Chapter 17 Quiz: Income Taxes

____________ differences between book income and taxable income result in an effective tax rate that differs from a statutory tax rate.

a. temporary

b. permanent

c. short term

d. long term

a. temporary

which of the following will not create a permanent difference between book and tax income?

a. fines and penalties

b. key man life insurance payments

c. accelerated depreciation

d. municipal bond interest

c. accelerated depreciation

a deferred tax asset exists when ______________.

a. the book basis of assets > tax basis of assets

b. the book basis of liabilities > tax basis of liabilities

c. the book basis of assets= tax basis of assets

d. the book basis of liabilities<  tax basis of liabilities

b. the book basis of liabilities> tax basis of liabilities

when a company depreciates a fixed asset at a faster rate for tax purposes than book purposes, this creates a ______________.

a. deferred tax asset

b. higher tax basis than book basis of assets in the early years

c. deferred tax liability

d. lower tax basis than book basis of liabilities in the early years

c. deferred tax liability

If the valuation allowance for a deferred tax asset is decreased, there is an ___________ to income tax expense, which is an ____________ to income tax benefit.

a. decrease, increase

b. increase, increase

c. increase, decrease

d. decrease, decrease

a. decrease, increase

Green Co. has pretax book income for the year ended December 31, 2022 in the amount $285,000 and has a tax rate of 40%. Depreciation for tax purposes exceed book depreciation by $13,500. 

What should Green Co. record as federal income tax liability for 2022?

a. $114,000

b. $78,750

c. $108,600

d. $119,400

c. $108,600

Tetra Corp. recorded book income of $215,000 in 2022. It does not have any permanent differences and the only temporary difference relates to unearned income that it recorded for book purposes. Tetra anticipates satisfying this liability equally over the following three years. The current enacted rate is 36%. The enacted tax rates for the following three years are 33%, 38% an 43%. Under U.S GAAP, what deferred tax amount should Tetra Corp. record for this temporary difference?

a. $12,840

b. $12,960

c. $13,680

d. $15,480

c. $13,680

If book income is $425,000, and the tax rate is 30%. Assuming there are no book-tax differences, what is the income tax expense?

$425,000 × 30% = $127,500

income before taxes is $720,000 and its tax rate is 25%. There were $30,000 in non-deductible life insurance premiums in the $720,000. There are no other book-tax differences. What is the journal entry to record income tax expense?

($720,000 + $30,000) × 0.25= 187,500

income before taxes is $720,000 and its tax rate is 25%. There were $30,000 in non-deductible life insurance premiums in the $720,000. There are no other book-tax differences. What is the journal entry to record income tax expense?

($720,000 + $30,000) × 0.25= 187,500

Income Tax Expense 187,500

Income Tax Payable 187,500

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2022 total $540,000. Included in this amount is $15,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. What is Greenville's taxable income?

The installment sale is not considered revenue for tax purposes

sales are $540,000 - $15,000 = $525,000 expenses are $140,000

taxable income is 535,000 – 140,000 = $385,000.

	Deferred tax assets (liabilities)
Accelerated tax depreciation	$(120,000)
Warranty expense	80,000
NOL carryforward	200,000
Total	$160,000

A valuation allowance was not considered necessary. Maple anticipates that​ $40,000 of the deferred tax liability will reverse in Year​ 7, that actual warranty costs will be incurred evenly in Years 8 and​ 9, and that the net operating loss​ (NOL) carryforward will be used in Year 7. On​ Maple's December​ 31, Year 6 balance​ sheet, what amount should be reported as a​ non-current deferred tax asset under U.S. Generally Accepted Accounting Principles​ (GAAP)? Assume all deferred accounts are from the same taxing jurisdiction.

​A. $160,000

​B. $200,000

​C. $240,000

​D. $280,000

​A. $160,000

	Income	Tax Rate (%)
Year 4	$20,000	30 %
Year 5	15,000	25
Year 6	(100,000)	25
Year 7	120,000	21

The pretax financial income and taxable income of Zeus Corporation were the same for each year presented​ (i.e., there were no permanent or temporary​ differences). What amount of income tax benefit will Zeus Corporation record in Year 6 under U.S. Generally Accepted Accounting Principles​ (GAAP)? Assume that the Year 7 tax rate is known in Year 6 and is enacted at the beginning of Year 7.

A. $23,400

​B. $21,000

​C. $25,000

​D. $25,200

​B. $21,000

	Income	Tax Rate (%)
Year 4	$20,000	30 %
Year 5	15,000	25
Year 6	(100,000)	25
Year 7	25,000	21

The pretax financial income and taxable income of Zeus Corporation were the same for the years presented​ (i.e., there were no permanent or temporary​ differences). What amount of income tax benefit will Zeus Corporation record in Year 6 under U.S. Generally Accepted Accounting Principles​ (GAAP), that it is more likely than not that there will be no taxable earnings after Year​ 7? Assume the Year 7 tax rate is known in Year 6.

A. $25,000

​B. $5,250

​C. $15,750

​D. $21,000

​B. $5,250