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Exam 3: Taxes on the Financial Statements

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Question 1

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A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

A) True
B) False

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Question 2

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Which of the following items is not included in the income tax footnote for a publicly traded company?

A) Rate reconciliation.
B) Analysis of deferred tax assets and liabilities.
C) Breakdown of income tax between foreign and domestic.
D) Breakdown of income tax among U.S.states.
E) Analysis of total tax expense components.

F) None of the above
G) B) and E)

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Question 3

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Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 21% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible business meals expense.Provide the income tax footnote rate reconciliation for Black, using either dollars or percentages.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 21% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible business meals expense.Provide the journal entry to record Black's current tax expense.

A valuation allowance expresses on the GAAP balance sheet that there exists uncertainty that the taxpayer will be able to recover a deferred tax asset.

The Jacobsen Corporation has determined the appropriate changes to its deferred tax accounts.The Jacobsen auditor now is discussing whether to place a valuation allowance against the deferred tax asset on the balance sheet.List some of the factors that the Jacobsen auditor will consider in this regard.

If a valuation allowance is decreased released) in the current year, the corporation's effective tax rate is lower than if the valuation allowance had not decreased.

In general, the purpose of ASC 740 is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments, for the current year and all future years.

At the beginning of the year, Schrader, Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000.At the end of the year, the balance in the deferred tax asset account has not changed, but Schrader's auditors want to record a $90,000 valuation allowance against this amount, because of a persistent downturn in Schrader's profitability.Develop the journal entry to record the valuation allowance.

Which of the following taxes are included in the total income tax expense of a corporation as reported on its GAAP financial statements?

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 21% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible business meals expense.Calculate Black's current tax expense.

A GAAP financial statement includes footnotes that:

Giant uses the "equity method" to account for the operations of its 40% owned subsidiary Little.A portion of Little's profits for the year are included in Giant's GAAP book income.

Hot, Inc.'s primary competitor is Cold, Inc.When comparing relative deferred tax asset and liability accounts with Cold, which of the following benchmarking activities should Hot undertake?

Which of the following items are not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?

A corporation's taxable income almost never is the same as its GAAP financial accounting income.Explain why this occurs.Use the terms permanent and temporary book-tax differences in you answer.Give at least two examples of each type of book-tax difference.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 21% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible business meals expense.Determine the change in Black's deferred tax liabilities for the current year.

Which of the following taxes are included in the total income tax liability of a corporation reported on its Federal income tax return?

You are assisting LipidCo, a U.S.corporation subject to GAAP, to determine its current-year book expense for income taxes.The following represent the steps that you will take in making this computation.Put the steps into the correct order. A.Compute the deferred tax provision. B.Determine book income before income tax effects. C.Determine the current tax provision. D.Determine whether a valuation allowance is required, and apply or release it. E.Identify and measure temporary book-tax differences. F.Prepare the disclosures for the financial statement footnotes. G.Add/Subtract any permanent book-tax differences.

Book-tax differences can be explained in part by examining the objectives underlying financial accounting and taxable income computations.Evaluate this statement.