Test bank taxation of individuals and business entities 2015 6e by brian c spilker chap017

Chapter 17
Accounting for Income Taxes
True / False Questions
1. ASC 740 governs how a company accounts for all taxes it incurs.
True

False

2. ASC 740 is the sole source of rules related to accounting for income taxes.
True

False

3. Temporary differences create either a deferred tax asset or a deferred tax liability.
True

False

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

False

5. The Emerging Issues Task Force assists the FASB by providing guidance on the
implementation of ASC 740 and other accounting pronouncements.
True

False

6. ASC 740 applies to accounting for state and local and international income taxes as

well as federal income taxes.
True

False

7. The "current income tax expense or benefit" always represents the taxes paid or
refunded in the current year.
True

False

8. The focus of ASC 740 is the income statement.
True

False

9. Tax-exempt interest from municipal bonds is an example of a permanent difference.
True

False

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

False

11. In general, a temporary difference reflects a difference in the financial basis and tax
basis of an asset or liability on the balance sheet.
True

False

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

False

13. 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.
True

False

14. ASC 740 deals with accounting for uncertain tax positions.
True

False

15. Congress reduces the corporate tax rate from 35 percent to 25 percent effective in
2015. The tax rate change will affect only deferred tax assets and liabilities that arise
in 2015 and thereafter.

True

False

16. A valuation allowance can reduce both a deferred tax asset and a deferred tax
liability.
True

False

17. A corporation evaluates the need for a valuation allowance by comparing both
positive and negative evidence that the corporation will realize a deferred tax asset
in the future.
True

False

18. A corporation undertakes a valuation allowance analysis to determine if a deferred
tax asset should be recognized on the balance sheet.
True

False

19. A cumulative financial accounting (book) loss over three years likely would be
considered significant negative evidence in a valuation allowance analysis.
True

False

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20. ASC 740 applies a two-step process in determining if an uncertain tax benefit should
be recognized.
True

False

21. 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.
True

False

22. Once determined, an unrecognized tax benefit under ASC 740 is not readjusted for
subsequent events.
True

False

23. ASC 740 permits a corporation to net its current and long-term deferred tax
liabilities.
True

False

24. The classification of a deferred tax asset as current or long-term usually depends on
the balance sheet classification of the asset or liability to which it relates.

True

False

25. A corporation's effective tax rate as computed in its income tax note is the
company's cash tax rate for the year.
True

False

Multiple Choice Questions
26. Which of the following taxes would not be accounted for under ASC 740?

A.
B.
C.
D.

Income taxes paid to the German government.
Income taxes paid to the U.S. government.
Value-added taxes paid to the Swiss government.
Income taxes paid to the City of New York.

27. Which of the following organizations does not issue rules that apply to accounting for
income taxes?

A.
B.
C.
D.

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28. Which of the following statements best describes the objective(s) of ASC 740?

A.
B.
C.
D.

To compute a corporation's current income tax liability or benefit.
To recognize deferred tax liabilities and assets.
To report permanent differences in the balance sheet.
To compute a corporation's current income tax liability or benefit and to recognize

29. Which of the following items does not result in a permanent difference?

A.
B.
C.
D.

Accelerated tax depreciation in excess of straight-line book depreciation
Interest income from a tax-exempt municipal bond
Dividend received deduction on the income tax return
Domestic manufacturing deduction on the income tax return

30. Which of the following temporary differences creates a deferred tax asset in the year
in which it originates?

A.
B.
C.
D.

Accelerated tax depreciation in excess of straight-line book depreciation
Prepayment income reported on the tax return prior to being reported on the incom
Gain reported on the income statement prior to being reported on the tax retu
Prepayment deduction reported on the tax return prior to being reported on the in

31. Which of the following statements is true?

A.
B.
C.
D.

Another name for a taxable temporary difference is an unfavorable difference
Another name for a taxable temporary difference is a favorable difference
Another name for a deductible temporary difference is a favorable difference
Another name for a deductible temporary difference is a permanent differenc

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

A.
B.
C.

D.

ASC 740 takes an "asset and liability approach" that focuses on the balance she
ASC 740 takes an "income and expense approach" that focuses on the income sta
ASC 740 takes a "taxes paid or refunded approach" that focuses on the statemen
ASC 740 takes a "permanent differences approach" that focuses on the effective

33. Grand River Corporation reported pretax book income of $500,000. Included in the
computation were favorable temporary differences of $100,000, unfavorable
temporary differences of $10,000, and favorable permanent differences of $90,000.
Assuming a tax rate of 34%, the Corporation's current income tax expense or benefit
would be:

A.
B.
C.
D.
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34. Packard Corporation reported pretax book income of $500,000. Included in the
computation were favorable temporary differences of $10,000, unfavorable
temporary differences of $100,000, and unfavorable permanent differences of
$90,000. Assuming a tax rate of 34%, the Corporation's current income tax expense
or benefit would be:

A.
B.

C.
D.
35. Abbot Corporation reported pretax book income of $500,000. During the current
year, the reserve for bad debts increased by $5,000. In addition, tax depreciation
exceeded book depreciation by $40,000. Finally, Abbot received $3,000 of taxexempt life insurance proceeds from the death of one of its officers. Using a tax rate
of 34%, Abbot's current income tax expense or benefit would be:

A.
B.
C.
D.
36. Costello Corporation reported pretax book income of $500,000. During the current
year, the reserve for bad debts increased by $5,000. In addition, tax depreciation
exceeded book depreciation by $40,000. Finally, Costello received $3,000 of taxexempt life insurance proceeds from the death of one of its officers. Using a tax rate
of 34%, Costello's deferred income tax expense or benefit would be:

A.
B.
C.
D.

$11,900 net deferred tax expense
$11,900 net deferred tax benefit
$15,300 net deferred tax benefit
$15,300 net deferred tax expense

37. Davison Company determined that the book basis of its net accounts receivable was
less than the tax basis of its net accounts receivable by $800,000 due to a difference
in the allowance for bad debts account. This basis difference is characterized as:

A.
B.
C.
D.

Deductible temporary difference
Taxable temporary difference
Favorable permanent difference
Unfavorable permanent difference

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38. Which of the following items is not a temporary difference?

A.
B.
C.
D.

Vacation pay accrued for tax purposes in a prior period is deducted in the curren
Tax depreciation for the period exceeds book depreciation
A goodwill impairment expense is recorded on the income statement; the goodwi
Bad debts charged off in the current period exceed the bad debts accrued in the c

39. Smith Company reported pretax book income of $400,000. Included in the
computation were favorable temporary differences of $50,000, unfavorable
temporary differences of $20,000, and favorable permanent differences of $40,000.

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

A.
B.
C.
D.

Net deferred tax expense of $10,200
Net deferred tax benefit of $10,200
Net deferred tax expense of $23,800
Net deferred tax benefit of $23,800

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

A.
B.
C.
D.

Book basis of an employee post-retirement benefits liability exceeds its tax bas
Book basis of a building exceeds the tax basis of the building
Book basis of an acquired intangible exceeds the tax basis of the intangible
Tax basis of a prepaid liability exceeds the book basis of the liability

41. Which of the following items is not a permanent book/tax difference?

A.
B.
C.

D.

Tax-exempt life insurance proceeds
Non-deductible meals and entertainment expense
Accrued vacation pay liability not paid within the first 2½ months of the next ta
Domestic production activities deduction

42. Marlin 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. Finally, Marlin subtracted a
dividends received deduction of $15,000 in computing its current year taxable
income. Using a tax rate of 34%, Marlin's current income tax expense or benefit
would be:

A.
B.
C.
D.

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43. 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:

A.
B.
C.
D.

$25,500 net deferred tax expense
$25,500 net deferred tax benefit
$42,500 net deferred tax benefit
$42,500 net deferred tax expense

44. Kedzie Company determined that the book basis of its liability for "other postretirement benefits" (OPEB) exceeded the tax basis of this account by $10,000,000.
This basis difference is characterized as:

A.
B.
C.
D.

Deductible temporary difference
Taxable temporary difference
Favorable permanent difference
Unfavorable permanent difference

45. Which of the following statements is true?

A.
B.
C.

D.

ASC 740 focuses on the income tax expense or benefit on the income statemen
ASC 740 focuses on the balances in the deferred tax assets and liabilities on the b
ASC 740 focuses on the income taxes paid or refunded in the Statement of Cash
ASC 740 focuses on the computation of a company's effective tax rate in the inco

46. Bruin Company received a $100,000 insurance payment on the death of its company
president. The company annually paid $1,000 of non-deductible insurance premiums
on the policy. Bruin reported the insurance receipt as income and deducted the
premium payments on its books. For ASC 740 purposes, the income and deduction
are characterized as:

A.
B.
C.
D.

Both are taxable temporary differences
Both are deductible temporary differences
The insurance receipt is a favorable permanent difference and the premium paym
The insurance receipt is a taxable temporary difference and the premium paymen

47. Which of the following statements is true?

A.
B.
C.
D.

A change in capitalized inventory costs under §263A always produces an increase
A change in capitalized inventory costs under §263A always produces a decrease i
A change in capitalized inventory costs under §263A can produce an increase or a
A change in capitalized inventory costs under §263A always produces a permanen

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48. 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:

A.
B.
C.
D.

Net deferred tax benefit of $10,500
Net deferred tax expense of $10,500
Net deferred tax benefit of $11,500
Net deferred tax expense of $11,500

49. Which of the following statements is true?

A.
B.
C.
D.

In determining if a valuation allowance is needed, positive evidence is considered
In determining if a valuation allowance is needed, negative evidence is considered
In determining if a valuation allowance is needed, negative and positive evidence
In determining if a valuation allowance is needed, only negative evidence is eva

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

A.
B.
C.
D.

A valuation allowance is a contra account to deferred tax assets only
A valuation allowance is a contra account to deferred tax liabilities only
A valuation allowance is a contra account to deferred tax assets and liabilities
A valuation allowance is a contra account to noncurrent deferred tax assets on

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

A.
B.
C.
D.

It is probable that the deferred tax asset will not be realized in the future
It is more likely than not that the deferred tax asset will not be realized in the fu
It is highly likely the deferred tax asset will not be realized in the future
It is remote the deferred tax asset will not be realized in the future

52. 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.
B.
C.
D.

The book loss is considered sufficient negative evidence that a valuation must be
The book loss is considered negative evidence that must be evaluated along with
The book loss is not considered negative evidence because it relates to book inco
A cumulative book loss is considered negative evidence only after a period of 60

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

A.
B.
C.

D.

A cumulative book loss over some period of time.
Management projects future taxable income based on a backlog of signed contr
A net operating loss expired unused in the current year.
Management can implement a tax strategy to create future taxable income, but i

54. Which of the following statements best describes "book equivalent of taxable
income" (BETI)?

A.
B.
C.
D.

BETI is book income adjusted for all permanent and temporary differences
BETI is book income adjusted for all temporary differences
BETI is book income adjusted for all permanent differences
BETI is book income before adjustment for all permanent and temporary differe

55. Jones Company reported pretax book income of $400,000. Included in the
computation were favorable temporary differences of $50,000, unfavorable
temporary differences of $20,000, and favorable permanent differences of $40,000.
Book equivalent of taxable income is:

A.
B.
C.
D.
56. Tuna 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. Finally, Tuna subtracted a
dividends received deduction of $15,000 in computing its current year taxable
income. Book equivalent of taxable income is:

A.
B.
C.
D.

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57. Weaver 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,
Weaver 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 decreased from 34% to 30%.
Weaver's deferred income tax expense or benefit for the current year would be:

A.
B.
C.
D.

Net deferred tax benefit of $9,000
Net deferred tax expense of $9,000
Net deferred tax benefit of $5,000

Net deferred tax expense of $5,000

58. Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year,
representing a net taxable temporary difference of $200,000. During the year, Lynch
reported pretax book income of $800,000. Included in the computation were
favorable temporary differences of $20,000 and unfavorable temporary differences of
$50,000. During the year, the company's tax rate decreased from 34% to 30%.
Lynch's deferred income tax expense or benefit for the current year would be:

A.
B.
C.
D.

Net deferred tax benefit of $9,000
Net deferred tax expense of $9,000
Net deferred tax benefit of $1,000
Net deferred tax expense of $1,000

59. Which of the following statements about ASC 740 as it relates to uncertain tax
positions is true?

A.
B.
C.
D.

ASC 740 deals with all tax benefits involving income and non-income taxes.
ASC 740 deals with whether a recognized income tax benefit will be realized.
ASC 740 deals with recognized tax benefits related to income tax positions claime

ASC 740 deals with recognized tax benefits related to income tax positions regard

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

A.
B.
C.
D.

ASC 740 requires a company to complete a two-step analysis every time it evaluat
ASC 740 requires a company to complete step 2 (measurement) in its evaluation o
ASC 740 allows a company to take into account the probability of audit by a tax a
ASC 740 allows a company to record a tax benefit from an uncertain tax position

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61. 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?

A.
B.
C.
D.

Madison must record the expense separate from its income tax provision.

Madison can elect to include the expense as part of its income tax provision or rec
Madison must record the expense in its income tax provision.
Madison does not record the expense until it is paid.

62. 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?

A.
B.
C.
D.

More likely than not

Substantial authorit

63. Which of the following statements about uncertain tax position disclosures is false?

A.
B.
C.

ASC 740 requires a company to disclose the amount of unrecognized tax benefits
ASC 740 requires a company to disclose the aggregate amount of unrecognized ta
ASC 740 requires a company to disclose the aggregate amount of unrecognized t

64. Which of the following statements is true with respect to a company's effective tax
rate reconciliation?

A.
B.
C.
D.

The hypothetical tax expense is the tax that would be due if the company's statuto
The hypothetical tax expense is the tax that would be due if the company's statuto
The hypothetical tax expense is the tax that would be due if the company's statu
The hypothetical tax expense is another name for the company's effective tax

65. A company's effective tax rate can best be described as:

A.
B.
C.
D.

The company's cash taxes paid divided by taxable income
The company's cash taxes paid divided by net income from continuing operatio
The company's financial statement income tax provision divided by taxable inc
The company's financial statement income tax provision divided by net income fr

66. Which of the following statements best describes the disclosure of a company's
deferred tax assets and liabilities?

A.
B.
C.
D.

All four categories of deferred tax accounts (current deferred tax assets and liabili
The four categories of deferred tax accounts can be netted and disclosed as one a
Current deferred tax assets and liabilities and noncurrent deferred tax assets and
Current deferred tax accounts and noncurrent deferred tax accounts can be nette

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67. Which of the following statements concerning the classification of deferred tax assets
and liabilities is false?

A.
B.
C.
D.

A deferred tax asset is classified as noncurrent if the company expects the future t
A deferred tax asset related to a bad debt reserve is classified as noncurrent if the
A deferred tax asset related to a bad debt reserve is classified as current if the re
A deferred tax asset related to inventory capitalization is classified as noncurrent

68. 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.
B.
C.
D.

69. Which of the following temporary differences creates a current deferred tax liability?

A.
B.
C.
D.

Accumulated depreciation on a building
Accumulated amortization on a customer list (intangible with a five-year life)
Unearned revenue expected to be collected in the next 12 months
Deferred compensation expected to be paid in the next 12 months

70. Which of the following items is not a reconciling item in the income tax footnote?

A.
B.
C.
D.

Compensation deduction related to incentive stock options
Compensation deduction related to nonqualified stock options that were expensed
Domestic production activities deduction
State and local income taxes

71. 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.
B.
C.
D.

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72. 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:

A.
B.
C.
D.
73. Green 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, Green subtracted a
dividends received deduction of $25,000 in computing its current year taxable
income. Using a tax rate of 34%, Green's cash tax rate is:

A.
B.
C.

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

A.
B.
C.
D.

Tax effects of international operations
Tax effects of state and local operations
Tax effects from the domestic production activities deduction
Tax effects from goodwill impairment

75. Which of the following statements best describes the ASC 740 rules related to the
disclosure of the components of deferred tax assets and liabilities in the company's
income tax note?

A.
B.
C.
D.

A publicly traded company should disclose the approximate "tax effect" (dollar am
A publicly traded company should disclose the approximate "tax effect" (dollar am
A privately-held company should disclose the approximate "tax effect" (dollar am
A privately-held company should disclose the approximate "tax effect" (dollar am

Essay Questions

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76. Gull Corporation reported pretax book income of $2,000,000. Included in the
computation were favorable temporary differences of $300,000, unfavorable
temporary differences of $200,000, and favorable permanent differences of $50,000.
Assuming a tax rate of 34%, compute Gull's current income tax expense or benefit.

77. Heron Corporation reported pretax book income of $4,000,000. Included in the
computation were favorable temporary differences of $500,000, unfavorable
temporary differences of $700,000, and unfavorable permanent differences of
$200,000. Using a tax rate of 34%, compute Heron's current income tax expense or
benefit.

78. 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 taxexempt interest from municipal bonds. Using a tax rate of 34%, compute Sparrow's
current income tax expense or benefit.

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79. Cardinal Corporation reported pretax book income of $3,000,000. During the current
year, the reserve for bad debts increased by $200,000. In addition, book depreciation
exceeded tax depreciation by $100,000. Cardinal sold a fixed asset and reported a
book gain of $60,000 and a tax gain of $80,000. Finally, Cardinal deducted $50,000

of domestic production activities deduction on its tax return. Using a tax rate of 34%,
compute Cardinal's current income tax expense or benefit.

80. Purple Rose Corporation reported pretax book income of $500,000. Tax depreciation
exceeded book depreciation by $300,000. In addition, the company received
$250,000 of tax-exempt life insurance proceeds. The prior year tax return showed
taxable income of $100,000. Using a tax rate of 34%, compute Purple Rose's current
income tax expense or benefit.

81. Yellow Rose Corporation reported pretax book income of $1,000,000. Tax depreciation
exceeded book depreciation by $100,000. During the year Yellow Rose capitalized
$50,000 into ending inventory under §263A. Capitalized inventory costs of $75,000 in
beginning inventory were deducted as part of cost of goods sold on the tax return.
Using a tax rate of 34%, compute Yellow Rose's taxes payable or refundable.

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82. 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.

83. Frost Corporation reported pretax book income of $3,000,000. Included in the
computation were favorable temporary differences of $200,000, unfavorable
temporary differences of $350,000, and unfavorable permanent differences of
$50,000. Using a tax rate of 34%, compute Frost's deferred income tax expense or

benefit.

84. Potter, Inc. reported pretax book income of $5,000,000. During the current year, the
reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded
book depreciation by $300,000. Potter sold a fixed asset and reported book gain of
$60,000 and tax gain of $80,000. Finally, the company received $50,000 of taxexempt municipal bond interest. Using a tax rate of 34%, compute Potter's deferred
income tax expense or benefit.

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85. Whitman Corporation reported pretax book income of $400,000 in 2014. Book
depreciation exceeded tax depreciation by $100,000. In addition, the Company
accrued vacation pay of $50,000 that was not deductible until paid in 2015. Whitman
has a net operating loss carryforward of $200,000 from 2013. Assuming a tax rate of
34%, compute the Company's deferred income tax expense or benefit for 2014.

86. Farm Corporation reported pretax book loss of $500,000 in 2014. 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 2013 and 2012. Assuming a tax rate of 34%,
compute the Company's deferred income tax expense or benefit for 2014.

87. 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.

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88. Stone Corporation reported pretax book income of $1,000,000 in 2014. Tax
depreciation exceeded book depreciation by $300,000. In addition, the reserve for
bad debts decreased by $50,000. Stone had a net deferred tax asset of $29,000 at
the beginning of the year, representing a net deductible temporary difference of
$100,000. During the year, the company's tax rate increased from 29% to 30%.
Compute the Company's current and deferred income tax expense or benefit for
2014.

89. Identify the following items as creating a temporary difference, permanent difference,
or no difference.

17-18
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90. Irish Corporation reported pretax book income of $1,000,000 in 2014. Included in the
computation were favorable temporary differences of $300,000, unfavorable
temporary differences of $100,000, and favorable permanent differences of
$200,000. Compute Irish's book equivalent of taxable income. Use this number to
compute the company's total income tax provision or benefit for 2014, assuming a
tax rate of 34%.

91. Weber Corporation reported pretax book income of $400,000. Included in the
computation were favorable temporary differences of $100,000, unfavorable
temporary differences of $300,000, and unfavorable permanent differences of
$200,000. Compute the Company's book equivalent of taxable income. Use this
number to compute the Company's total income tax provision or benefit, assuming a
tax rate of 34%.

92. 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%.

17-19
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93. MAC, Inc. completed its first year of operations with a pretax loss of $300,000. The
tax return showed a net operating loss of $500,000, which MAC will carry forward.
The $200,000 book-tax difference results from excess tax depreciation over book
depreciation. 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.

94. 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
carry forward. 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.

17-20
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95. Morgan Corporation determined that $2,000,000 of its domestic production activities
deduction on its current year tax return was uncertain, but that it was more likely
than not to be sustained on audit. Management made the following assessment of
the company's potential tax benefit from the deduction and its probability of
occurring.

Under ASC 740, what amount of the tax benefit related to the domestic production
activities deduction can Morgan recognize in calculating its income tax provision in
the current year?

17-21
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96. 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?

97. 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?

17-22
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98. Manchester Corporation recorded the following deferred tax assets and liabilities:

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 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?

99. Oriole Company reported pretax net income from continuing operations of
$1,000,000 and taxable income of $1,200,000. The unfavorable book-tax difference
of $200,000 was due to a $200,000 favorable temporary difference relating to
depreciation, an unfavorable temporary difference of $300,000 due to an increase in
the reserve for bad debts, and a $100,000 unfavorable permanent difference from
the disallowance of compensation expense related to the exercise of incentive stock
options. Oriole Company's applicable tax rate is 34%.

a. Compute Oriole Company's current income tax expense.
b. Compute Oriole Company's deferred income tax expense or benefit.
c. Compute Oriole Company's effective tax rate.
d. Provide a reconciliation of Oriole Company's effective tax rate with its hypothetical
tax rate of 34%.

17-23
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100 Izzo Company reported pretax net income from continuing operations of $1,000,000
.
and taxable income of $800,000. The favorable book-tax difference of $200,000 was
due to a $100,000 favorable temporary difference relating to depreciation, an
unfavorable temporary difference of $50,000 due to accrued vacation pay, and a
$150,000 favorable permanent difference from the domestic manufacturing
deduction. Izzo Company's applicable tax rate is 34%.
a. Compute Izzo Company's current income tax expense.
b. Compute Izzo Company's deferred income tax expense or benefit.
c. Compute Izzo Company's effective tax rate.
d. Provide a reconciliation of Izzo Company's effective tax rate with its hypothetical
tax rate of 34%.

17-24
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Chapter 17 Accounting for Income Taxes Answer Key

True / False Questions
1.

ASC 740 governs how a company accounts for all taxes it incurs.
FALSE
ASC 740 applies only to income taxes.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process.
Level of Difficulty: 1 Easy
Topic: Objectives of accounting for income taxes and the income tax provision process

2.

ASC 740 is the sole source of rules related to accounting for income taxes.
FALSE
Other pronouncements (e.g., ASC 805 and ASC 718) also provide rules related to
accounting for income taxes.
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process.
Level of Difficulty: 1 Easy
Topic: Objectives of accounting for income taxes and the income tax provision process

3.

Temporary differences create either a deferred tax asset or a deferred tax liability.
TRUE
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 17-01 Explain the objectives behind FASB ASC Topic 740; Income Taxes; and the income
tax provision process.
Level of Difficulty: 1 Easy
Topic: Objectives of accounting for income taxes and the income tax provision process

4.

Publicly-traded companies usually file their financial statements before they file
their federal income tax returns.
TRUE
AACSB: Reflective Thinking
17-25
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