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Flashcards in DETX Deck (50):
1

At the most recent year-end, a company had a deferred tax liability related to an asset classified as current. The amount exceeded a deferred tax asset related to a current liability, and a deferred tax liability related to a noncurrent liability. Which of the following should be reported in the company’s most recent year-end balance sheet?
a. The deferred tax asset as a current asset.
b. The excess of the two deferred tax liabilities over the deferred tax asset as a current liability.
c. The excess of the deferred tax liability related to a current asset over the deferred tax asset related to a current liability as a current liability
d. The sum of the two deferred tax liabilities as a noncurrent liability.

he excess of the deferred tax liability related to a current asset over the deferred tax asset related to a current liability as a current liability

2

According to ASC Topic 740, Income Taxes, which of the following items should affect current income tax expense for year 3?
a. Interest on a 2006 tax deficiency paid in year 3.
b. Change in income tax rate for year 4.
c. Penalty on a 2006 tax deficiency paid in year 3.
d. Change in income tax rate for year 3.

Change in income tax rate for year 3.

3

Nala Inc. reported deferred tax assets and deferred tax liabilities at the end of year 3 and at the end of year 4. For the year ended year 4 Nala should report deferred
income tax expense or benefit equal to the

Sum of the net changes in deferred tax assets and deferred tax liabilities.

4

Miro Co. began business on January, 2, year 2. Miro used the double-declining balance method of depreciation for financial statement purposes for its building, and the straight-line method for income taxes. On January 16, year 4, Miro elected to switch to the straight-line method for both financial statement and tax purposes. The building cost $240,000 in year 2, which has an estimated useful life of 16 years and no salvage value. Data related to the building is as follows:
Double-declining Straight-line
Year 2 $30,000 $15,000
Year 3 $26,250 $15,000
Miro’s tax rate is 40%. Which of the following statements is correct?
a. Miro’s deferred tax asset should be reduced by $10,500 in year 4.
b. Miro’s deferred tax liability should be reduced by $1,875 in year 4
c. Miro’s deferred tax asset should be decreased by $750 in year 4.
d. There should be no reduction in Miro’s deferred tax liabilities or deferred tax assets in year 4.

Miro’s deferred tax asset should be decreased by $750 in year 4.

5

In year 3, Lobo Corp. reported for financial statement purposes the following revenue and expenses which were not included in taxable income:
Premiums on officer’s life insurance under which the corporation is the beneficiary: $5,000
Interest revenue on qualified state or municipal bonds: 10,000
Estimated future warranty costs to be paid in year 4 and year 5: 60,000
Lobo’s enacted tax rate for the current and future years is 30%. Lobo has never had any net operating losses (book or tax) and does not expect any in the future. There were no temporary differences in prior years. The deferred tax benefit to be applied against current income tax expense is

$18,000

6

Purl Company began operations on January 1, year 1. It recognizes income from construction-type contracts under the percentage-of-completion method for financial reporting. However, on its income tax returns, Purl appropriately reports revenues under the completed-contract method. Information concerning income recognition under each method is as follows:
Year Percentage-of-completion Completed-contract
year 1 $450,000 $0
year 2 675,000 425,000
year 3 825,000 925,000
For all affected years, assume the income tax rate is 30% and there are no other temporary differences. For year 3 Purl should record an increase (decrease) in the deferred tax liability account of

(30,000)

7

Among the items reported on Neal Corporation’s income statement for the year ended December 31, year 3, are the following:
Interest received on municipal bonds $10,000
Penalties and related interest 18,000
Temporary differences for measuring deferred taxes (interperiod tax allocation) amount to

$0

8

Brass Co. reported income before income tax expense of $60,000 for year 2. Brass had no permanent or temporary timing differences for tax purposes. Brass has an effective tax rate of 30% and a $40,000 net operating loss carry forward from year 1. What is the maximum income tax benefit that Brass can realize from the loss carry foward for year 2?

$12,000

9

No net deferred tax asset (i.e., deferred tax asset net of related valuation allowance) was recognized in the year 2 financial statements by the Chaise Company when
a loss from discontinued segments was carried forward for tax purposes because it was more likely than not that none of this deferred tax asset would be realized.
Chaise had no temporary differences. The tax benefit of the loss carried forward reduced current taxes payable on year 3 continuing operations. The year 3 income
statement would include the tax benefit from the loss brought forward in

Income from continuing operations.

10

Kent, Inc.’s reconciliation between financial statement and taxable income for year 3 follows:
Pretax financial income $150,000
Permanent difference (12,000)
138,000
Temporary difference—depreciation (9,000)
Taxable income $129,000
Additional information
At
12/31/Y1 12/31/Y2
Cumulative temporary
difference (future taxable
amounts) $11,000 $20,000
The enacted tax rate was 34% for year 2 and 40% for year 3 and years thereafter. In its year 3 income statement, what amount should Kent report as current portion of income tax expense?

$51 600

11

Grace Corporation prepares its financial statements under IFRS. Which of the following statements is true?
I. IFRS permits netting of all deferred taxes.
II. IFRS permits netting of deferred taxes that relate to the same taxing authority.
III. IFRS permits deferred taxes to be classified as current.
IV. IFRS permits deferred taxes to be classified as noncurrent.

II and IV.

12

Lion Co.’s income statement for its first year of operations shows pretax income of $6,000,000. In addition1 the following differences existed between Lion’s tax return and records
Tax return Accounting records
Uncollectible accounts
expense $220,000 $250,000
Depreciation expense 860,000 570,000
Tax-exempt interest revenue 50,000
Lion’s current year tax rate is 30% and the enacted rate for future years is 40%. what amount should Lion report as deferred tax expense in its income statement for the year?

$104,000

13

Ajax Corp. has an effective tax rate of 30%. on January 1, year 2, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during year 2 by using the 150% declining balance method of depreciation for tax purposes instead of the straight-line method?

$1,500

14

On December 20, year 3, Sussex Corporation received a condemnation award of $300,000 as compensation for the forced sale of a company plant with a book value
of $200,000. In its income tax return for the year ended December 31, year 3, Sussex elected to replace the condemned plant within the allowed replacement
period. Accordingly, the $100,000 gain was rot reported as taxable income for year 3. Sussex has an enacted income tax rate of 30% for year 3. In its December
31, year 3 balance sheet, what amount should Sussex report as a deferred tax liability on the above gain?

$30,000

15

At December 31, year 3, Bren Co. had the following deferred income tax items:
. A deferred income tax liability of $15,000 related to a noncurrent asset.
. A deferred income tax asset of $3,000 related to a noncurrent liability.
. A deferred income tax asset of $8,000 related to a current liability.
Which of the following should Bren report in the noncurrent section of its December 31, year 3 balance sheet?
a. A noncurrent liability of $12,000.
b. A noncurrent liability of $4,000.
c. A noncurrent asset of $3,000 and a noncurrent liability of $15,000.
d. A noncurrent asset of $11,000 and a noncurrent liability of $15,000.

A noncurrent liability of $12,000.

16

North, Inc. uses the equity method of accounting for its 50% investment in Mill Corp.’s common stock. During year 3, Mill reported earnings of $600,000 and paid
dividends of $200,000. Assume that: (1) all undistributed earnings of Mill will be distributed as dividends in future periods, (2) the dividends received from Mill are eligible for the 80% dividends received deduction, and (3) North’s income tax rate is 30%. The change in the amount of deferred income tax to be reported by North for year 3 is

$12,000

17

Collin Co.’s year 1 income statement reported $90,000 income before provision for income taxes. To compute the provision for federal income taxes, the following
year 1 data are provided:
Rent received in advance $20,000
Income from exempt municipal bonds 20,000
Depreciation deducted for income tax
purposes in excess of depreciation reported 10,000
for financial statements purposes
Enacted corporate income tax rate 30%
If the alternative minimum tax provisions are ignored, what amount of current federal income tax liability should be reported in Dunn’s December 31, year 1 balance sheet?

$24,000

18

Agard Company’s enacted income tax rate is 30%. For the year ended December 31, year 3, Agard’s income statement reflected depletion expense of $1,000,000
based on the cost of assets being depleted. However, Agard properly deducted $4,000,000 for percentage depletion on its year 3 tax return. How much should be
reported as provision (expense) for deferred income taxes in Agard’s year 3 financial statements?

$0

19

According to ASC 740, Income Taxes, justification for the method of determining periodic tax expense is based on the concept of

Recognition of assets and liabilities.

20

As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co.’s sole depreciable asset, acquired in year 3, exceeded its tax basis by $250,000 at December 31, year 3. This difference will reverse in future years. The enacted tax rate is 30% for year 3, and 40% for future years. Noor has no other temporary differences. In its December 31, year 3 balance sheet, how should Noor report the deferred tax effect of this difference?

As a liability of $100,000.

21

Huskie Corporation’s income statement for the year ended December 31, year 3, shows pretax book income of $400,000. The following items for year 3 are treated
differently on the tax return and on the books:
Per tax return Per books
Royalty income $20,000 $40,000
Depreciation expense 125,000 100,000
Payment of a penalty None 15,000
Assume that Huskie’s enacted tax rate for year 3 is 40%, and 30% for all future years. Of Huskie’s total income tax expense, how much should be reported as current portion of income taxes in Huskie’s year 3 income statement?

$148,000

22

At the most recent year-end, a company’s appropriately recognized noncurrent deferred income tax asset exceeded a current deferred income tax liability. Which of
the following should be reported in the company’s most recent year-end balance sheet?
a. The excess of the deferred income tax asset over the deferred income tax liability as a current asset.
b. The deferred income tax asset as a noncurrent asset.
c. The deferred income tax asset as a current asset.
d. The excess of the deferred income tax asset over the deferred income tax liability as a noncurrent asset.

The deferred income tax asset as a noncurrent asset.

23

Which of the following could require interperiod tax allocation?
a. Percentage depletion in excess of cost depletion.
b. Nondeductible officers life insurance premium.
c. Unearned service contract revenue.
d. Interest received on municipal obligations.

Unearned service contract revenue.

24

Deferred taxes should be recognized for
a. Permanent difference and Temporary difference
b. Permanent difference
c. Temporary difference
d. Neither

Temporary difference

25

Orleans Co., a cash-basis taxpayer, prepares accrual basis financial statements. In its year 3 balance sheet, Orleans’ deferred income tax liabilities increased compared to year 3. Which of the following changes would cause this increase in deferred income tax liabilities?
I. An increase in prepaid insurance.
II. An increase in rent receivable.
III. An increase in warranty obligations.

I and II

26

Lance, Inc., a calendar year corporation, reported the following operating income (loss) before income tax and the enacted tax rates for the last three years of operations:
Income Tax rate
year 2 $ 100,000 40%
year 3 $(300,000) 30%
year 4 $ 400,000 30%
There are no permanent or temporary differences between operating income (loss) for financial and income tax reporting purposes. When filing its year 3 tax return,
Lance elected to use only the carry forward provision. What amount should Lance report as income tax refund receivable in year 3?

$0

27

As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of a company’s plant assets exceeded the tax basis. Assuming the company had no other temporary differences, the company should report a

Deferred tax liability

28

In year 2, Ajax, Inc. reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible
premiums on Ajax’s officers’ life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax’s enacted tax rate is 30%. In its year 2 income statement, what amount should Ajax report as income tax expense—current portion?

$120,000

29

Pine Corp.’s books showed pretax income of $800,000 for the year ended December 31, year 3. In the computation of federal considered:
Gain on an involuntary conversion (Pine has elected to replace the property within the statutory period using total proceeds): $350,000
Depreciation deducted for tax purposes in excess of depreciable deducted for book purposes: $50,000
Federal estimated tax payments, year 3: $70,000
Enacted federal tax rate, year 3: 30%
What amount should Pine report as its current federal income tax liability on its December 31, year 3 balance sheet?

$50,000

30

For the year ended December 31, year 3, Colt Corp. has a loss carry forward of $180,000 available to offset future taxable income. At December 31, year 3, all available evidence concerning future profitability is positive. Assume an income tax rate of 30%. What amount of the tax benefit should be reported in Colt’s year 3 income statement?

$ 54,000

31

For calendar year year 3, Clark Corp. had depreciation of $300,000 on its income statement. On its year 3 tax return, Clark had depreciation of $500,000. Clark’s
income statement also included $50,000 accrued warranty expense that will be deducted for tax purposes when paid. Clark’s enacted tax rates are 30% for year 3
and 25% for future years. These were Clark’s only temporary differences. In Clark’s year 3 income statement, the deferred portion of its provision for income taxes
should be

$37,500

32

Lake Corp., a newly organized company, reported pretax financial income of $100,000 for year 1. Among the items reported in Lake’s year 1 income statement are
the following:
Premium on officer’s life insurance with Lake as owner and beneficiary $15,000
Interest received on municipal bonds $20,000
The enacted tax rate for year 1 is 30% and 25% thereafter. In its December 31, year 1 balance sheet, Lake should report a deferred income tax liability of

$0

33

Galway Corp. prepares its financial statements in accordance with 1ERS. Which of the following is true regarding reporting Galway’s deferred income taxes in its
year 4 financial statements?
a. Deferred tax assets are always netted with deferred tax liabilities to arrive at one amount presented on the balance sheet.
b. Deferred tax assets and liabilities are classified as current and noncurrent based on their expiration dates.
c. Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process.
d. Deferred tax assets and liabilities may only be classified as noncurrent.

Deferred tax assets and liabilities may only be classified as noncurrent.

34

At the end of year 1, Cody Co. reported a profit on a partially completed construction contract by applying the percentage-of-completion method. By the end of year
2, the total estimated profit on the contract at completion in year 3 had been drastically reduced from the amount estimated at the end of year 1. Consequently, in year 2, a loss equal to one-half of the year 1 profit was recognized. Cody used the completed-contract method for income tax purposes and had no other contracts. The year 2 balance sheet should include a deferred tax
a. Asset and Liability
b. Liability
c. Asset
d. Neither

Liability

35

For calendar year, year 3 Steiner Corporation reported depreciation of $300,000 in its income statement. On its year 3 income tax return Steiner reported depreciation of $500,000. Additionally, Steiner’s income statement included interest revenue of $50,000 on municipal obligations. Assuming an enacted income tax rate of 30%, the amount of deferred tax expense reported on Steiner’s year 3 income statement should be

$60,000

36

For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There
were no other differences between its taxable and financial statement income. Cable’s effective tax rate for the current year is 45%, but a 40% rate has already
been passed into law for next year. In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability)?

$40,000 liability.

37

On January 2, year 2, Ross Co. purchased a machine for $70,000. This machine has a 5-year useful life, a residual value of $10,000, and is depreciated using the straight-line method for financial statement purposes. For tax purposes, depreciation expense was $25,000 for year 2 and $20,000 for year 3. Ross’ year 3 income, before income taxes and depreciation expense, was $100,000 and its tax rate was 30%. If Ross had made no estimated tax payments during year 3, what amount of current income tax liability would Ross report in its December 31, year 3 balance sheet?

24,000

38

Rouge Corporation prepares its financial statements in accordance with IFRS. Rouge locates its business in two jurisdictions1 France and Germany. Assume that in
both countries the company has the legal right to offset the taxes receivable and payable. Rouge prepares its taxes based on taxing authority and has the following
information related to its deferred tax assets and liabilities.
Classification Amount Jurisdiction
Deferred Tax Asset $8,000 France
Deferred Tax Liability $3,000 Germany
Deferred Tax Liability $6,000 Francy
How should Rouge present its deferred taxes on its December 31, year 4 statement of financial position?
Deferred Tax Asset Deferred Tax Liability
a. $8,000 $9,000
b. $0 $1,000
c. $2,000 $6,000
D. $2,000 $3,000

$2,000 $3,000

39

Royalties are recognized when received in year 3 for income tax purposes and recognized when earned in year 4 for financial statement purposes. This an example
of a

Temporary difference that gives rise to deferred taxes.

40

Cory, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax
purposes. Installment income of $250,000 will be collected in the following years when the enacted tax rates are
Collection of income Enacted tax rates
year 3 $ 25,000 35%
year 4 50,000 30%
year 5 75,000 30%
year 6 100,000 25%
The installment income is Cow’s only temporary difference. What amount should be included in the deferred income tax liability in balance sheet?

$62,500

41

When accounting for income taxes, a temporary difference occurs in which of the following scenarios?
a. The accrual method of accounting is used.
b. An item is included in the calculation of net income, but is neither taxable nor deductible.
c. An item is no longer taxable due to a change in the tax law.
d. An item is included in the calculation of net income in one year and in taxable income in a different year.

An item is included in the calculation of net income in one year and in taxable income in a different year.

42

Temporary differences arise when expenses are deductible for tax purposes
After they are recognized Before they are recognized
in financial income in financial income
a. No No
b. No Yes
c. Yes Yes
d. Yes No

Yes Yes

43

When a temporary difference will result in taxable amounts in 5 years

A deferred tax liability is recognized in the current year.

44

Hanson Corporation’s income statement for the year ended December 31, year 3, shows pretax book income of $400,000. The following items for year 3 are treated
differently on the tax return and on the books:
Per tax return Per books
Royalty income $ 20,000 $ 40,000
Depreciation expense 125,000 100,000
Officers life insurance
premium None 15,000
Assume that Hanson’s enacted tax rate for year 3 is 40% and 30% for all future years. Of Hanson’s total income tax expense, how much should be reported as deferred income taxes in Hanson’s year 3 income statement?

$13,500

45

Oak Corp.’s books showed pretax income of $800,000 for the year ended December 31, year 1. In the computation of federal income taxes, the following data were considered:
Gain on an involuntary conversion $300,000
(Oak has elected to replace the
property within the statutory period
using total proceeds.) 50 000
Depreciation deducted for the tax
purposes in excess of depreciation
deducted for book purposes
Federal estimated tax payments, year 1 70,000
Enacted federal tax rates, year 1 30%
What amount should What amount should Oak report as its current federal income tax liability on its December 31, year 1 balance sheet?

$65,000

46

Lelak Company was formed on January 1, year 2. Its machinery is being depreciated using the MACP.S for income tax reporting and the straight-line method for
financial statement reporting. Information concerning depreciation amounts under each method is as follows:
Year MACRS Straight-line method
year 2 $600,000 $400,000
year 3 800,000 500,000
Assuming that the enacted income tax rate is 30% for all affected years, the amount of deferred taxes charged to expense in Lelak’s year 3 income statement should
be

$ 90,000

47

Which of the following should be disclosed in a company’s financial statements related to deferred taxes?
I. The types and amounts of existing temporary differences.
II. The types and amounts of existing permanent differences.
III. The nature and amount of each type of operating loss and tax credit carry forward.

I and III only.

48

Sandy Inc. prepares financial statements under IFRS. At December 31, year 4, Sandy’s income for financial (book) purposes equaled $100,000 and Sandy’s only temporary difference related to depreciation. For financial (book) purposes, depreciation equaled $10,000 and for tax purposes, depreciation equaled $15,000. The difference is expected to reverse evenly over the next two years. The enacted tax rate for year 4 is 30% and the substantially enacted tax rate for year 4 and thereafter is 40%. In its year-end balance sheet, what amount should Sandy report as a deferred tax asset (liability)?

$2,000 deferred tax liability.

49

Kent, Inc.’s reconciliation between financial statement and taxable income for year 2 follows:
Pretax financial income $150,000
Permanent difference (12,000)
138,000
Temporary difference—depreciation (9,000)
Taxable income 129,000
Additional information
At
12/31/Y1 12/31/Y2
Cumulative temporary
difference (future taxable
amounts) $11,000 $20,000
The enacted tax rate was 34% for year 1, and 40% for year 2 and years thereafter. In its December 31, year 2 balance sheet, what amount should Kent report as deferred income tax liability?

$8,000

50

HG, Inc., a calendar year corporation, reported the following operating income (loss) before income tax and the enacted tax rates for the last three years of
operations:
Income Tax rate
year 2 $ 100,000 40%
year 3 $ (300,000) 30%
year 4 $ 400,000 30%
There are no permanent or temporary differences between operating income (loss) for financial and income tax reporting purposes. When filing its year 3 tax return,
HG did not forego to carryback the year 3 loss. What amount should HG record in year 3 to account for the income tax refund receivable?

$40,000