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Exam 6: Accounting for Income Taxes

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Question 1

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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. Election to treat as a deduction in computing net income before income taxes.

A) True
B) False

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Question 2

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Which of the following items is not considered evidence in determining if a valuation allowance is necessary?

A) A cumulative book loss over some period of time.
B) Management projects future taxable income based on a backlog of signed contracts.
C) A net operating loss expired unused in the current year.
D) Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company.

E) A) and B)
F) All of the above

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Question 3

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Which of the following statements best describes the ASC 740 process for evaluating a company's uncertain tax positions?

Brown Corporation reports $100,000 of gain from the sale of land on its income statement. For tax purposes, Brown uses the installment method and reports gain of $10,000. The $90,000 difference in the gain reported is a deductible temporary difference. Taxable temporary difference because when the difference reverses in a future period, it will increase taxable income relative to book income.

ASC 740 governs how a company accounts for all taxes it incurs. ASC 740 applies only to income taxes.

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?

Lafayette, Inc. completed its first year of operations with a pretax loss of $800,000. The tax return showed a net operating loss of $750,000, which the company will carryforward. The $50,000 book-tax difference results from a disallowed deduction for meals and entertainment. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming a tax rate of 34%, prepare the journal entries to record the deferred tax provision and the valuation allowance.

A corporation's effective tax rate as computed in its income tax note is the company's cash tax rate for the year. The accounting ETR is the provision (benefit) divided by pretax income from continuing operations.

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

Which of the following statements best describes a valuation allowance as it relates to accounting for income taxes?

For 2016, Manchester Corporation recorded the following deferred tax assets and liabilities: The current deferred tax accounts and the noncurrent deferred tax liabilities result from temporary differences that relate to the company's U.S. operations. The noncurrent 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, assuming Manchester early adopts ASU 2015-17?

Which of the following book-tax basis differences results in a deductible temporary difference?

In 2016, Moody Corporation recorded the following deferred tax assets and liabilities: All of the deferred tax accounts relate to temporary differences that result from the company's U.S. operations. Moody wants to minimize the number of deferred tax accounts it reports on the balance sheet. What is the minimum number of deferred tax accounts Moody can report on its balance sheet and what are the names and dollar amounts in each account, assuming Moody early adopts ASU 2015-17?

Acai Corporation determined that $5,000,000 of its R&D credit on its current year tax return was uncertain. Acai determined that there was a 40 percent chance of the credit being sustained on audit. Management made the following assessment of the company's potential tax benefit from the R&D credit and its probability of occurring. Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai recognize in calculating its income tax provision in the current year?

Once determined, an unrecognized tax benefit under ASC 740 is not readjusted for subsequent events. A UTB must be adjusted every reporting period if new information arises that changes management's assessment of the probability of recognition or the measurement amount.

The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year. The current income tax expense also includes additions and subtractions to the company's uncertain tax benefits and adjustments for prior year returns.

Robinson Company 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, Robinson reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. During the year, the company's tax rate increased from 34% to 35%. Robinson's deferred income tax expense or benefit for the current year would be:

Farm Corporation reported pretax book loss of $500,000 in 2016. Tax depreciation exceeded book depreciation by $100,000. In addition, Farm received prepaid income of $50,000, which was included on its tax return but was not included in the book loss. Farm had $0 taxable income in 2015 and 2014. Assuming a tax rate of 34%, compute the Company's income tax expense or benefit for 2016.

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:

Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Using a tax rate of 34%, compute Sparrow's current income tax expense or benefit.