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Exam 3: Taxes on the Financial Statements

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Question 1

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ASC 740 addresses how an entity should report uncertain tax positions in its financial statements.

A) True
B) False

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True

Question 2

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In the rate reconciliation of GAAP tax footnotes, temporary book-tax differences are reconciled between book income as if taxed at U.S.tax rates and the actual book income tax expense.

A) True
B) False

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Question 3

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

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.

The release of a valuation allowance may relate to a tax planning strategy adopted by the taxpayer that will produce taxable income in the future.

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, 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.

Van Dyke, Inc., hopes to report a total book-tax expense of $150,000 in the current year.This amount consists of $200,000 in current tax expense and a $50,000 tax benefit related to the expected future use of an NOL by Van Dyke.If the auditors determine that a valuation allowance of $20,000 must be placed against Van Dyke's deferred tax assets, what is Van Dyke's total book-tax expense?

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return if a proper election is made.

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.

Gravel, Inc., earns book net income before tax of $600,000.Gravel puts into service a depreciable asset this year, and its first-year tax depreciation exceeds book depreciation by $120,000.Gravel has recorded no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21%, what is Gravel's current income tax expense reported on its GAAP financial statements?

Jogg, Inc., earns book net income before tax of $600,000.It puts into service a depreciable asset this year, and its first-year tax depreciation exceeds book depreciation by $120,000.Jogg has recorded no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21%, and that this is Jogg's first year of operations, what is Jogg's balance in its deferred tax asset and deferred tax liability accounts at year-end?

Healy, Inc., reports an effective tax rate in its income tax footnote of 6%.The only reconciling item with regard to the hypothetical tax at 21% is a valuation allowance reversal of negative 15%.Which of the following statements is true concerning comparing Healy's effective tax rate with its competitors, all of whom have an effective tax rate between 20 and 24%?

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

Budlow, Inc., reported the following results for the current year. Determine Budlow's taxable income for the current year.Identify any temporary or permanent book-tax differences.

Purple, Inc., a domestic corporation, owns 100% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation.Purple also owns 40% of Green, a domestic corporation.Purple receives no distributions from any of these corporations.Which of these entities' net income is included in Purple's GAAP income statement for current- year financial reporting purposes?

Temporary differences are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return but not in the same reporting period.

A GAAP financial statement includes footnotes that:

Never, Inc., earns book net income before tax of $500,000.In computing its book income, Never deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes.Never records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21% and no valuation allowance is required, what is Never's deferred income tax asset reported on its GAAP financial statements?

The income tax footnote to the GAAP financial statements includes a reconciliation of a corporation's hypothetical tax on book income to its book-tax expense as if it were taxed in full at the applicable U.S.income tax rates.

ASC 740 is the GAAP equivalent of the Form 1120 Schedule UTP.