QUESTIONS
1. Explain the difference between pretax financial income and taxable income.
2. What are the two objectives of accounting for income taxes?
3. Explain the meaning of a temporary difference as it relates to deferred tax computations, and give three examples.
4. Differentiate between an originating temporary difference and a reversing difference.
5. The book basis of depreciable assets for Erwin Co. is $900,000, and the tax basis is $700,000 at the end of 2018.
The enacted tax rate is 34% for all periods. Determine the amount of deferred taxes to be reported on the balance sheet at the end of 2018.
6. Roth Inc. has a deferred tax liability of $68,000 at the beginning of 2018. At the end of 2018, it reports accounts receivable on the books at $90,000 and the tax basis at zero (its only temporary difference). If the enacted tax rate is 34% for all periods, and income taxes payable for the period is $230,000, determine the amount of total income tax expense to report for 2018.
7. What is the difference between a future taxable amount and a future deductible amount? When is it appropriate to record a valuation account for a deferred tax asset?
8. Pretax financial income for Lake Inc. is $300,000, and its taxable income is $100,000 for 2018. Its only temporary difference at the end of the period relates to a $70,000 difference due to excess depreciation for tax purposes. If the tax rate is 40% for all periods, compute the amount of income tax expense to report in 2018. No deferred income taxes existed at the beginning of the year.
9. Feagler Company’s current income taxes payable related to its taxable income for 2017 is $460,000. In addition,
Feagler’s deferred tax asset decreased $20,000 during 2017. What is Feagler’s income tax expense for 2017?
10. Lee Company’s current income taxes payable related to its taxable income for 2017 is $320,000. In addition, Lee’s deferred tax liability increased $40,000 and its deferred tax asset increased $10,000 during 2017. What is Lee’s income tax expense for 2017?
11. How are deferred tax assets and deferred tax liabilities reported on the balance sheet?
12. Interest on municipal bonds is referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.
13. At the end of the year, Falabella Co. has pretax financial income of $550,000. Included in the $550,000 is $70,000 interest income on municipal bonds, $25,000 fine for dumping hazardous waste, and depreciation of $60,000. Depreciation for tax purposes is $45,000. Compute income taxes payable, assuming the tax rate is 30% for all periods.
14. Addison Co. has one temporary difference at the beginning of 2017 of $500,000. The deferred tax liability established for this amount is $150,000, based on a tax rate of 30%. The temporary difference will provide the following taxable amounts: $100,000 in 2018, $200,000 in 2019, and $200,000 in 2020. If a new tax rate for 2020 of 20% is enacted into law at the end of 2017, what is the journal entry necessary in 2017 (if any) to adjust deferred taxes?
15. What are some of the reasons that the components of income tax expense should be disclosed and a reconciliation between the effective tax rate and the statutory tax rate be provided?
16. Differentiate between “loss carryback” and “loss carryforward.”
Which can be accounted for with the greater certainty when it arises? Why?
17. What are the possible treatments for tax purposes of a net operating loss? What are the circumstances that determine the option to be applied? What is the proper treatment of a net operating loss for financial reporting purposes?
18. What controversy relates to the accounting for net operating loss carryforwards?
19. What is an uncertain tax position, and what are the general guidelines for accounting for uncertain tax positions?
