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Exam 6: Accounting for Income Taxes

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Question 1

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

A) ASC 740 uses an "asset and liability approach" that focuses on the balance sheet.
B) ASC 740 uses an "income and expense approach" that focuses on the income statement.
C) ASC 740 uses a "taxes paid or refunded approach" that focuses on the statement of cash flows.
D) ASC 740 uses a "permanent differences approach" that focuses on the effective tax rate reported in the income tax note to the financial statements.

E) None of the above
F) C) and D)

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Question 2

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In 2017,Moody Corporation recorded the following deferred tax assets and liabilities: All of the deferred tax accounts relate to temporary differences that result from the company's U.S.operations.Moody wants to minimize the number of deferred tax accounts it reports on the balance sheet.What is the minimum number of deferred tax accounts Moody can report on its balance sheet and what are the names and dollar amounts in each account?

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Minimum number of 1: $1,300,000 net noncurrent deferred tax liability. Under ASU 2015-17,all deferred tax assets and liabilities are classified as noncurrent.ASC 740 allows a company to net deferred tax assets and liabilities if they arise in the same tax jurisdiction.

Question 3

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Marlin 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.Finally,Marlin subtracted a dividends received deduction of $15,000 in computing its current year taxable income.Using a tax rate of 34%,Marlin's current income tax expense or benefit would be:

Weaver Company had a net deferred tax liability of $34,000 at the beginning of the year,representing a net taxable temporary difference of $100,000.During the year,Weaver reported pretax book income of $400,000.Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000.During the year,the company's tax rate decreased from 34% to 30%.Weaver's deferred income tax expense or benefit for the current year would be:

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.Using a tax rate of 34%,Swordfish's deferred income tax expense or benefit would be:

The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements.

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.Using a tax rate of 34%,Abbot's current income tax expense or benefit would be:

Tuna 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.Finally,Tuna subtracted a dividends received deduction of $15,000 in computing its current year taxable income.Book equivalent of taxable income is:

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

ASC 740 is the sole source of rules related to accounting for income taxes.

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

Angel Corporation reported pretax book income of $1,000,000.During the current year,the net reserve for warranties increased by $25,000.In addition,tax depreciation exceeded book depreciation by $100,000.Finally,Angel subtracted a dividends received deduction of $25,000 in computing its current year taxable income.Using a tax rate of 34%,Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

Costello 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,Costello received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers.Using a tax rate of 34%,Costello's deferred income tax expense or benefit would be:

Weber Corporation reported pretax book income of $400,000.Included in the computation were favorable temporary differences of $100,000,unfavorable temporary differences of $300,000,and unfavorable permanent differences of $200,000.Compute the Company's book equivalent of taxable income.Use this number to compute the Company's total income tax provision or benefit,assuming a tax rate of 34%.

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

ASC 740 governs how a company accounts for all taxes it incurs.

The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year.

Temporary differences that are cumulatively "favorable" are defined as taxable temporary differences.

ASC 740 deals with accounting for uncertain tax positions.

Purple Rose Corporation reported pretax book income of $500,000.Tax depreciation exceeded book depreciation by $300,000.In addition,the company received $250,000 of tax-exempt life insurance proceeds.The prior year tax return showed taxable income of $100,000.Using a tax rate of 34%,compute Purple Rose's current income tax expense or benefit.