Chapter 19 - CPA Questions
Because Jab Co. uses different methods to depreciate equipment for financial statement and
income tax purposes, Jab has temporary differences that will reverse during the next year and
add to taxable income. Deferred income taxes that are based on these temporary differences
should be classified in Jab's balance sheet as a:
a.Noncurrent liability
b.Current liability
c.Contra account to current assets
d.Contra account to noncurrent assets ✔✔Choice " Noncurrent liability " is correct, noncurrent
deferred tax liability since the items causing the temporary differences (equipment
depreciation) are noncurrent fixed assets.
Hut Co. has temporary taxable differences that will reverse during the next year and add to
taxable income. These differences relate to noncurrent assets. Deferred income taxes based on
these temporary differences should be classified in Hut's balance sheet as a:
a.Current asset
b.Noncurrent liability
c.Noncurrent asset
d.Current liability ✔✔Choice " Noncurrent liability " is correct. Hut's temporary taxable
differences add to taxable income, making them deferred tax liabilities. Deferred tax liabilities
are classified in the balance sheet based on the classification of the related assets. In this case,
the related asset is a noncurrent asset, so the deferred tax liability is classified as a noncurrent
liability.
Choice " Current asset " is incorrect. Hut's temporary taxable differences add to taxable income,
making them deferred tax liabilities, not deferred tax assets.
Choice " Noncurrent asset " is incorrect. Hut's temporary taxable differences add to taxable
income, making them deferred tax liabilities, not deferred tax assets.
Choice " Current liability " is incorrect. Deferred tax liabilities are classified in the balance sheet
based on the classification of the related assets. In this case, the related asset is a noncurrent
asset.
Mill, which began operations on January 1, 1988, recognizes income from long-term
construction contracts under the percentage-of-completion method in its financial statements
and under the completed contract method for income tax reporting. Income under each
method follows:
Completed Percentage
,Year contract of-completion
1988 $ - $300,000
1989 400,000 600,000
1990 700,000 850,000
The income tax rate was 30% for 1988 through 1990. For years after 1990, the enacted tax rate
is 25%. There are no other temporary differences. Mill elected early application of FASB
Statement No. 109, Accounting for Income Taxes. Mill should report in its December 31, 1990,
balance sheet, a deferred income tax liability of:
a.$105,000
b.$87,500
c.$195,000
d.$162,500 ✔✔Choice " $162,500 " is correct, $162,500 deferred income tax liability.
(tax) (book)
Completed % of
Year contract compl Difference
1988 - 300,000
1989 400,000 600,000
1990 700,000 850,000
Cumul 1,100,000 1,750,000 650,000
Enacted tax rate - after 1990 x 25%
Deferred income tax liability $162,500
Note: Use "enacted tax rates" of (future) year taxes are to be paid.
As a result of differences between depreciation for financial reporting purposes and tax
purposes, the financial reporting basis of a company's plant assets exceeded the tax basis.
Assuming the company had no other temporary differences, the company should report a:
a.Current tax payable
b.Deferred tax asset
c.Current tax asset
d.Deferred tax liability ✔✔Choice " Deferred tax liability " is correct, deferred tax liability. If
book basis of asset is greater than tax basis (resulting from different depreciation methods), a
deferred tax liability should be established for the tax effect of the difference. In future years
the taxable income will be higher than book income when the temporary difference reverses.
Thorn Co. applies Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
At the end of 1993, the tax effects of temporary differences were as follows:
Deferred tax assets Related asset
, (liabilities) classification
Accelerated tax depr($75,000)Noncur asset
Add costs in inv for tax purp 25,000 Cur asset
($50,000)
A valuation allowance was not considered necessary. Thorn anticipates that $10,000 of the
deferred tax liability will reverse in 1994. In Thorn's December 31, 1993, balance sheet, what
amount should Thorn report as noncurrent deferred tax liability?
a.$75,000
b.$50,000
c.$40,000
d.$65,000 ✔✔Choice " $75,000 " is correct, $75,000 noncurrent deferred tax liability (based on
classification of related asset as noncurrent).
For the year ended December 31, 1993, Grim Co.'s pretax financial statement income was
$200,000 and its taxable income was $150,000. The difference is due to the following:
Interest on municipal bonds $70,000
Premium expense on keyman life insurance (20,000)
Total $50,000
Grim's enacted income tax rate is 30%. In its 1993 income statement, what amount should Grim
report as current provision for income tax expense?
a.$45,000
b.$60,000
c.$51,000
d.$66,000 ✔✔Choice " $45,000 " is correct, $45,000 current provision for income tax expense
($150,000 x 30%) representing the taxes to be paid for 1993.
Note: The items causing the difference between taxable income and financial statement
income are permanent and will never reverse; therefore, no deferred tax is involved.
TAX F/S
$150,000 $150,000
-0- Permanent 70,000
-0- Permanent (20,000)
$150,000 $200,000
× 30% × 30%
$45,000 + $0 = $45,000
Dodd Corp. is preparing its December 31, 1989 financial statements and must determine the
proper accounting treatment for the following situations:
• For the year ended December 31, 1989, Dodd has a loss carry forward of $180,000 available
to offset future taxable income. However, there are no temporary differences.
Because Jab Co. uses different methods to depreciate equipment for financial statement and
income tax purposes, Jab has temporary differences that will reverse during the next year and
add to taxable income. Deferred income taxes that are based on these temporary differences
should be classified in Jab's balance sheet as a:
a.Noncurrent liability
b.Current liability
c.Contra account to current assets
d.Contra account to noncurrent assets ✔✔Choice " Noncurrent liability " is correct, noncurrent
deferred tax liability since the items causing the temporary differences (equipment
depreciation) are noncurrent fixed assets.
Hut Co. has temporary taxable differences that will reverse during the next year and add to
taxable income. These differences relate to noncurrent assets. Deferred income taxes based on
these temporary differences should be classified in Hut's balance sheet as a:
a.Current asset
b.Noncurrent liability
c.Noncurrent asset
d.Current liability ✔✔Choice " Noncurrent liability " is correct. Hut's temporary taxable
differences add to taxable income, making them deferred tax liabilities. Deferred tax liabilities
are classified in the balance sheet based on the classification of the related assets. In this case,
the related asset is a noncurrent asset, so the deferred tax liability is classified as a noncurrent
liability.
Choice " Current asset " is incorrect. Hut's temporary taxable differences add to taxable income,
making them deferred tax liabilities, not deferred tax assets.
Choice " Noncurrent asset " is incorrect. Hut's temporary taxable differences add to taxable
income, making them deferred tax liabilities, not deferred tax assets.
Choice " Current liability " is incorrect. Deferred tax liabilities are classified in the balance sheet
based on the classification of the related assets. In this case, the related asset is a noncurrent
asset.
Mill, which began operations on January 1, 1988, recognizes income from long-term
construction contracts under the percentage-of-completion method in its financial statements
and under the completed contract method for income tax reporting. Income under each
method follows:
Completed Percentage
,Year contract of-completion
1988 $ - $300,000
1989 400,000 600,000
1990 700,000 850,000
The income tax rate was 30% for 1988 through 1990. For years after 1990, the enacted tax rate
is 25%. There are no other temporary differences. Mill elected early application of FASB
Statement No. 109, Accounting for Income Taxes. Mill should report in its December 31, 1990,
balance sheet, a deferred income tax liability of:
a.$105,000
b.$87,500
c.$195,000
d.$162,500 ✔✔Choice " $162,500 " is correct, $162,500 deferred income tax liability.
(tax) (book)
Completed % of
Year contract compl Difference
1988 - 300,000
1989 400,000 600,000
1990 700,000 850,000
Cumul 1,100,000 1,750,000 650,000
Enacted tax rate - after 1990 x 25%
Deferred income tax liability $162,500
Note: Use "enacted tax rates" of (future) year taxes are to be paid.
As a result of differences between depreciation for financial reporting purposes and tax
purposes, the financial reporting basis of a company's plant assets exceeded the tax basis.
Assuming the company had no other temporary differences, the company should report a:
a.Current tax payable
b.Deferred tax asset
c.Current tax asset
d.Deferred tax liability ✔✔Choice " Deferred tax liability " is correct, deferred tax liability. If
book basis of asset is greater than tax basis (resulting from different depreciation methods), a
deferred tax liability should be established for the tax effect of the difference. In future years
the taxable income will be higher than book income when the temporary difference reverses.
Thorn Co. applies Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
At the end of 1993, the tax effects of temporary differences were as follows:
Deferred tax assets Related asset
, (liabilities) classification
Accelerated tax depr($75,000)Noncur asset
Add costs in inv for tax purp 25,000 Cur asset
($50,000)
A valuation allowance was not considered necessary. Thorn anticipates that $10,000 of the
deferred tax liability will reverse in 1994. In Thorn's December 31, 1993, balance sheet, what
amount should Thorn report as noncurrent deferred tax liability?
a.$75,000
b.$50,000
c.$40,000
d.$65,000 ✔✔Choice " $75,000 " is correct, $75,000 noncurrent deferred tax liability (based on
classification of related asset as noncurrent).
For the year ended December 31, 1993, Grim Co.'s pretax financial statement income was
$200,000 and its taxable income was $150,000. The difference is due to the following:
Interest on municipal bonds $70,000
Premium expense on keyman life insurance (20,000)
Total $50,000
Grim's enacted income tax rate is 30%. In its 1993 income statement, what amount should Grim
report as current provision for income tax expense?
a.$45,000
b.$60,000
c.$51,000
d.$66,000 ✔✔Choice " $45,000 " is correct, $45,000 current provision for income tax expense
($150,000 x 30%) representing the taxes to be paid for 1993.
Note: The items causing the difference between taxable income and financial statement
income are permanent and will never reverse; therefore, no deferred tax is involved.
TAX F/S
$150,000 $150,000
-0- Permanent 70,000
-0- Permanent (20,000)
$150,000 $200,000
× 30% × 30%
$45,000 + $0 = $45,000
Dodd Corp. is preparing its December 31, 1989 financial statements and must determine the
proper accounting treatment for the following situations:
• For the year ended December 31, 1989, Dodd has a loss carry forward of $180,000 available
to offset future taxable income. However, there are no temporary differences.
