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Exam 16: Accounting for Income Taxes

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Question 71

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The valuation allowance account that is used in conjunction with deferred tax assets is a(n) :

A) Liability.
B) Component of shareholders' equity.
C) Asset.
D) Contra asset.

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

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Question 72

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Which of the following statements is true as to GAAP regarding accounting for income taxes,and its use of the asset and liability approach?

A) Considerable flexibility is permitted in the balance sheet classification of deferred tax amounts.
B) The approach recognizes the time value of money.
C) The approach is consistent with a balance sheet emphasis of U.S.GAAP and the International Financial Reporting Standards (IFRS) .
D) The approach is consistent with cash basis accounting.

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

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Question 73

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EZ,Inc. ,reports pretax accounting income of $400,000,but due to a single temporary difference,taxable income is $500,000.At the beginning of the year,no temporary differences existed.EZ is subject to a tax rate of 40%. Required: Prepare the appropriate journal entry to record EZ's income taxes.Show well-labeled computations.

Financial statement disclosure of the components of income tax expense:

Use the following to answer questions The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars) : The applicable tax rate is 40%.There are no other temporary or permanent differences. -Which of the following must Franklin Freightways disclose related to the income tax expense reported in the income statement ($ in millions) ?

Bumble Bee Co.had taxable income of $7,000,MACRS depreciation of $5,000,book depreciation of $2,000,and accrued warranty expense of $400 on the books although no warranty work was performed.What is Bumble Bee's pretax accounting income?

Listed below are five independent situations.For each situation indicate (by letter)whether it will create (A)a deferred tax asset, (L)a deferred tax liability,or (N)neither. ____ An operating loss carryback. ____ Warranty expense,tax deductible when paid. ____ Interest earned on investments in state and local government bonds. ____ Current year charitable contributions not currently deductible due to tax limitations but which can be carried forward to future tax years. ____ Prepaid expenses,tax deductible when paid.

Sometimes a temporary difference will produce future deductible amounts.Explain what is meant by future deductible amounts.Describe at least one situation that has this effect.How are future deductible amounts recognized in the financial statements?

Use the following to answer questions For its first year of operations,Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%.Assume that no estimated taxes have been paid. - Tringali's tax rate is 40%. What should Tringali report as its deferred income tax liability as of the end of its first year of operations?

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

Changes in enacted tax rates that do not become effective in the current period affect deferred tax accounts only after the new rates take effect.

During the current year,Stern Company had pretax accounting income of $45 million.Stern's only temporary difference for the year was rent received for the following year in the amount of $15 million.Stern's taxable income for the year would be:

A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31,2016,its first year of operations.The income tax rate is 40%. What amount(s) should Fieval report related to deferred income taxes in its 2016 balance sheet?

Use the following to answer questions In LMC's 2016 annual report to shareholders,it disclosed the following information about its income taxes: INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31 were as follows: -Explain why LMC has a $209.4 million valuation allowance for its deferred tax assets.

Gallo Light began operations in 2016.The company sometimes sells used warehouses on an installment basis.In those cases,Gallo Light reports income in its income statement in the year of the sale.In its income tax return,though,Gallo Light reports installment income by the installment method.Installment income in 2016 was $90,000,which Gallo Light expects to collect equally over the next three years.The tax rate is 30%,but based on an enacted law,is scheduled to become 35% in 2018. Gallo Light's pretax accounting income from the 2016 income statement was $830,000,which includes $40,000 of interest revenue from an investment in municipal bonds.There were no differences between accounting income and taxable income other than those described above. Required: (1. )Prepare the appropriate journal entry to record Gallo Light's 2016 income taxes.Show calculations. (2. )What is Gallo Light's 2016 net income?

The valuation allowance account that is used in conjunction with deferred taxes relates:

Pocus,Inc. ,reports warranty expense when related products are sold.For tax purposes,the warranty costs are deductible as incurred.At the end of the current year,Pocus has a warranty liability of $200,000 and taxable income of $20,000,000.At the end of the previous year,Pocus reported a deferred tax asset of $80,000 related to the difference in reporting warranty expense,its only temporary difference.The enacted tax rate is 30% each year. Required: Prepare the appropriate journal entry for Pocus to record the income tax provision for the current year.Show well-labeled supporting computations.

Deferred tax assets and liabilities typically are classified as current or long term according to when the underlying temporary difference is expected to reverse.

When a new tax rate is enacted,what adjustment,if any,is made to the retained earnings account as a result of the change?

For classification purposes,a valuation allowance: