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Exam 16: Accounting for Income Taxes

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Question 41

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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 40% 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.

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Question 42

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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.

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

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Question 43

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Two independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences: The enacted tax rate is 40% 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.

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 40%. What should Tringali report as its income tax expense for its first year of operations?

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 40%. On January 1 of the current year, a new tax law was enacted, reducing the rate to 30% effective immediately. Fama's income tax payable for the current year would be:

The basic issue in deciding whether to record a valuation allowance for a deferred tax asset is if probable taxable income is anticipated to be insufficient to realize the tax benefit.

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.

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 40%. The total income tax expense for the year was:

In 2013, 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 2013, Magic Table Inc incurs:

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

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

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 40%. Assume that no estimated taxes have been paid. What should Tringali report as income tax payable for its first year of operations?

A deferred tax asset represents a:

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

A reconciliation of pretax financial statement income to taxable income is shown below for See Shipping for the year ended December 31, 2013, its first year of operations. The income tax rate is 40%. What amount should See report as a current item related to deferred income taxes in its 2013 balance sheet?

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:

Several years ago, Western Electric Corp. purchased equipment for $20,000,000. Western uses straight-line depreciation for financial reporting and MACRS for tax purposes. At December 31, 2012, the carrying value of the equipment was $18,000,000 and its tax basis was $15,000,000. At December 31, 2013, 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 35% 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.

Two independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences: The enacted tax rate is 40% 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.

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

What should Hobson report as income from continuing operations?