Tax Ch 17 HW

Which of the following taxes is not accounted for under ASC 740?

a.Income taxes paid to the U.S. government

b.Income taxes paid to the French government

c.Income taxes paid to the city of Detroit

d.Property taxes paid to the city of Detroit

e.All of these taxes are accounted for under ASC 740.

d.Property taxes paid to the city of Detroit

why: Property taxes paid to the city of Detroit are not income taxes because they are assessed based on value and not income.

Which of the following organizations can issue rules that govern accounting for income taxes?

a. FASB

b.SEC

c.IRS

d.FASB and SEC
e.All of these organizations

d.FASB and SEC

Why: Both the FASB and SEC can issue rules that govern accounting for income taxes. Congress also can issue rules that govern accounting for income taxes, but the IRS is restricted to writing rules and procedures related to the federal income tax.

Bautista Corporation reported pretax book income of $1,000,000. Included in the computation were favorable temporary differences of $200,000, unfavorable temporary differences of $50,000, and favorable permanent differences of $100,000.

Compute the company's current income tax expense or benefit.

Why: Current income tax expense = Taxable income × 21% = $750,000 × 21% = $157,500

Cass Corporation reported pretax book income of $10,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000. Cass Corporation sold a fixed asset and reported book gain of $50,000 and tax gain of $75,000. Finally, the company received $250,000 of tax-exempt life insurance proceeds from the death of one of its officers.

Compute the company's current income tax expense or benefit.

Choi Company determined that the book basis of its office building exceeded the tax basis by $800,000. This basis difference is properly characterized as:

a.a permanent difference.

b. a taxable temporary difference.

c. a deductible temporary difference.

d. a favorable book–tax difference.

e. a taxable temporary difference and a favorable book–tax difference.

e. a taxable temporary difference and a favorable book–tax difference.

why: Taxable temporary difference and favorable book-tax difference. Future taxable income will increase by $800,000 compared to future book income as the excess book basis is recovered, resulting in a future tax payable.

Abbot Company determined that the book basis of its allowance for bad debts is $100,000. There is no corresponding tax basis in this account. The basis difference is properly characterized as:

a. a permanent difference.

b. a taxable temporary difference.

c. a deductible temporary difference.

d.a favorable book–tax difference.

e.a taxable temporary difference and a favorable book–tax difference.

d.a favorable book–tax difference.

Why: Deductible temporary difference. Future taxable income will decrease by $100,000 compared to future book income as the bad debts are charged off, resulting in a future tax benefit.

Which of the following items is not a temporary book–tax basis difference?

a. Warranty reserve accruals

b. Accelerated depreciation

c. Capitalized inventory costs under §263A

d. Nondeductible stock option compensation from exercising an incentive stock option (ISO)

e. All of these are temporary differences.

d. Nondeductible stock option compensation from exercising an incentive stock option (ISO)Why: Nondeductible stock option compensation from exercising an ISO (incentive stock option). An enterprise does not receive a tax deduction when an employee exercises an incentive stock option, making the book stock compensation deduction a permanent difference.

Lodge Incorporated reported pretax book income of $5,000,000. During the year, the company increased its reserve for warranties by $200,000. The company deducted $50,000 on its tax return related to warranty payments made during the year. What is the impact on taxable income compared to pretax book income of the book–tax difference that results from these two events?

a.Neutral (no impact on taxable income)

b.Favorable (decreases taxable income)

c.Unfavorable (increases taxable income)

c.Unfavorable (increases taxable income)

Why: Unfavorable (increases taxable income). Book income will be $150,000 less than taxable income in the current year.

Kumara Corporation reported pretax book income of $1,000,000. Kumara also reports an increase in the taxable temporary differences of $200,000, an increase in the deductible temporary differences of $50,000, and favorable permanent differences of $100,000.

Assuming a tax rate of 21 percent, compute the company's deferred income tax expense or benefit.

The net increase in the balance sheet deferred income tax liability results in an increase in the company's deferred tax expense in the current year. Permanent differences do not affect the deferred income tax provision.

Which of the following items is not a permanent book–tax difference?

a. Tax-exempt interest income

b. Tax-exempt insurance proceeds

c. Windfall tax benefits from the exercise of a nonqualified stock option (NQO)

d. Nondeductible meal expenses

e. First-year expensing under §179

e. First-year expensing under §179

Ex: First year expensing under §179. The reduction in the tax basis over the book basis resulting from first-year expensing will be recovered over time as book depreciation exceeds tax depreciation in later periods.

Arain Corporation has total deferred tax assets of $3,000,000 at year-end. Management is assessing whether a valuation allowance must be recorded against some or all of the deferred tax assets. What level of assurance must management have, based on the weight of available evidence, that some or all of the deferred tax assets will not be realized before a valuation allowance is required?

a. Probable

b. More likely than not

c. Realistic possibility

d. Reasonable

e. More than remote

b. More likely than not

Cadillac Square Corporation determined that $1,000,000 of its research and development tax credit 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.

What amount of the tax benefit related to the uncertain tax position from the research and development tax credit can Cadillac Square Corporation recognize in calculating its income tax provision in the current year?

The potential Estimated Benefit is the tax benefit amount recognized for that year: $750,000