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Exam 17: Accounting for Income Taxes

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Question 51

True/False

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ASC 740 governs how a company accounts for all taxes it incurs.

A) True
B) False

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Question 52

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A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet.

A) True
B) False

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Question 53

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Which of the following items is NOT a reconciling item in the income tax footnote?

Frost Corporation reported pretax book income of $3,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $350,000, and unfavorable permanent differences of $50,000. Compute Frost's deferred income tax expense or benefit.

A company's effective tax rate can best be described as:

Farm Corporation reported pretax book loss of $500,000 in 2018. Tax depreciation exceeded book depreciation by $100,000. In addition, Farm received prepaid income of $50,000, which was included on its tax return but was not included in the book loss. Compute the company's income tax expense or benefit for 2018.

The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year.

Weaver Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000 (taxed at 34%) . During the year, Weaver reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. At the beginning of the year, Congress reduced the corporate tax rate to 21%. Weaver's deferred income tax expense or benefit for the current year would be:

Potential interest and penalties that would be assessed on a disallowed unrecognized tax benefit must be recorded in a company's income tax expense under ASC 740.

Tuna Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Tuna subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Book equivalent of taxable income is:

Angel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Angel subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

Packard Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $10,000, unfavorable temporary differences of $100,000, and unfavorable permanent differences of $80,000. The corporation's current income tax expense or benefit would be:

What confidence level must management have that a tax position will be sustained on audit before it can recognize any portion of the related deferred tax asset under ASC 740?

Publicly-traded companies usually file their financial statements before they file their federal income tax returns.

Smith Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Smith's deferred income tax expense or benefit would be:

Kedzie Company determined that the book basis of its liability for "other post-retirement benefits" (OPEB) exceeded the tax basis of this account by $10,000,000. This basis difference is characterized as:

Temporary differences create either a deferred tax asset or a deferred tax liability.

A corporation's effective tax rate as computed in its income tax note is the company's cash tax rate for the year.

Purple Rose Corporation reported pretax book income of $500,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the company received $250,000 of tax-exempt life insurance proceeds. The prior year tax return showed taxable income of $100,000. Compute Purple Rose's current income tax expense or benefit.

The tax effects of permanent differences generally are reported in a company's computation of its effective tax rate.