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Exam 17: Accounting for Income Taxes

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Question 1

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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 D)
F) A) and C)

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Question 2

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Knollcrest Corporation has a cumulative book loss over the past 36 months. Which of the following statements best describes how this fact enters into the valuation allowance analysis?

A) The book loss is considered sufficient negative evidence that a valuation must be recorded.
B) The book loss is considered negative evidence that must be evaluated along with other evidence as to whether a valuation allowance should be recorded.
C) The book loss is not considered negative evidence because it relates to book income and not taxable income.
D) A cumulative book loss is considered negative evidence only after a period of 60 months.

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

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Question 3

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Which of the following statements is true?

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

Temporary differences that are cumulatively "favorable" are defined as taxable temporary differences.

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, assuming a tax rate of 34%.

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. Using a tax rate of 34%, Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

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

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?

Which of the following items is not a temporary difference?

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?

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

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

Milton Corporation reported pretax book income of $2,500,000. Included in the computation were favorable temporary differences of $400,000, unfavorable temporary differences of $150,000, and favorable permanent differences of $100,000. Using a tax rate of 34%, compute Milton's deferred income tax expense or benefit.

Manchester Corporation recorded the following deferred tax assets and liabilities: $\begin{array} { l r } \text { Current deferred tax assets }&\mathbf { \$ 5 0 0 , 0 0 0 }\\\text { Current deferred tax liabilities } & \mathbf { 6 0 0 , 0 0 0 ) } \\ \text { Non-current deferred tax assets } & 8 0 0 , 0 0 0 \\ \text { Non-current deferred tax liabilities } & ( \underline { \mathbf { 2 } , 000,000 } ) \\ \text { Net deferred tax liabilities } & \mathbf { \$( \underline { 1 , 3 0 0 , 0 0 0 } ) } \end{array}$ The current deferred tax accounts and the non-current deferred tax liabilities result from temporary differences that relate to the company's U.S. operations. The non-current deferred tax asset relates to the company's German operations. Manchester wants to minimize the number of deferred tax accounts it reports on the balance sheet. What is the minimum number of deferred tax accounts Manchester can report on its balance sheet and what are the names and dollar amounts in each account?

Price Corporation reported pretax book income of $600,000 in 2014. Tax depreciation exceeded book depreciation by $100,000. In addition, the reserve for warranties increased by $40,000. Price had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000. During the year, the company's tax rate decreased from 34% to 30%. Compute the Company's current and deferred income tax expense or benefit for 2014.

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

The tax effects of permanent differences always show up in a company's computation of its effective tax rate.

TarHeel 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, TarHeel subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Assume a tax rate of 34%. TarHeel's accounting effective tax rate is:

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: