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Exam 6: Accounting for Income Taxes

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Question 1

True/False

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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

Correct Answer

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False

Question 2

Multiple Choice

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ASC 740 requires a publicly traded company to disclose the components of its deferred tax assets and liabilities only if the amounts are considered to be:

A) Material.
B) Significant.
C) Pertinent.
D) Important.

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

Correct Answer

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B

Question 3

True/False

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ASC 740 deals with accounting for uncertain tax positions.

Whitman Corporation reported pretax book income of $400,000. 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 the next year. Whitman has a net operating loss carryforward of $200,000 from the prior year. Compute the company's deferred income tax expense or benefit for the current year.

Which of the following statements is true?

Which of the following items would likely not be included in the computation of a company's structural effective tax rate?

Which of the following statements is true?

Swordfish 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. In prior years, tax depreciation exceeded book depreciation by a cumulative amount of $500,000. Finally, Swordfish subtracted a dividends received deduction of $15,000 in computing its current-year taxable income. Swordfish's deferred income tax expense or benefit would be:

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.

Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference in the allowance for bad debts account. This basis difference is characterized as:

Which of the following statements is true?

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

Smith Company reported pretax book income of $411,000. Included in the computation were favorable temporary differences of $52,200, unfavorable temporary differences of $21,100, and favorable permanent differences of $41,100. Smith's deferred income tax expense or benefit would be:

Tuna Corporation reported pretax book income of $1,005,000. During the current year, the net reserve for warranties increased by $27,500. In addition, book depreciation exceeded tax depreciation by $105,000. Finally, Tuna subtracted a dividends received deduction of $17,500 in computing its current-year taxable income. Book equivalent of taxable income is:

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.

ASC 740 applies to accounting for state, local, and international income taxes as well as federal income taxes.

A valuation allowance is recorded against a deferred tax asset when:

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.

Farm Corporation reported pretax book loss of $500,000. 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.Farm Corporation had taxable income of $750,000 in the prior year. Compute the company's 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. Smith's deferred income tax expense or benefit would be: