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Exam 6: Accounting for Income Taxes

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Question 51

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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:

A) $1,125,000
B) $1,110,000
C) $1,015,000
D) $985,000

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

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Question 52

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Green 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, Green subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Using a tax rate of 34%, Green's cash tax rate is:

A) 34%
B) 33.15%
C) 31.45%
D) 30.6%

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

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Question 53

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Which of the following statements is true?

Whitman Corporation reported pretax book income of $400,000 in 2016. Book depreciation exceeded tax depreciation by $100,000. In addition, the Company accrued vacation pay of $50,000 that was not deductible until paid in 2017. Whitman has a net operating loss carryforward of $200,000 from 2015. Assuming a tax rate of 34%, compute the Company's deferred income tax expense or benefit for 2016.

Which of the following items does not result in a permanent difference?

Cardinal Corporation reported pretax book income of $3,000,000. During the current year, the reserve for bad debts increased by $200,000. In addition, book depreciation exceeded tax depreciation by $100,000. Cardinal sold a fixed asset and reported a book gain of $60,000 and a tax gain of $80,000. Finally, Cardinal deducted $50,000 of domestic production activities deduction on its tax return. Using a tax rate of 34%, compute Cardinal's current income tax expense or benefit.

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

Identify the following items as creating a temporary difference, permanent difference, or no difference. $\begin{array} { | l | l | l | l | } \hline \text { Item } & \begin{array} { r } \text { Temporay } \\\text { Difference }\end{array} & \begin{array} { r } \text { Permanent } \\\text { Difference }\end{array} & \begin{array} { r } \text { No } \\\text { Difference }\end{array} \\\hline \text { Reserve tor bad debts } & & & \\\hline \begin{array} { l } \text { Accrued other post- } \\\text { employment benefits }\end{array} & & & \\\hline \begin{array} { l } \text { Domestic production } \\\text { activities deduction }\end{array} & & & \\\hline \begin{array} { l } \text { Non-deductible fines } \\\text { and penalties }\end{array} & & & \\\hline \begin{array} { l } \text { Interest trom municipal } \\\text { bonds }\end{array} & & & \\\hline \begin{array} { l } \text { Net operating loss } \\\text { carryouer }\end{array} & & & \\\hline \begin{array} { l } \text { Stock option expense } \\\text { under ASC } 718\end{array} & & & \\\hline \begin{array} { l } \text { Deterred } \\\text { compensation }\end{array} & & & \\\hline\end{array}$

Tax-exempt interest from municipal bonds is an example of a permanent book to tax difference.

Oriole Company reported pretax net income from continuing operations of $1,000,000 and taxable income of $1,200,000. The unfavorable book-tax difference of $200,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $300,000 due to an increase in the reserve for bad debts, and a $100,000 unfavorable permanent difference from the disallowance of compensation expense related to the exercise of incentive stock options. Oriole Company's applicable tax rate is 34%. a. Compute Oriole Company's current income tax expense. b. Compute Oriole Company's deferred income tax expense or benefit. c. Compute Oriole Company's effective tax rate. d. Provide a reconciliation of Oriole Company's effective tax rate with its hypothetical tax rate of 34%.

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. Using a tax rate of 34%, compute Purple Rose's current income tax expense or benefit.

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. Using a tax rate of 34%, Smith's deferred income tax expense or benefit would be:

Costello Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Costello received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Using a tax rate of 34%, Costello's deferred income tax expense or benefit would be:

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized. Recognition and measurement are the two steps.

Potter, Inc. reported pretax book income of $5,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $300,000. Potter sold a fixed asset and reported book gain of $60,000 and tax gain of $80,000. Finally, the company received $50,000 of tax-exempt municipal bond interest. Using a tax rate of 34%, compute Potter's deferred income tax expense or benefit.

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. Using a tax rate of 34%, compute Frost's deferred income tax expense or benefit.

Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable temporary difference of $200,000. During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000. During the year, the company's tax rate decreased from 34% to 30%. Lynch's deferred income tax expense or benefit for the current year would be:

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 $90,000. Assuming a tax rate of 34%, the Corporation's current income tax expense or benefit would be:

Yellow Rose Corporation reported pretax book income of $1,000,000. Tax depreciation exceeded book depreciation by $100,000. During the year Yellow Rose capitalized $50,000 into ending inventory under §263A. Capitalized inventory costs of $75,000 in beginning inventory were deducted as part of cost of goods sold on the tax return. Using a tax rate of 34%, compute Yellow Rose's taxes payable or refundable.

Abbot Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Abbot received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Using a tax rate of 34%, Abbot's current income tax expense or benefit would be: