Chapter 6 Study Questions

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

Multiple Choice

• To recognize deferred tax liabilities and assets

• To compute a corporation's current income tax liability or benefit

• To report permanent differences in the balance sheet

• To both compute a corporation's current income tax liability or benefit and to recognize deferred tax liabilities and assets

• To both compute a corporation's current income tax liability or benefit and to recognize deferred tax liabilities and assets

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

Multiple Choice

• Value-added taxes paid to the Swiss government

• Income taxes paid to the U.S. government

• Income taxes paid to the German government

• Income taxes paid to New York City

Value-added taxes paid to the Swiss government

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

Multiple Choice

• EITF

• FASB

• SEC

• IRS

URS

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

Multiple Choice

• ASC 740 uses a "taxes paid or refunded approach" that focuses on the statement of cash flows.

• ASC 740 uses an "income and expense approach" that focuses on the income statement.

• ASC 740 uses an "asset and liability approach" that focuses on the balance sheet.

• ASC 740 uses a "permanent differences approach" that focuses on the effective tax rate reported in the income tax note to the financial statements.

ASC 740 uses an "asset and liability approach" that focuses on the balance sheet.

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. Swordfish's deferred income tax expense or benefit would be:

Multiple Choice

• $23,100 net deferred tax benefit.

• $26,250 net deferred tax expense.

• $23,100 net deferred tax expense.

• $26,250 net deferred tax benefit.

$26,250 net deferred tax benefit.

The increase in the warranty reserve is a deductible temporary difference of $25,000. The "drawdown" of the prior excess of tax depreciation over book depreciation reduces an existing taxable temporary difference. The result is a net deferred tax benefit of $26,250 [($25,000 + $100,000) × 21%].

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

Multiple Choice

• Prepayment deduction reported on the tax return prior to being reported on the income statement

• Accelerated tax depreciation in excess of straight-line book depreciation

• Gain reported on the income statement prior to being reported on the tax return

• Prepayment income reported as income on the tax return prior to being reported as income on the financial income statement

Prepayment income reported as income on the tax return prior to being reported as income on the financial income statement

Which of the following statements is true?

Multiple Choice

• Another name for a deductible temporary difference is a favorable difference.

• Another name for a taxable temporary difference is a favorable difference.

• Another name for a taxable temporary difference is an unfavorable difference.

• Another name for a deductible temporary difference is a permanent difference.

Another name for a taxable temporary difference is a favorable difference.

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

Multiple Choice

• Accrued vacation pay liability not paid within the first two and a half months of the next tax year

• Nondeductible meals expense

• Tax-exempt life insurance proceeds

• Excess tax benefits from the exercise of NQO's

Accrued vacation pay liability not paid within the first two and a half months of the next tax year

Costello Corporation reported pretax book income of $501,200. During the current year, the reserve for bad debts increased by $7,400. In addition, tax depreciation exceeded book depreciation by $41,200. Finally, Costello received $3,600 of tax-exempt life insurance proceeds from the death of one of its officers. Costello's deferred income tax expense or benefit would be:

• $7,098 net deferred tax benefit.

• $7,854 net deferred tax expense.

• $7,098 net deferred tax expense.

• $7,818 net deferred tax benefit.

$7,098 net deferred tax expense.

The increase in the reserve for bad debts is a deductible temporary difference of $7,400. The excess of tax depreciation over book depreciation is a taxable temporary difference of $41,200. The result is a net taxable temporary difference of $33,800, which results in a net deferred tax expense of $7,098 ($33,800 × 21%).

Which of the following book–tax basis differences results in a deductible temporary difference?

Multiple Choice

• Book basis of an employee's postretirement benefits liability exceeds its tax basis.

• Tax basis of a prepaid liability exceeds the book basis of the liability.

• 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.

Book basis of an employee's postretirement benefits liability exceeds its tax basis.

Bruin Company received a $100,000 insurance payment on the death of its company president. The company annually paid $1,000 of nondeductible 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:

Multiple Choice

• the insurance receipt is a taxable temporary difference and the premium payment is an unfavorable permanent difference.

• both are deductible temporary differences.

• both are taxable temporary differences.

• the insurance receipt is a favorable permanent difference and the premium payment is an unfavorable permanent difference.

the insurance receipt is a favorable permanent difference and the premium payment is an unfavorable permanent difference.

Smith Company reported pretax book income of $408,000. Included in the computation were favorable temporary differences of $51,600, unfavorable temporary differences of $20,800, and favorable permanent differences of $40,800. Smith's deferred income tax expense or benefit would be:

Multiple Choice

• net deferred tax benefit of $15,204.

• net deferred tax benefit of $6,468.

• net deferred tax expense of $15,204.

• net deferred tax expense of $6,468.

• net deferred tax expense of $6,468.

$51,600 − $20,800 = $30,800 net favorable (taxable) difference × 21%.

Marlin Corporation reported pretax book income of $1,010,000. During the current year, the net reserve for warranties increased by $27,000. In addition, book depreciation exceeded tax depreciation by $101,000. Finally, Marlin subtracted a dividends received deduction of $16,000 in computing its current-year taxable income. Marlin's current income tax expense or benefit would be:

Multiple Choice

• $238,980 tax expense.

• $212,100 tax expense.

• $207,585 tax expense.

• $235,620 tax expense.

$235,620 tax expense

Marlin's current income tax expense is: ($1,010,000 + $27,000 + $101,000 − $16,000 = $1,122,000 × 21%).

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 tax-exempt life insurance proceeds from the death of one of its officers. Abbot's current income tax expense or benefit would be:

Multiple Choice

• $105,000.

• $104,370.

• $97,650.

• $97,020.

97,020

($500,000 + $5,000 − $40,000 − $3,000 = $462,000) × 21%

Which of the following statements is true?

Multiple Choice

• A change in capitalized inventory costs under §263A always produces a permanent difference.

• A change in capitalized inventory costs under §263A can produce an increase or a decrease in a deferred tax asset.

• A change in capitalized inventory costs under §263A always produces a decrease in a deferred tax asset.

• A change in capitalized inventory costs under §263A always produces an increase in a deferred tax asset.

A change in capitalized inventory costs under §263A can produce an increase or a decrease in a deferred tax asset.

A change in capitalized inventory costs under §263A can cause an increase or decrease in a deferred tax asset, depending on whether the net change (beginning inventory to ending inventory) increases or decreases.

Robinson Company had a net deferred tax liability of $34,272 at the beginning of the year, representing a net taxable temporary difference of $100,800 (taxed at 34 percent). During the year, Robinson reported pretax book income of $400,800. Included in the computation were favorable temporary differences of $50,800 and unfavorable temporary differences of $20,400. During the year, Congress reduced the corporate tax rate to 21 percent. Robinson's deferred income tax expense or benefit for the current year would be:

Multiple Choice

• net deferred tax benefit of $6,720.

• net deferred tax expense of $6,720.

• net deferred tax benefit of $6,384.

• net deferred tax expense of $6,384.

net deferred tax benefit of $6,720.

The net deferred tax expense for the current year is $6,384 [($50,800 − $20,400) × 21%]. The beginning balance in the deferred tax liability account must be reduced to reflect the decrease in the tax rate by 13 percentage points ($100,800 × (13%) = $(13,104)). The net adjustment results in a net deferred tax benefit of $6,720.

Which of the following statements is true?

Multiple Choice

• ASC 740 focuses on the income taxes paid or refunded in the statement of cash flows.

• ASC 740 focuses on the income tax expense or benefit on the income statement.

• ASC 740 focuses on the computation of a company's effective tax rate in the income tax note to the financial statements.

• ASC 740 focuses on the balances in the deferred tax assets and liabilities on the balance sheet.

ASC 740 focuses on the balances in the deferred tax assets and liabilities on the balance sheet.

ASC 740 uses the "asset and liability" approach to computing a company's current taxes payable (refundable) and deferred taxes payable (refundable). The primary focus of ASC 740 is on the balance sheet.

Grand River Corporation reported pretax book income of $630,000. Included in the computation were favorable temporary differences of $165,000, unfavorable temporary differences of $114,000, and favorable permanent differences of $158,000. The corporation's current income tax expense or benefit would be:

Multiple Choice

• $132,300 tax benefit.

• $88,410 tax expense.

• $145,530 tax expense.

• $121,590 tax benefit.

$88,410 tax expense.

The corporation's current income tax expense is: ($630,000 − $165,000 + $114,000 − $158,000 = $421,000) × 21%.

Which of the following items is not a temporary difference?

Multiple Choice

• Bad debts charged off in the current period exceed the bad debts accrued in the current period.

• A goodwill impairment expense is recorded on the income statement; the goodwill did not have a tax basis when it was created.

• Vacation pay accrued for tax purposes in a prior period is deducted in the current period.

• Tax depreciation for the period exceeds book depreciation.

A goodwill impairment expense is recorded on the income statement; the goodwill did not have a tax basis when it was created.

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

Multiple Choice

• Excess tax benefits from the exercise of an NQO

• Dividends received deduction on the income tax return

• Interest income from a tax-exempt municipal bond

• Accelerated tax depreciation in excess of straight-line book depreciation

Accelerated tax depreciation in excess of straight-line book depreciation

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:

Multiple Choice

• unfavorable permanent difference.

• deductible temporary difference.

• taxable temporary difference.

• favorable permanent difference.

deductible temporary difference.

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:

Multiple Choice

• deductible temporary difference.

• unfavorable permanent difference.

• favorable permanent difference.

• taxable temporary difference.

deductible temporary difference.

Packard Corporation reported pretax book income of $500,900. Included in the computation were favorable temporary differences of $10,900, unfavorable temporary differences of $100,900, and unfavorable permanent differences of $80,450. The corporation's current income tax expense or benefit would be:

Multiple Choice

• $140,984 tax expense.

• $105,189 tax benefit.

• $124,073 tax benefit.

• $122,084 tax expense.

$140,984 tax expense.

The corporation's current income tax expense is: ($500,900 − $10,900 + $100,900 + $80,450 = $671,350) × 21%.

Lynch Company had a net deferred tax asset of $69,360 at the beginning of the year, representing a net taxable deductible difference of $204,000 (taxed at 34 percent). During the year, Lynch reported pretax book income of $816,000. Included in the computation were favorable temporary differences of $24,000 and unfavorable temporary differences of $52,000. At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Lynch's deferred income tax expense or benefit for the current year would be:

Multiple Choice

• net deferred tax expense of $5,880.

• net deferred tax benefit of $5,880.

• net deferred tax benefit of $32,400.

• net deferred tax expense of $20,640.

net deferred tax expense of $20,640.

The net deferred tax benefit for the current year is $5,880 [($24,000 − $52,000) × 21%]. The beginning balance in the deferred tax asset account must be adjusted downward to reflect the change in the tax rate by 13 percentage points ($204,000 × 13% = $26,520 reduction in the deferred tax asset). The net adjustment is a net deferred tax expense of $20,640.

Weaver Company had a net deferred tax liability of $34,034 at the beginning of the year, representing a net taxable temporary difference of $100,100 (taxed at 34 percent). During the year, Weaver reported pretax book income of $400,400. Included in the computation were unfavorable temporary differences of $50,100 and favorable temporary differences of $20,200. At the beginning of the year, Congress reduced the corporate tax rate to 21 percent. Weaver's deferred income tax expense or benefit for the current year would be:

Multiple Choice

• net deferred tax benefit of $6,279.

• net deferred tax expense of $6,279.

• net deferred tax benefit of $19,292.

• net deferred tax expense of $19,292.

net deferred tax benefit of $19,292.

The net deferred tax benefit for the current year is $6,279 [($50,100 − $20,200) × 21%]. The beginning balance in the deferred tax liability account must be adjusted downward to reflect the change in the tax rate by 13 percentage points ($100,100 × 13% = $13,013 reduction in the deferred tax liability). The net adjustment is a net deferred tax benefit of $19,292.

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

Multiple Choice

• Management projects future taxable income based on a backlog of signed contracts.

• A net operating loss expired unused in the current year.

• Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company.

• A cumulative book loss over some period of time.

Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company.

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

Multiple Choice

• A valuation allowance is a contra account to deferred tax assets and liabilities.

• A valuation allowance is a contra account to deferred tax liabilities only.

• A valuation allowance is a contra account to deferred tax assets only.

• A valuation allowance is a contra account to noncurrent deferred tax assets only.

A valuation allowance is a contra account to deferred tax assets only.

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

Multiple Choice

• 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 future.

• it is only remotely possible that the deferred tax asset will not be realized in the future.

• it is highly likely 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 future.

Which of the following statements is true?

Multiple Choice

• In determining if a valuation allowance is needed, positive evidence is considered more persuasive than negative evidence.

• In determining if a valuation allowance is needed, negative and positive evidence must be evaluated equally.

• In determining if a valuation allowance is needed, only negative evidence is evaluated.

• In determining if a valuation allowance is needed, negative evidence is considered more persuasive than positive evidence.

In determining if a valuation allowance is needed, negative and positive evidence must be evaluated equally.

Jones Company reported pretax book income of $401,000. Included in the computation were favorable temporary differences of $50,100, unfavorable temporary differences of $20,050, and favorable permanent differences of $40,050. Book equivalent of taxable income is:

Multiple Choice

• $441,050.

• $401,000.

• $330,850.

• $360,950.

360,950

$401,000 − $40,050 permanent differences.

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?

Multiple Choice

• The book loss is considered negative evidence that must be evaluated along with other evidence as to whether a valuation allowance should be recorded.

• The book loss is considered sufficient negative evidence that a valuation must be recorded.

• A cumulative book loss is considered negative evidence only after a period of 60 months.

• The book loss is not considered negative evidence because it relates to book income and not taxable income.

The book loss is considered negative evidence that must be evaluated along with other evidence as to whether a valuation allowance should be recorded.

Tuna Corporation reported pretax book income of $1,010,000. During the current year, the net reserve for warranties increased by $30,000. In addition, book depreciation exceeded tax depreciation by $110,000. Finally, Tuna subtracted a dividends received deduction of $20,000 in computing its current-year taxable income. Book equivalent of taxable income is:

Multiple Choice

• $1,130,000.

• $1,150,000.

• $990,000.

• $1,030,000.

990,000

$1,010,000 − $20,000 permanent difference (dividends received deduction).

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

Multiple Choice

• BETI is book income adjusted for all permanent and temporary differences.

• BETI is book income adjusted for all temporary differences.

• BETI is book income before adjustment for all permanent and temporary differences.

• BETI is book income adjusted for all permanent differences.

BETI is book income adjusted for all permanent differences.

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?

Multiple Choice

• Madison can elect to include the expense as part of its income tax provision or record the expense separate from its income tax provision, provided the company discloses which option it chose.

• Madison must record the expense in its income tax provision.

• Madison does not record the expense until it is paid.

• 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 record the expense separate from its income tax provision, provided the company discloses which option it chose.

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

Multiple Choice

• ASC 740 requires a company to disclose the amount of unrecognized tax benefits for each country in which it files a tax return.

• ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits, separated between U.S., state and local, and international tax positions.

• ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits without separation between U.S., state and local, and international tax positions.

• None of the choices are correct.

ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits, separated between U.S., state and local, and international tax positions.

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

Multiple Choice

• ASC 740 deals with recognized tax benefits related to income tax positions, regardless of whether the item is taken on a filed tax return.

• 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 claimed on a filed tax return.

• ASC 740 deals with all tax benefits involving income and non-income taxes.

ASC 740 deals with recognized tax benefits related to income tax positions, regardless of whether the item is taken on a filed tax return.

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?

Multiple Choice

• Probable

• Substantial authority

• More likely than not

• Reasonable basis

More likely than not

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

Multiple Choice

• ASC 740 allows a company to take into account the probability of audit by a tax authority in Step 1 (measurement) in its evaluation of its uncertain tax positions.

• ASC 740 allows a company to record a tax benefit from an uncertain tax position only if it is probable the benefit will be sustained on audit by a tax authority.

• ASC 740 requires a company to complete a two-step analysis every time it evaluates its uncertain tax positions.

• ASC 740 requires a company to complete Step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more likely than not that its tax position will be sustained on its merits (recognition).

ASC 740 requires a company to complete Step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more likely than not that its tax position will be sustained on its merits (recognition).

TarHeel Corporation reported pretax book income of $1,006,000. During the current year, the net reserve for warranties increased by $100,300. In addition, tax depreciation exceeded book depreciation by $201,500. Finally, TarHeel subtracted a dividends received deduction of $51,200 in computing its current-year taxable income. TarHeel's accounting effective tax rate is:

Multiple Choice

• 18.86 percent.

• 21.00 percent.

• 17.79 percent.

• 19.93 percent.

19.93%

The effective tax rate is the hypothetical tax rate (21 percent) adjusted for the tax cost or benefit from permanent differences. In this example, the dividends received deduction reduces the effective tax rate by 1.07 percent ($51,200 × 21 percent = $10,752 ÷ $1,006,000).

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

Multiple Choice

• The hypothetical tax expense is the tax that would be due if the company's statutory tax rate were applied to the company's book equivalent of taxable income.

• The hypothetical tax expense is the tax that would be due if the company's statutory tax rate were applied to the company's taxable income.

• The hypothetical tax expense is the tax that would be due if the company's statutory tax rate were applied to the company's net income from continuing operations.

• The hypothetical tax expense is another name for the company's effective tax rate.

The hypothetical tax expense is the tax that would be due if the company's statutory tax rate were applied to the company's net income from continuing operations.

Which of the following statements concerning the classification of deferred tax assets and liabilities is true?

Multiple Choice

• A deferred tax asset related to inventory capitalization is classified as noncurrent only if the company uses a FIFO accounting method and the inventory to which the deferred tax asset relates will not be treated as sold within 12 months from the balance sheet date.

• A deferred tax asset related to a bad debt reserve is classified as current if the related accounts receivable is classified as a current asset.

• A deferred tax asset is classified as noncurrent only if the company expects the future tax benefit to be received more than 12 months from the balance sheet date.

• All deferred tax assets and liabilities are treated as noncurrent.

All deferred tax assets and liabilities are treated as noncurrent.

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

Multiple Choice

• Tax effects from the R&D credit.

• Tax effects from an inventory reserve.

• Tax effects of state and local operations.

• Tax effects of international operations.

Tax effects from an inventory reserve.

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?

Multiple Choice

• A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.

• A privately held company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.

• A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.

• A privately held company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.

A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.

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

Multiple Choice

• Current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities can always be netted on the balance sheet.

• All deferred tax assets and liabilities are treated as noncurrent and can be netted on the balance sheet only if they arise in the same tax jurisdiction.

• Deferred tax assets and liabilities must be separately disclosed in the balance sheet.

• All deferred tax assets and liabilities are treated as noncurrent and can be netted and disclosed as one aggregate amount on the balance sheet.

All deferred tax assets and liabilities are treated as noncurrent and can be netted on the balance sheet only if they arise in the same tax jurisdiction.

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

Multiple Choice

• Accumulated tax depreciation in excess of book depreciation on a building.

• Accumulated tax amortization in excess of book amortization on a customer list.

• Compensation expensed for book purposes but deferred for tax purposes.

• Both accumulated tax depreciation in excess of book depreciation on a building and accumulated tax amortization in excess of book amortization on a customer list create a deferred tax liability.

Both accumulated tax depreciation in excess of book depreciation on a building and accumulated tax amortization in excess of book amortization on a customer list create a deferred tax liability.

Green Corporation reported pretax book income of $1,036,000. During the current year, the net reserve for warranties increased by $51,800. In addition, tax depreciation exceeded book depreciation by $109,000. Finally, Green subtracted a dividends received deduction of $25,900 in computing its current-year taxable income. Green's cash tax rate is:

Multiple Choice

• 21.000 percent.

• 19.316 percent.

• 19.950 percent.

• 20.475 percent.

19.316 percent.

The cash tax rate is the taxes payable divided by pretax book income. Green's taxable income is $952,900 ($1,036,000 + $51,800 − $109,000 − $25,900). Taxes payable on taxable income is $200,109. The cash tax rate is 19.316 percent ($200,109 ÷ $1,036,000).

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

Multiple Choice

• Compensation deduction related to incentive stock options

• Dividends received deduction

• Compensation deduction related to nonqualified stock options that were expensed for financial accounting purposes

• State and local income taxes

Compensation deduction related to nonqualified stock options that were expensed for financial accounting purposes

Angel Corporation reported pretax book income of $1,020,000. During the current year, the net reserve for warranties increased by $28,000. In addition, tax depreciation exceeded book depreciation by $105,000. Finally, Angel subtracted a dividends received deduction of $29,000 in computing its current-year taxable income. Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

Multiple Choice

• $198,030.

• $214,200.

• $192,150.

• $208,320.

$214,200.

The hypothetical tax expense is pretax income times the company's statutory tax rate ($1,020,000 × 21% = $214,200).

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

Multiple Choice

• the company's cash taxes paid divided by taxable income.

• the company's financial statement income tax provision divided by taxable income.

• the company's financial statement income tax provision divided by income from continuing operations.

• the company's cash taxes paid divided by income from continuing operations.

the company's financial statement income tax provision divided by income from continuing operations.

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:

Multiple Choice

• material.

• significant.

• pertinent.

• important.

significant