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Exam 6: Accounting for Income Taxes

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Question 41

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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.

A) True
B) False

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Question 42

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

A) True
B) False

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Question 43

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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. Costello's deferred income tax expense or benefit would be:

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

Which of the following items is not a temporary 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. a. Compute Oriole's current income tax expense. b. Compute Oriole's deferred income tax expense or benefit. c. Compute Oriole's effective tax rate. d. Provide a reconciliation of Oriole's effective tax rate with its hypothetical tax rate of 21 percent.

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. Compute Potter's deferred income tax expense or benefit.

Which of the following statements about ASC 740 as it relates to uncertain tax positions is true?

Jones 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. Book equivalent of taxable income is:

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

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.

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

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

Which of the following statements best describes the disclosure of a company's deferred tax assets and liabilities?

Stone Corporation reported pretax book income of $1,000,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the reserve for bad debts decreased by $50,000. Stone had a net deferred tax asset of $34,000 at the beginning of the year, representing a net deductible temporary difference of $100,000. At the beginning of the tax year, Congress reduced the corporate tax rate from 34 percent to 21 percent. Compute the company's current and deferred income tax expense or benefit.

Which of the following best describes the focus of ASC 740?

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.

As part of its uncertain tax position assessment, Madison Corporation records interest and penalties related to its unrecognized tax benefits of $1,000,000. Which of the following statements about recording this amount is most correct?

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.

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.