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Exam 14: Taxes on the Financial Statements

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Question 31

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Never, Inc., earns book net income before tax of $500,000. In computing its book income, Never deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes. Never records no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21% and no valuation allowance is required, what is Never's deferred income tax asset reported on its GAAP financial statements?

A) $115,500
B) $105,000
C) $94,500
D) $10,500

E) None of the above
F) A) and C)

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Question 32

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Which of the following taxes are included in the total income tax liability of a corporation reported on its Federal income tax return?

A) Federal income taxes.
B) Foreign income taxes.
C) State income taxes.
D) All these taxes are included.

E) None of the above
F) A) and B)

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Question 33

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Purple, Inc., a domestic corporation, owns 100% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 40% of Green, a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities' net income is included in Purple's GAAP income statement for current- year financial reporting purposes?

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

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

JuarezCo constructs the following table in determining how to apply ASC 740-10 to its filing position for its domestic production activities deduction. Its book-tax provision for the year, including $3 million for the uncertain transfer pricing issue, is $10 million. $\begin{array} { c c c } \begin{array} { c } \text { Resulting Estimated Tax } \\\text { Benefit }\end{array} & \begin{array} { c } \text { Probability of Agreement between } \\\text { JuarezCo and IRS }\end{array} & \begin{array} { c } \text { Cumulative Probability of } \\\text { Agreement }\end{array} \\\text { \$3 million } & 10 \% & 10 \% \\\text { \$2 million } & 45 \% & 55 \% \\\text { \$1.6 million } & 40 \% & 95 \% \\\text { \$1.1 million } & 5 \% & 100 \%\end{array}$ Under ASC 740-10, JuarezCo's book income tax expense for this item is:

Bryden Corporation is considering two tax planning strategies. Both would produce a $1 million tax savings. One of the strategies would structure the plan so that the $1 million would represent a temporary book-tax difference, and the other would generate a permanent difference. In general, which plan would the Bryden CFO prefer? Which would a stock analyst reviewing the Bryden valuation prefer?

A deferred tax liability represents a potential future tax benefit associated with income reported in the current-year GAAP financial statements.

Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.

Phyllis, Inc., earns book net income before tax of $600,000. Phyllis puts into service a depreciable asset this year, and its first-year tax depreciation exceeds book depreciation by $120,000. Phyllis has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21%, what is Phyllis's total income tax expense reported on its GAAP financial statements?

The best estimate of the actual current-year income tax liability i.e., perhaps the amount of the checks that the taxpayer will write to taxing jurisdictions) is the:

ASC 740 is the GAAP equivalent of the Form 1120 Schedule UTP.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 21% corporate tax rate and no valuation allowance. $\text { Assets } \quad \text { Tax Debit/(Credit) Book Debit/(Credit) }$ $\begin{array}{lrr}\text { Cash } & \$ 300 & \$ 300 \\\text { Accounts Receivable } & 5,000 & 5,000 \\\text { Buildings } & 300,000 & 300,000 \\\text { Accumulated Depreciation } & (150,000) & (80,000) \\\text { Furniture \& Fixtures } & 40,000 & 40,000 \\\text { Accumulated Depreciation } & (21.000) & (15,000)\\\text { Total Assets }&\$174,000&\$250,300\\\\\text { Liabilities }\\\text { Accrued Litigation Expense } & \$-0- & (\$ 27,000) \\\text { Note Payable } & {(116,000)} & (116,000) \\\text { Total Liabilities } &{(\$ 116,000)}& \$ 143,000)\\\\\text { Stockholders' Equity }\\\text { Paid in Capital } & (\$ 1,000) & (\$ 1,000) \\\text { Retained Earnings } & (57,300) & (106,300) \\\text { Total Liabilities and } & & \\\text { Stockholders' Equity } & (\$ 174,300) & (\$ 250,300)\\\end{array}$ Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible business meals expense. Determine the change in Black's deferred tax assets for the current year.

Which of the following statements best describes considerations regarding a company's tax expense that users of GAAP financial statements may make?

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

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 21% corporate tax rate and no valuation allowance. $\begin{array}{lrr}&\text { Tax Debit/(Credit) }&\text { Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 300 & \$300 \\\text { Accounts receivable } & 5,000 & 5,000 \\\text { Buildings } & 300,000 & 300,000 \\\quad \text { Accumulated depreciation } & (150,000) & (80,000) \\\text { Furniture \& fixtures } & 40,000 & 40,000 \\\quad \text { Accumulated depreciation } & (21,000) & (15,000) \\\text { Total assets } & \$ 174,300 & \$ 250,300\\\\\text { Liabilities }\end{array}$ $\begin{array}{lrr}\text { Accrued litigation expense } & \$-0- & (\$ 27,000) \\\text { Note payable } & (116,000) & (116.000) \\\text { Total liabilities } & (\$ 116.000) & (\$ 143,000)\\\\\text { Stockholders' Equity } & & \\\text { Paid in capital } & (\$ 1,000) & (\$ 1,000) \\\text { Retained earnings } & (57.300) & (106.300)\\\text { Total liabilities and }\\\text { stockholders' equity }&(\$174,300)&(\$250,300)\end{array}$ Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are as follows: Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible business meals expense. Provide the journal entry to record Black's current tax expense.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 21% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are as follows: Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest and incurred $500 in nondeductible business meals expense. Provide the income tax footnote rate reconciliation for Black, using either dollars or percentages.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year. Assume a 21% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. $\begin{array}{ll}&\text { Beginning of Year }\\\text { Accrued litigation expense } & \$ 20,000 \\\text { Subtotal } & \$ 20,000\end{array}$ Black, Inc.'s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest and incurred $500 in nondeductible business meals expense. Determine the change in Black's deferred tax liabilities for the current year.

Jogg, Inc., earns book net income before tax of $600,000. It puts into service a depreciable asset this year, and its first-year tax depreciation exceeds book depreciation by $120,000. Jogg has recorded no other temporary or permanent book-tax differences. Assuming that the U.S. tax rate is 21%, and that this is Jogg's first year of operations, what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year-end?

A GAAP financial statement includes footnotes that: