Comp Issues PRACTICE Quiz Questions
with complete solution
Selected financial information for Windham, Inc., for the year just ended is shown below.
Pretax income
$5,000,000
Interest received on municipal bonds
600,000
Gain on the sale of land reported this year but not taxable until next year
1,000,000
Tax rate for all years
40%
Beginning balances:
Income taxes payable
-0-
Deferred tax liability
$50,000
The total income tax expense reported on Windham's income statement for the year just ended
should be - ANS $1,760,000
When accounting for income taxes, a temporary difference occurs in which of the following
scenarios? - ANS An item is included in the calculation of net income in one year and in
taxable income in a different year.
As a result of differences between depreciation for financial reporting purposes and tax
purposes, the financial reporting basis of Noor Co.'s sole depreciable asset acquired in the
current year exceeded its tax basis by $250,000 at December 31. This difference will reverse in
future years. The enacted tax rate is 30% for the current year and 40% for future years. Noor
has noother temporary differences. In its December 31 balance sheet, how should Noor report
the deferred tax effect of this difference? - ANS As a liability of $100,000.
Bake Co.'s trial balance included the following at December 31, Year 1:
Accounts payable
$ 80,000
Bonds payable, due Year 2
300,000
Discount on bonds payable
15,000
Deferred income tax liability
25,000
,The deferred income tax liability is not related to an asset for financial accounting purposes and
is expected to reverse in Year 2. What amount should be included in the current liability section
of Bake's December 31, Year 1, balance sheet? - ANS $365,000
In its first year of operations, Aviator Corp. took a deduction of $20,000 on its tax return. Its
effective tax rate was 35%, resulting in a tax benefit of $7,000. Aviator believes that it is more
likely than not that this deduction will be sustained based on its technical merits. However,
Aviator prefers not to litigate the matter and would accept a settlement offer. Aviator has
considered the amounts and probabilities of the possible estimated outcomes as follows:
Possible Estimate Outcome
Individual Probability of Occurring %
Cumulative Probability of Occurring
$7,000
35
35
5,500
25
60
3,000
25
85
1,500
15
100
What is the amount of tax benefit Aviator Corp. should recognize in its financial statements? -
ANS $5,500
For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that
will not be recorded in its accounting records until next year. There were no other differences
between its taxable and financial statement income. Cable's effective tax rate for the current
year is 45%, but a 40% rate has already been passed into law for next year. In its year-end
balance sheet, what amount should Cable report as a deferred tax asset (liability)? - ANS
$40,000 liability.
Sable Co., organized on January 2, Year 1, had pretax accounting income of $300,000 and
taxable income of $800,000 for the year ended December 31, Year 1. Sable expected to
maintain this level of taxable income in future years. The only temporary difference is for
accrued product warranty costs expected to be paid as follows:
Year 2
$100,000
Year 3
150,000
Year 4
150,000
,Year 5
100,000
The applicable enacted income tax rate is 30%. In Sable's December 31, Year 1, balance sheet,
the deferred income tax asset and related valuation allowance should be
Deferred Tax Asset
Valuation Allowance - ANS DeferredTax Asset
$150,000
Valuation Allowance
$0
In its first 4 years of operations, Alder, Inc.'s depreciation for income tax purposes exceeded its
depreciation for financial statement purposes. This temporary difference was expected to
reverse over the next 3 years. Alder had no other temporary differences. Alder's balance sheet
for its fourth year of operation should include - ANS A noncurrent deferred tax liability only.
Shear, Inc., began operations in Year 1. Included in Shear's Year 1 financial statements were
credit loss expenses on accounts receivable of $1,400 and profit from an installment sale of
$2,600. For tax purposes, the credit losses will be deducted and the profit from the installment
sale will be recognized in Year 2. The applicable tax rate is 25%. In its Year 1 income statement,
what amount should Shear report as deferred income tax expense? - ANS $300
Cory, Inc., uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment method of accounting for income tax purposes. Installment
income of $250,000 will be collected in the following years when the applicable enacted tax
rates are
Collection
Enacted
Year
of Income
Tax Rates
1
$ 25,000
30%
2
50,000
30%
3
75,000
30%
4
100,000
25%
, The installment income is Cory's only temporary difference. What amount should be included in
the deferred income tax liability in Cory's December 31, Year 1, balance sheet? - ANS $62,500
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 - ANS Noncurrent
liability.
Lion Co.'s income statement for its first year of operations shows pretax income of $6,000,000.
In addition, the following differences existed between Lion's tax return and records:
Tax
Accounting
Return
Records
Credit loss expense
$220,000
$250,000
Depreciation expense
860,000
570,000
Tax-exempt interest revenue
--
50,000
Lion's current year tax rate is 30% and the enacted rate for future years is 40%. What amount
should Lion report as deferred tax expense in its income statement for the year? - ANS
$104,000
Lamb Corp. has taxable income of $240,000 and depreciation expense for tax purposes of
$50,000 greater than financial reporting purposes. Lamb has a tax rate of 30%, and no other
differences exist. Which of the following entries should Lamb make for deferred taxes? - ANS
$15,000 deferred tax liability.
Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable
income for the year ended December 31, its first year of operations:
Pretax financial income
$160,000
Nontaxable interest received on municipal securities
(5,000)
Long-term loss accrual in excess of deductible amount
10,000
Depreciation in excess of financial statement amount
(25,000)
Taxable income
$140,000
with complete solution
Selected financial information for Windham, Inc., for the year just ended is shown below.
Pretax income
$5,000,000
Interest received on municipal bonds
600,000
Gain on the sale of land reported this year but not taxable until next year
1,000,000
Tax rate for all years
40%
Beginning balances:
Income taxes payable
-0-
Deferred tax liability
$50,000
The total income tax expense reported on Windham's income statement for the year just ended
should be - ANS $1,760,000
When accounting for income taxes, a temporary difference occurs in which of the following
scenarios? - ANS An item is included in the calculation of net income in one year and in
taxable income in a different year.
As a result of differences between depreciation for financial reporting purposes and tax
purposes, the financial reporting basis of Noor Co.'s sole depreciable asset acquired in the
current year exceeded its tax basis by $250,000 at December 31. This difference will reverse in
future years. The enacted tax rate is 30% for the current year and 40% for future years. Noor
has noother temporary differences. In its December 31 balance sheet, how should Noor report
the deferred tax effect of this difference? - ANS As a liability of $100,000.
Bake Co.'s trial balance included the following at December 31, Year 1:
Accounts payable
$ 80,000
Bonds payable, due Year 2
300,000
Discount on bonds payable
15,000
Deferred income tax liability
25,000
,The deferred income tax liability is not related to an asset for financial accounting purposes and
is expected to reverse in Year 2. What amount should be included in the current liability section
of Bake's December 31, Year 1, balance sheet? - ANS $365,000
In its first year of operations, Aviator Corp. took a deduction of $20,000 on its tax return. Its
effective tax rate was 35%, resulting in a tax benefit of $7,000. Aviator believes that it is more
likely than not that this deduction will be sustained based on its technical merits. However,
Aviator prefers not to litigate the matter and would accept a settlement offer. Aviator has
considered the amounts and probabilities of the possible estimated outcomes as follows:
Possible Estimate Outcome
Individual Probability of Occurring %
Cumulative Probability of Occurring
$7,000
35
35
5,500
25
60
3,000
25
85
1,500
15
100
What is the amount of tax benefit Aviator Corp. should recognize in its financial statements? -
ANS $5,500
For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that
will not be recorded in its accounting records until next year. There were no other differences
between its taxable and financial statement income. Cable's effective tax rate for the current
year is 45%, but a 40% rate has already been passed into law for next year. In its year-end
balance sheet, what amount should Cable report as a deferred tax asset (liability)? - ANS
$40,000 liability.
Sable Co., organized on January 2, Year 1, had pretax accounting income of $300,000 and
taxable income of $800,000 for the year ended December 31, Year 1. Sable expected to
maintain this level of taxable income in future years. The only temporary difference is for
accrued product warranty costs expected to be paid as follows:
Year 2
$100,000
Year 3
150,000
Year 4
150,000
,Year 5
100,000
The applicable enacted income tax rate is 30%. In Sable's December 31, Year 1, balance sheet,
the deferred income tax asset and related valuation allowance should be
Deferred Tax Asset
Valuation Allowance - ANS DeferredTax Asset
$150,000
Valuation Allowance
$0
In its first 4 years of operations, Alder, Inc.'s depreciation for income tax purposes exceeded its
depreciation for financial statement purposes. This temporary difference was expected to
reverse over the next 3 years. Alder had no other temporary differences. Alder's balance sheet
for its fourth year of operation should include - ANS A noncurrent deferred tax liability only.
Shear, Inc., began operations in Year 1. Included in Shear's Year 1 financial statements were
credit loss expenses on accounts receivable of $1,400 and profit from an installment sale of
$2,600. For tax purposes, the credit losses will be deducted and the profit from the installment
sale will be recognized in Year 2. The applicable tax rate is 25%. In its Year 1 income statement,
what amount should Shear report as deferred income tax expense? - ANS $300
Cory, Inc., uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment method of accounting for income tax purposes. Installment
income of $250,000 will be collected in the following years when the applicable enacted tax
rates are
Collection
Enacted
Year
of Income
Tax Rates
1
$ 25,000
30%
2
50,000
30%
3
75,000
30%
4
100,000
25%
, The installment income is Cory's only temporary difference. What amount should be included in
the deferred income tax liability in Cory's December 31, Year 1, balance sheet? - ANS $62,500
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 - ANS Noncurrent
liability.
Lion Co.'s income statement for its first year of operations shows pretax income of $6,000,000.
In addition, the following differences existed between Lion's tax return and records:
Tax
Accounting
Return
Records
Credit loss expense
$220,000
$250,000
Depreciation expense
860,000
570,000
Tax-exempt interest revenue
--
50,000
Lion's current year tax rate is 30% and the enacted rate for future years is 40%. What amount
should Lion report as deferred tax expense in its income statement for the year? - ANS
$104,000
Lamb Corp. has taxable income of $240,000 and depreciation expense for tax purposes of
$50,000 greater than financial reporting purposes. Lamb has a tax rate of 30%, and no other
differences exist. Which of the following entries should Lamb make for deferred taxes? - ANS
$15,000 deferred tax liability.
Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable
income for the year ended December 31, its first year of operations:
Pretax financial income
$160,000
Nontaxable interest received on municipal securities
(5,000)
Long-term loss accrual in excess of deductible amount
10,000
Depreciation in excess of financial statement amount
(25,000)
Taxable income
$140,000
