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Exam 6: Accounting for Income Taxes

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Question 1

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In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet.

A) True
B) False

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Question 2

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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.

A) True
B) False

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Question 3

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ASC 740 is the sole source of rules related to accounting for income taxes.

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

Morgan Corporation determined that $2,000,000 of the research credit on its current year tax return was uncertain, but that it was more likely than not to be sustained on audit. Management made the following assessment of the company's potential tax benefit from the credit and its probability of occurring. Under ASC 740, what amount of the tax benefit related to the research credit can Morgan recognize in calculating its income tax provision in the current year?

Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Compute Sparrow's current income tax expense or benefit. 

Weber Corporation reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $100,000, unfavorable temporary differences of $300,000, and unfavorable permanent differences of $200,000. Compute the Company's book equivalent of taxable income. Use this number to compute the Company's total income tax provision or benefit.

Heron Corporation reported pretax book income of $4,000,000. Included in the computation were favorable temporary differences of $500,000, unfavorable temporary differences of $700,000, and unfavorable permanent differences of $200,000. Compute Heron's current income tax expense or benefit.

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

Acai Corporation determined that $5,000,000 of its R&D credit on its current year tax return was uncertain. Acai determined that there was a 40 percent chance of the credit being sustained on audit. Management made the following assessment of the company's potential tax benefit from the R&D credit and its probability of occurring. Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai recognize in calculating its income tax provision in the current year?

Congress reduced the corporate tax rate from 35 percent to 21 percent effective in 2018. The tax rate change will affect only deferred tax assets and liabilities that arise in 2018 and thereafter.

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

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

DeWitt Corporation reported pretax book income of $800,000. Tax depreciation exceeded book depreciation by $400,000. In addition, the company received $100,000 of tax-exempt municipal bond interest. DeWitt used a net operating loss carryover of $200,000 to offset taxable income in the current year. Compute DeWitt's book equivalent of taxable income. Use this number to compute DeWitt's total income tax provision or benefit for the current year. 

Whitman Corporation reported pretax book income of $400,000 in 2018. 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 2019. Whitman has a net operating loss carryforward of $200,000 from 2017. Compute the company's deferred income tax expense or benefit for 2018. 

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:

Which of the following temporary differences creates a deferred tax liability?

A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future.

Robinson 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, Robinson 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. During the year, Congress reduced the corporate tax rate to 34%. Robinson's deferred income tax expense or benefit for the current year would be:

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. Compute Cardinal's current income tax expense or benefit.