19 - 16 Test Bank for Intermediate Accounting, Fourteenth Edition
64. Horner Corporation has a deferred tax asset at December 31, 2013 of $120,000 due to
the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2010–2012; 35% for 2013; and 30% for 2014 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of: a. $60,000 b. $24,000 c. $21,000 d. $18,000
65. Watson Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2013 $1,400,000 Tax exempt interest (100,000) Originating temporary difference Taxable income rate of 40%. The enacted tax rate for 2013 is 28%. What amount should be reported in its 2013 income statement as the current portion of its provision for income taxes? a. $280,000 b. $400,000 c. $392,000 d. $560,000
Use the following information for questions 66 and 67.
Mitchell Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2013 Tax exempt interest
Originating temporary difference Taxable income
$ 900,000 (75,000) The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2013 is 35%.
66. What amount should be reported in its 2013 income statement as the deferred portion of
income tax expense? a. $50,000 debit b. $90,000 debit c. $50,000 credit d. $70,000 credit
67. In Mitchell’s 2013 income statement, what amount should be reported for total income tax
expense? a. $325,000 b. $315,000 c. $295,000 d. $245,000
Accounting for Income Taxes 19 - 17
Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture.
For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%. If Ewing's December 31, 2013, balance sheet includes a deferred tax liability of $450,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of a. $3,750,000. b. $1,500,000. c. $1,125,000. d. $450,000.
Ferguson Company has the following cumulative taxable temporary differences:
The tax rate enacted for 2013 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2013 is $3,200,000 and there are no permanent differences. Ferguson's pretax financial income for 2013 is a. $5,000,000. b. $3,720,000. c. $2,680,000. d. $1,400,000.
Use the following information for questions 70 through 72.
Lyons Company deducts insurance expense of $105,000 for tax purposes in 2012, but the expense is not yet recognized for accounting purposes. In 2013, 2014, and 2015, no insurance expense will be deducted for tax purposes, but $35,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $90,000 at the end of 2012. There were no deferred taxes at the beginning of 2012.
70. What is the amount of the deferred tax liability at the end of 2012?
a. $42,000 b. $36,000 c. $15,000 d. $0
71. What is the amount of income tax expense for 2012?
a. $132,000 b. $126,000 c. $105,000 d. $90,000
19 - 18 Test Bank for Intermediate Accounting, Fourteenth Edition
72. Assuming that income tax payable for 2013 is $120,000, the income tax expense for 2013
would be what amount? a. $162,000 b. $134,000 c. $120,000 d. $106,000
Use the following information for questions 73 and 74.
Kraft Company made the following journal entry in late 2012 for rent on property it leases to Danford Corporation.
Cash Unearned Rent Revenue
The payment represents rent for the years 2013 and 2014, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $138,000 at the end of 2012, and its tax rate is 35%.
73. What amount of income tax expense should Kraft Company report at the end of 2012?
a. $79,500 b. $106,500 c. $122,250 d. $169,500
74. Assuming the income taxes payable at the end of 2013 is $153,000, what amount of
income tax expense would Kraft Company record for 2013? a. $121,500 b. $137,250 c. $168,750 d. $184,500
75. The following information is available for Kessler Company after its first year of operations:
Income before taxes
Federal income tax payable Deferred income tax Income tax expense Net income
$104,000 Kessler estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $105,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims? a. $115,000 b. $100,000 c. $105,000 d. $95,000
Accounting for Income Taxes 19 - 19
Use the following information for questions 76–78.
At the beginning of 2012; Elephant, Inc. had a deferred tax asset of $8,000 and a deferred tax liability of $12,000. Pre-tax accounting income for 2012 was $600,000 and the enacted tax rate is 40%. The following items are included in Elephant’s pre-tax income:
Interest income from municipal bonds $ 48,000 Accrued warranty costs, estimated to be $104,000 paid in 2013
Operating loss carryforward $ 76,000 Installment sales revenue, will be collected $ 52,000 in 2013
Prepaid rent expense, will be used in 2013 $24,000
76. What is Elephant, Inc.’s taxable income for 2012?
a. $600,000 b. $504,000 c. $696,000 d. $904,000
77. Which of the following is required to adjust Elephant, Inc.’s deferred tax asset to its correct
balance at December 31, 2012? a. A debit of $41,600 b. A credit of $30,400 c. A debit of $30,400 d. A debit of $33,600
78. The ending balance in Elephant, Inc’s deferred tax liability at December 31, 2012 is
a. $18,400 b. $30,400 c. $20,800 d. $62,400
Use the following information for questions 79 and 80.
Rowen, Inc. had pre-tax accounting income of $1,350,000 and a tax rate of 40% in 2013, its first year of operations. During 2013 the company had the following transactions:
Received rent from Jane, Co. for 2014 $48,000 Municipal bond income $60,000 Depreciation for tax purposes in excess of book $30,000 depreciation
Installment sales revenue to be collected in $81,000 2014
79. For 2013, what is the amount of income taxes payable for Rowen, Inc?
a. $452,400 b. $490,800 c. $514,800 d. $579,600
19 - 20 Test Bank for Intermediate Accounting, Fourteenth Edition
80. At the end of 2013, which of the following deferred tax accounts and balances is reported
on Rowen, Inc.’s balance sheet? a. Deferred tax asset $19,200 b. Deferred tax liability $19,200 c. Deferred tax asset $31,200 d. Deferred tax liability $31,200
81. Based on the following information, compute 2013 taxable income for South Co. assuming
that its pre-tax accounting income for the year ended December 31, 2013 is $460,000.
Future taxable Installment sales $384,000 Depreciation $120,000 Unearned rent ($400,000)
a. $564,000 b. $356,000 c. $964,000 d. $444,000
82. Fleming Company has the following cumulative taxable temporary differences:
The tax rate enacted for 2013 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2013 is $2,400,000 and there are no permanent differences. Fleming’s pretax financial income for 2013 is: a. $1,440,000 b. $2,010,000 c. $2,595,000 d. $3,360,000
Larsen Corporation reported $100,000 in revenues in its 2012 financial statements, of which $55,000 will not be included in the tax return until 2013. The enacted tax rate is 40% for 2012 and 35% for 2013. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2012? a. $19,250 b. $22,000 c. $24,500 d. $28,000
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