

A) Is the basis for computing the tax liability for taxes currently payable.

B) Is a process of allocating income tax expense among income from continuing operations.

C) Reduces the net deferred tax asset and is classified as noncurrent in a balance sheet.

D) Arises when future deductible amounts are created by temporary differences.

E) Will generate a refund of taxes paid in prior years.

Difficulty: 2 Medium

Topic: Determine tax payable; Deferred tax assets; Valuation allowance; Net operating losses; Intraperiod tax allocation

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes; 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets; 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements; 16-10 Explain intraperiod tax allocation.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

114) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.

_____ 1. Operating loss carryforward

_____ 2. Deferred tax asset

_____ 3. Interperiod tax allocation

_____ 4. Deferred tax liability

_____ 5. Permanent difference

A) Is usually a revenue or expense item that is excluded or not deductible in determining taxable income.

B) Is reduced by a valuation allowance if realization of future tax benefit is not more likely than not.

C) Arises when future taxable amounts are created by temporary differences.

D) Is the process of allocating income taxes among two or more reporting periods.

E) Will always create a deferred tax asset.

Difficulty: 2 Medium

Topic: Deferred tax liabilities; Permanent differences; Valuation allowance; Net operating losses

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets; 16-05 Explain why permanent differences have no deferred tax consequences; 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

115) Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither.

_____ 1) Research and development costs reported in the income statement but elected to be capitalized and amortized over five years for tax purposes.

_____ 2) An operating loss carryforward.

_____ 3) Organization costs reported in the income statement but amortized and deducted over five years for tax purposes.

_____ 4) Premiums paid on life insurance policies covering key corporate executives.

_____ 5) The nondeductible portion of travel and entertainment expenses.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference; Permanent differences

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

116) Listed below are five independent situations. For each situation indicate (by letter) whether it will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither.

_____ 1) An operating loss carryback.

_____ 2) Warranty expense, tax deductible when paid.

_____ 3) Interest earned on investments in state and local government bonds.

_____ 4) Fines and penalties due to violations of law.

_____ 5) Prepaid expenses, tax deductible when paid.

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference; Permanent differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

117) Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the most correct term.

_____ 1. Balance sheet classification

_____ 2. Permanent difference

_____ 3. Temporary difference

_____ 4. Income tax expense

_____ 5. Valuation allowance

A) No tax consequences.

B) Produces future taxable amounts or future deductible amounts.

C) "More likely than not" test.

D) Noncurrent.

E) A "plug" for the net effect of the current tax liability and changes in deferred tax assets and liabilities.

Difficulty: 2 Medium

Topic: Distinguish items causing deferred tax; Determine tax expense; Valuation allowance; Permanent differences; Balance sheet classification

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes; 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets; 16-05 Explain why permanent differences have no deferred tax consequences; 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

118) Roberts Corp. reports pretax accounting income of $200,000, but due to a single temporary difference, taxable income is only $150,000. At the beginning of the year, no temporary differences existed. Roberts is subject to a tax rate of 25%.

Required:

Prepare the compound journal entry to record Roberts Corp.'s income taxes. Show well-labeled computations.

Difficulty: 1 Easy

Topic: Determine tax expense

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

Use the following to answer the question(s) below:

In its 2021 annual report to shareholders, Black Inc. disclosed the following information about income taxes.

A reconciliation of income taxes computed at the United States federal statutory income tax rate (20%) to the provision (benefit) for income taxes reflected in the Consolidated Statement of Operations for the years ended December 31, 2021, 2020, and 2019 is as follows ($ in millions):

The significant components of the net deferred tax assets at December 31, 2021 and 2020 were as follows ($ in millions):

2021 2020

Deferred Tax Assets:

Net operating loss carry forwards $141.6 $139.0

Sales incentive discounts. 30.6 22.8

Inventory valuation reserves 15.0 8.3

Postretirement benefits 7.8 8.2

Other 64.2 74.1

Valuation allowance (52.7) (71.8)

Total deferred tax assets 206.5 180.6

Deferred Tax Liabilities:

Tax over book depreciation 23.5 24.2

Tax over book amortization of patent 18.2 17.9

Other 19.1 16.3

Total deferred tax liabilities 60.8 58.4

Net deferred tax assets $145.7 $122.2

119) Why are the depreciation and patent amortization listed as deferred tax liabilities?

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

120) Estimate the effective tax rate for Black Inc. in 2021. Why is it different from the 20% federal statutory rate?

Difficulty: 3 Hard

Topic: Distinguish type of temporary difference

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

121) Several years ago, Western Electric Corp. purchased equipment for $20,000,000. Western uses straight-line depreciation for financial reporting and accelerated depreciation for tax purposes. At December 31, 2020, the carrying value of the equipment was $18,000,000 and its tax basis was $15,000,000. At December 31, 2021, the carrying value of the equipment was $16,000,000 and the tax basis was $11,000,000. There were no other temporary differences and no permanent differences. Pretax accounting income for the current year was $25,000,000. A tax rate of 25% applies to all years.

Required:

Prepare one journal entry to record Western's income tax expense for the current year. Show well-labeled computations for the income tax payable and the change in the deferred tax account.

Difficulty: 3 Hard

Topic: Determine tax expense; Determine tax payable

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

122) North Dakota Corporation began operations in January 2020 and purchased a machine for $20,000. North Dakota uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2020, 30% in 2021, and 20% in 2022. Pretax accounting income for 2020 was $150,000, which includes interest revenue of $20,000 from municipal bonds. The enacted tax rate is 25% for all years. There are no other differences between accounting and taxable income.

Required:

Prepare a journal entry to record income taxes for the year 2020. Show well-labeled computations for the amount of income tax payable and the change in the deferred tax account.

Difficulty: 3 Hard

Topic: Determine tax payable; Determine tax expense; Permanent differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

123) The following information is for Hulk Gym's first year of operations. Amounts are in millions of dollars. The enacted tax rate is 25%.

Year Future

Future Taxable Amounts Amounts

2021 2022 2023 2024 2025 Total

Accounting income $60

Temporary difference:

Prepaid insurance (12) $ 3 $ 3 $ 3 $ 3 $ 12

Taxable income $ 48

Required:

Prepare a compound journal entry to record the income tax expense for the year 2021. Show well-labeled computations.

Difficulty: 3 Hard

Topic: Determine tax expense

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

124) Gallo Light began operations in 2021. The company sometimes sells used warehouses on an installment basis. In those cases, Gallo Light reports income in its income statement in the year of the sale. In its income tax return, though, Gallo Light reports installment income by the installment method. Installment income in 2021 was $90,000, which Gallo Light expects to collect equally over the next three years. The tax rate is 25%, but based on an enacted law, is scheduled to become 30% in 2023.

Gallo Light's pretax accounting income from the 2021 income statement was $830,000, which includes $40,000 of interest revenue from an investment in municipal bonds. There were no differences between accounting income and taxable income other than those described above.

Required:

(1.) Prepare the appropriate journal entry to record Gallo Light's 2021 income taxes. Show calculations.

(2.) What is Gallo Light's 2021 net income?

Difficulty: 3 Hard

Topic: Determine tax payable; Determine tax expense; Permanent differences; Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

125) EZ, Inc., reports pretax accounting income of $400,000, but due to a single temporary difference, taxable income is $500,000. At the beginning of the year, no temporary differences existed. EZ is subject to a tax rate of 25%.

Required:

Prepare the appropriate journal entry to record EZ's income taxes. Show well-labeled computations.

Difficulty: 1 Easy

Topic: Determine tax expense

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

126) In the current year, Bruno Corporation collected rent of $3,600,000. For income tax reporting, the rent is taxed when collected. For financial reporting, the rent is recognized as income in the period earned. At the end of the current year, the unearned portion of the rent collected in the current year amounted to $400,000. Bruno had no temporary differences at the beginning of the current year. Assume an income tax rate of 25%.

Required:

The current year's income tax liability from the tax return is $800,000. Prepare the journal entry to record income taxes for the year. Show well-labeled computations.

Difficulty: 2 Medium

Topic: Determine tax expense

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

127) 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 25%.

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.

Difficulty: 2 Medium

Topic: Determine tax expense

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

128) Pocus, Inc., reports warranty expense when related products are sold. For tax purposes, the warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty liability of $200,000 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 warranty expense, its only temporary difference. The enacted tax rate is 25% 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.

Difficulty: 2 Medium

Topic: Determine tax payable; Determine tax expense

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

129) Pocus Inc. reports warranty expense when related products are sold. For tax purposes, the warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty liability of $500,000 and taxable income of $50,000,000. At the beginning of the current year, Pocus reported a deferred tax asset of $210,000 related to the difference in reporting warranty expense, its only temporary difference. The enacted tax rate is 25% each year.

Required:

Prepare the appropriate journal entry for Pocus to record the income tax provision for the current year. Show well-labeled computations to support the three amounts in your journal entry.

Difficulty: 2 Medium

Topic: Determine tax expense; Determine tax payable

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

130) Gore Company, organized on January 2, 2021, had pretax accounting income of $7,000,000 and taxable income of $10,000,000 for the year ended December 31, 2021. The 2021 tax rate was 25%. The only difference between book and taxable income is estimated warranty costs. Expected payments and scheduled enacted tax rates are as follows:

2022 $1,000,000 30%

2023 500,000 30%

2024 500,000 30%

2025 1,000,000 35%

Required:

Prepare one compound journal entry to record Gore's provision for taxes for the year 2021.

Difficulty: 3 Hard

Topic: Determine tax payable; Determine tax expense; Tax rate considerations

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes; 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

Use the following to answer the question(s) below:

In LMC's 2021 annual report to shareholders, it disclosed the following information about its income taxes:

INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax liabilities and assets as of December 31 were as follows:

($ in millions) 2021 2020

Deferred tax liabilities:

Property, plant and equipment $ 441.2 $ 468.4

Partnership tax basis difference 125.0 125.0

Other liabilities 253.7 223.7

Total deferred tax liabilities 819.9 817.1

Deferred tax assets:

Alternative minimum tax credit 154.7 155.3

carryforwards

Capital loss carryforwards 122.5

Net operating loss carryforwards 242.9 110.7

Postretirement and postemployment 35.5 39.5

benefits

Foreign tax credit carryforwards 77.9 133.2

Reclamation and decommissioning 31.6 38.3

accruals

Restructuring charges 90.6 104.7

Other assets 111.4 170.4

Subtotal 867.1 752.1

Valuation allowance (209.4) (142.2)

Total deferred tax assets 657.7 609.9

Net deferred tax liabilities $ 162.2 $ 207.2

131) Explain why LMC has a $209.4 million valuation allowance for its deferred tax assets.

Difficulty: 2 Medium

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

132) Assuming these amounts relate to the same tax-paying component of the company and the same tax jurisdiction, will LMC report $819.9 million as a liability in its balance sheet at December 31, 2021? Explain.

Difficulty: 3 Hard

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

133) Indicate why LMC lists net operating loss carryforwards as a component of deferred tax assets.

Difficulty: 2 Medium

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

134) At the end of the preceding year, World Industries had a deferred tax asset of $17,500,000, attributable to its only temporary difference of $70,000,000 for estimated expenses. At the end of the current year, the temporary difference is $45,000,000. At the beginning of the year there was no valuation account for the deferred tax asset. At year-end, World Industries now estimates that it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable income is $12,000,000 for the current year and the tax rate is 25% for all years.

Required:

Prepare journal entries to record World Industries' income tax expense for the current year. Show well-labeled supporting computations for each component of the journal entries.

Difficulty: 3 Hard

Topic: Determine tax expense; Determine tax payable; Valuation allowance

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes; 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

135) At the end of the prior year, Doubtful Inc. had a deferred tax asset of $20,000,000 attributable to its only timing difference, a temporary difference of $80,000,000 in a liability for estimated expenses. At that time, a valuation allowance of $4,000,000 was established. At the end of the current year, the temporary difference is $45,000,000, and Doubtful determines that the balance in the valuation account should now be $5,000,000. Taxable income is $15,000,000 and the tax rate is 25% for all years.

Required:

Prepare journal entries to record Doubtful's income tax expense for the current year. Show well-labeled supporting computations for the income tax payable, the valuation allowance, and the change in the deferred tax asset account.

Difficulty: 3 Hard

Topic: Determine tax payable; Determine tax expense; Valuation allowance

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes; 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Apply

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

136) The following information is for James Industries' first year of operations. Amounts are in millions of dollars.

Future

Year Future Taxable Amounts Amounts

2020 2021 2022 2023 2024 Total

Accounting income $60

Temporary difference:

Advance rent payment (12) $ 3 $ 3 $ 3 $ 3 $ 12

Taxable income $ 48

In 2021 the company's pretax accounting income was $67. The enacted tax rate for 2020 and 2021 is 25%, and it is 30% for years after 2021.

Required:

Prepare a journal entry to record the income tax expense for the year 2021. Show well-labeled computations for income tax payable and the change in the deferred tax account.

Difficulty: 3 Hard

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

Use the following to answer the question(s) below:

Typical Corp. reported a deferred tax liability of $3,750,000 for the year ended December 31, 2020, when the tax rate was 25%. The deferred tax liability was related to a temporary difference of $15,000,000 caused by an installment sale in 2020. The temporary difference is expected to reverse in 2022 when the income deferred from taxation will become taxable. There are no other temporary differences. Assume a new tax law passed in 2021 and the tax rate, which will remain at 25% through December 31, 2021, will become 30% for tax years beginning after December 31, 2021. Pretax accounting income and taxable income for the year 2021 is $30,000,000.

137) Required:

Prepare a compound journal entry to record Typical's income tax expense for the year 2021. Show well-labeled computations.

Difficulty: 2 Medium

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

138) Prepare two disclosure notes for Typical's year 2021 financial statements to:

(a.) Show the composition of Typical's income tax expense for the year.

(b.) Explain the classification and description of the deferred tax liability.

Give supporting computations to show how you arrived at the dollar amounts disclosed in your disclosure notes.

Difficulty: 3 Hard

Topic: Determine tax expense; Tax rate considerations; Balance sheet classification; Disclosure notes

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts; 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

139) Patterson Development sometimes sells property on an installment basis. In those cases, Patterson reports income in its income statement in the year of the sale but reports installment income by the installment method on the tax return. Installment income in 2021 was $120 million, which Patterson expects to collect equally over the next four years. The tax rate is 25%, but based on an enacted law, is scheduled to become 35% in 2023.

Patterson's pretax accounting income for the 2021 income statement was $530 million. Of this amount, $30 million is non-taxable revenue from proceeds of a life insurance policy. There were no differences between accounting income and taxable income other than those described above and no cumulative temporary differences existed at the beginning of the year.

Required:

1. Prepare the appropriate journal entry to record Patterson's 2021 income taxes. Show calculations.

2. What is Patterson's 2021 net income?

Difficulty: 3 Hard

Topic: Determine tax payable; Determine tax expense; Permanent differences; Tax rate considerations

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-05 Explain why permanent differences have no deferred tax consequences; 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

140) Tobac Company reported an operating loss of $132,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25% for 2021 and all future years. Assume that Tobac operates in an industry for which NOL carryback is allowed and elects a loss carryback. No valuation allowance is needed for any deferred tax assets. Taxable income, tax rates, and income taxes paid in Tobac's first four years of operations were as follows:

Taxable Tax Taxes

income rates paid

2017 $30,000 30% $9,000

2018 35,000 30% 10,500

2019 42,000 35% 14,700

2020 40,000 40% 16,000

Required:

1.) Prepare a compound journal entry to record Tobac's tax provision for the year 2021. Show well-labeled computations.

2.) Compute Tobac's net loss for 2021.

Difficulty: 3 Hard

Topic: Tax rate considerations; Net operating losses

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts; 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

141) The information that follows pertains to Julia Company:

(a.) Temporary differences for the year 2021 are summarized below.

Expenses deducted in the tax return, but not included in the income statement:

Depreciation $60,000

Prepaid expense 8,000

Expenses reported in the income statement, but not deducted in the tax return:

Warranty expense 9,000

(b.) No temporary differences existed at the beginning of 2021.

(c.) Pretax accounting income was $67,000 and taxable income was $8,000 for 2021.

(d.) There were no permanent differences.

(e.) The tax rate is 25%.

Required:

Prepare the journal entry to record the tax provision for 2021. Provide supporting computations.

Difficulty: 2 Medium

Topic: Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

142) The information below pertains to Mondavi Corporation:

(a.) For the current year temporary differences existed between the financial statement carrying amounts and the tax basis of the following:

Carrying Future Taxable or

Amount Tax Basis (Deductible) Amount

Buildings and

equipment $60,000,000 $45,000,000 $15,000,000

Prepaid insurance 1,000,000 0 1,000,000

Liability-loss

contingency 10,000,000 0 (10,000,000)

(b.) No temporary differences existed at the beginning of the year.

(c.) Pretax accounting income was $300,000,000 and taxable income was $120,000,000 for the year and the tax rate is 25%. Permanent differences are the cause of any difference between pretax accounting income and taxable income that are not due to temporary differences.

Required:

Prepare one journal entry to record the tax provision for the current year. Provide supporting computations.

Difficulty: 2 Medium

Topic: Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

143) Two independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences:

SITUATION 1 2

Taxable income $40,000 $80,000

Amounts at year-end:

Future deductible amounts 5,000 10,000

Future taxable amounts 0 5,000

Balances at beginning of year, dr (cr):

Deferred tax asset $1,000 $4,000

Deferred tax liability 0 1,000

The enacted tax rate is 25% for both situations.

Required:

For each situation determine the:

(a.) Income tax payable currently.

(b.) Deferred tax asset - balance at year-end.

(c.) Deferred tax asset change dr or (cr) for the year.

(d.) Deferred tax liability - balance at year-end.

(e.) Deferred tax liability change dr or (cr) for the year.

(f.) Income tax expense for the year.

Difficulty: 3 Hard

Topic: Multiple temporary differences

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

144) Two independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences:

SITUATION 1 2

Taxable income $100,000 $130,000

Amounts at year-end:

Future deductible amounts 0 10,000

Future taxable amounts 10,000 15,000

Balances at beginning of year:

Deferred tax asset 0 $2,000

Deferred tax liability 2,000 0

The enacted tax rate is 25% for both situations.

Required:

For each situation determine the:

(a.) Income tax payable currently.

(b.) Deferred tax asset - balance at year-end.

(c.) Deferred tax asset change dr or (cr) for the year.

(d.) Deferred tax liability - balance at year-end.

(e.) Deferred tax liability change dr or (cr) for the year.

(f.) Income tax expense for the year.

Difficulty: 3 Hard

Topic: Multiple temporary differences

Learning Objective: 16-01 Explain the conceptual underpinnings of accounting for temporary differences and the four-step method used to calculate income tax expense.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

145) Four independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences reported first on:

Income Statement Tax Return

Revenue Expense Revenue Expense

(1.) $20,000

(2.) $20,000

(3.) $15,000 $20,000

(4.) $15,000 $20,000 $10,000

Required:

For each situation, determine the taxable income assuming pretax accounting income is $100,000. Show well-labeled computations.

Difficulty: 3 Hard

Topic: Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

146) Four independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences reported first on:

Income Statement Tax Return

Revenue Expense Revenue Expense

(1.) $20,000

(2.) $20,000

(3.) $20,000 $15,000

(4.) $15,000 $20,000 $ 5,000 $10,000

Required:

For each situation, determine the taxable income assuming pretax accounting income is $100,000. Show well-labeled computations.

Difficulty: 3 Hard

Topic: Multiple temporary differences

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

147) Cabot Company reported a pretax operating loss of $50,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25% for 2021 and subsequent years. Assume that Cabot operates in an industry for which NOL carryback is allowed and requests a refund of taxes already paid by electing a loss carryback. Taxable income, tax rates, and income taxes paid in Cabot's first four years of operations were as follows:

Taxable Tax Taxes

income rates paid

2017 $30,000 30% $9,000

2018 35,000 30% 10,500

2019 42,000 35% 14,700

2020 40,000 40% 16,000

Required:

1.) Prepare the journal entry to record Cabot's income taxes for the year 2021. Show well-labeled computations.

2.) Compute Cabot's net loss for 2021.

Difficulty: 3 Hard

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

148) Brook Company has taken a position on its tax return to claim a tax credit of $30 million (direct reduction in taxes payable) and has determined that its sustainability is "more likely than not" based on its technical merits. Brook's management has developed the probability table shown below of all possible material outcomes:

Probability Table ($ in millions)

Amount of the tax benefit that management expects to

receive $30 $24 $18 $12 $6

Percentage likelihood that the tax benefit will be

sustained at this level 10% 20% 25% 20% 25%

Brook's taxable income is $300 million for the year, and its effective tax rate is 25%. The tax credit would be a direct reduction in current taxes payable.

Required:

1. At what amount would Brook measure the tax benefit in its income statement?

2. Prepare the appropriate journal entry for Brook to record its income taxes for the year.

Difficulty: 3 Hard

Topic: Uncertainty in income taxes

Learning Objective: 16-09 Demonstrate how to account for uncertainty in income tax decisions.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

149) What is the justification for a corporation determining income for financial reporting purposes differently than the way it is determined for tax purposes?

Difficulty: 2 Medium

Topic: Distinguish items causing deferred tax

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

150) What argument serves as the basis for the GAAP requirement that deferred taxes should be recognized for all temporary differences?

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

151) Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe at least one situation that has this effect. How are future deductible amounts recognized in the financial statements?

Difficulty: 2 Medium

Topic: Distinguish type of temporary difference

Learning Objective: 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

152) What is a valuation allowance for deferred tax assets and when is it used?

Difficulty: 1 Easy

Topic: Valuation allowance

Learning Objective: 16-04 Describe when and how a valuation allowance is recorded for deferred tax assets.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

153) Identify three examples of permanent differences between accounting income and taxable income.

Difficulty: 1 Easy

Topic: Permanent differences

Learning Objective: 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

154) What events create permanent differences between accounting income and taxable income? What effect do these events have on the determination of income taxes payable and deferred income taxes?

Difficulty: 2 Medium

Topic: Permanent differences

Learning Objective: 16-05 Explain why permanent differences have no deferred tax consequences.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

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

Difficulty: 2 Medium

Topic: Tax rate considerations

Learning Objective: 16-06 Explain how a change in tax rates affects the measurement of deferred tax amounts.

Bloom's: Remember

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

156) Some accountants believe that deferred taxes should not be recognized for certain temporary differences. What is the conceptual basis for this argument?

Difficulty: 1 Easy

Topic: Distinguish type of temporary difference

Learning Objective: 16-02 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.; 16-03 Describe the types of temporary differences that cause deferred tax assets and determine the amounts needed to record periodic income taxes.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

157) How are deferred tax assets arising from net operating loss carryforwards classified with regard to GAAP accounting for income taxes?

Difficulty: 2 Medium

Topic: Net operating losses

Learning Objective: 16-07 Describe when and how the tax effects of net operating losses are recognized in the financial statements.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

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

Difficulty: 1 Easy

Topic: Balance sheet classification

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.

Bloom's: Remember

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

159) The way companies deal with uncertainty in tax positions is prescribed by GAAP in FASB ASC 740–10: Income Taxes–Overall (previously FASB Interpretation No. 48 (FIN 48)). Describe the two-step process provided by GAAP (previously FIN 48).

Difficulty: 2 Medium

Topic: Uncertainty in income taxes

Learning Objective: 16-09 Demonstrate how to account for uncertainty in income tax decisions.

Bloom's: Remember

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

160) What disclosures for deferred taxes, pertaining to the income statement, are required by GAAP regarding accounting for income taxes?

Difficulty: 2 Medium

Topic: Disclosure notes; Intraperiod tax allocation

Learning Objective: 16-08 Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet and describe related disclosures.; 16-10 Explain intraperiod tax allocation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

161) Why are differences in reported amounts for deferred taxes are among the most frequent between IFRS and U.S. GAAP, despite the fact that the two follow similar approaches for accounting for taxation?

Difficulty: 2 Medium

Topic: IFRS―Income tax accounting

Learning Objective: 16-11 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for income taxes.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement