Deferred Tax-Practice questions- part 1 - DOC by arnold1

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									Deferred Tax-Practice questions- part 1

1. Justification for the method of determining periodic deferred tax expense is based on the
concept of
a. Matching of periodic expense to periodic revenue.
b. Objectivity in the calculation of periodic expense.
c. Recognition of assets and liabilities.
d. Consistency of tax expense measurements with actual tax planning strategies.
2. Among the items reported on Cord, Inc.'s income statement for the year ended December 31,
X1, were the following:
      Payment of penalty                             $5,000
      Insurance premium on life of an officer
      with                                    10,000
      Cord as owner and beneficiary
  Temporary differences amount to
a. $0
b. $5,000
c. $10,000
d. $15,000
3. Caleb Corporation has three financial statement elements for which the December 31, 2002,
book value is different than the December 31, 2002, tax basis
                     Book value          Tax basis        Difference
Equipment             $200,000           $120,000          $80,000
Prepaid officers
insurance policy           75,000             0               75,000
Warranty liability         50,000             0               50,000
As a result of these differences, future taxable amounts are
a. $50,000
b. $80,000
c. $155,000
d. $205,000

4. Temporary differences arise when revenues are taxable
     After they are recognized      Before they are recognized
       in financial income          Financial income
a.         Yes                      Yes
b.         Yes                       No
c.         No                       No
d.         No                       Yes

5. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Expenses or losses that are deductible before they are recognized in financial income.
d. Revenues or gains that are recognized in financial income but are never included in taxable
income.
6. Dunn Co.'s X1 income statement reported $90,000 income before provision for income taxes.
To compute the provision for federal income taxes, the following X1 data are provided:
    Rent received in advance                                             $16,000
      Income from exempt municipal bonds                               20,000
    Depreciation deducted for income tax purposes in excess of 10,000
    depreciation reported for financial statements purposes

    Enacted corporate income tax rate                                      30%

  If the alternative minimum tax provisions are ignored, what amount of current federal income
tax liability should be reported in Dunn's December 31, X1, balance sheet?
a. $18,000
b. $22,800
c. $25,800
d. $28,800

7. Pine Corp.'s books showed pretax income of $800,000 for the year ended December 31, x1. In
the computation of federal income taxes, the following data were considered:
     Gain on an involuntary conversion (Pine has elected to replace the $350,000
     property within the statutory period using total proceeds.)
    Depreciation deducted for tax purposes in excess of depreciation 50,000
    deducted for book purposes
    Federal estimated tax payments, 1996                                      70,000
    Enacted federal tax rates, 1996                                            30%

  What amount should Pine report as its current federal income tax liability on its December 31,
X1, balance sheet?
a. $50,000
b. $65,000
c. $120,000
d. $135,000

8. For the year ended December 31, 2002, Tyre Co. reported pretax financial statement income of
$750,000. Its taxable income was $650,000. The difference is due to accelerated depreciation for
income tax purposes. Tyre`s effective c income tax rate is 30%, and Tyre made estimated tax
payments during 2002 for $90,000. What amount should Tyre report as current income tax
expense for 2002?
a.       $105,000
b.       $135,000
c.       $195,000
d.       $225,000

9. Tower Corp. began operations on January 1, X1. For financial reporting, Tower recognizes
revenues from all sales under the accrual method. However, in its income tax returns, Tower
reports qualifying sales under the installment method. Tower's gross profit on these installment
sales under each method was as follows:
     Year                        Accrual method        Installment method
    X1                          $1,600,000            $ 600,000
    X2                           2,600,000             1,400,000

  The income tax rate is 30% for X1 and future years. There are no other temporary or permanent
differences. In its December 31, X2, balance sheet, what amount should Tower report as a
liability for deferred income taxes?
a. $840,000
b. $660,000
c. $600,000
d. $360,000
10. On June 30, X1, Ank Corp. prepaid a $19,000 premium on an annual insurance policy. The
premium payment was a tax deductible expense in Ank's X1 cash basis tax return. The accrual
basis income statement will report a $9,500 insurance expense in X1 and X2. Ank's income tax
rate is 30% in X1 and 25% thereafter. In Ank's December 31, X1, balance sheet, what amount
related to the insurance should be reported as a deferred income tax liability?
a. $5,700
b. $4,750
c. $2,850
d. $2,375
11. Mill, which began operations on January 1, X1, recognizes income from long-term construction
contracts under the percentage-of-completion method in its financial statements and under the
completed-contract method for income tax reporting. Income under each method follows:
      Year                Completed contract         Percentage-of-completion
      X1                   $ --                     $300,000
      X2                   400,000                  600,000
      X3                   700,000                  850,000

  The income tax rate was 30% for X1 through X3. For years after X3, the enacted tax rate is
25%. There are no other temporary differences. Mill should report in its December 31, X3,
balance sheet, a deferred income tax liability of
a. $87,500
b. $105,000
c. $162,500
d. $195,000

Items 12 and 13are based on the following:
Zeff Co. prepared the following reconciliation of its pretax financial statement income for the
year ended December 31, X1, its first year of operations:
Pretax financial income                                                $160,000
Nontaxable interest received on municipal securities                    (5,000)
Long-term loss accrual in excess of deductible amount                              10,000
Depreciation in excess of financial statement amount                    (25,000)
Taxable income                                                         $140,000
Zeff`s tax rate for X1 is 40%.
12. On its X1 income statement, what amount should Zeff report as income tax expense- current
portion?
a. $52,000
b. $56,000
c. $62,000
d. $64,000
13. In its December 31, X1 balance sheet, what should Zeff report as deferred income tax
liability?
a. $2,000
b. $4,000
c. $6,000
d. $8,000

14. West Corp. leased a building and received the $36,000 annual rental payment on June 15, X1.
The beginning of the lease was July 1, X1. Rental income is taxable when received. West's tax
rates are 30% for X1 and 40% thereafter. West had no other permanent of temporary differences.
West determined that no valuation allowance was needed. What amount of deferred tax asset
should West report in its December 31, X1, balance sheet?
a. $5,400
b. $7,200
c. $10,800
d. $14,400
15. Black Co., organized on January 2, X1, had pretax accounting income of $500,000 and
taxable income of $800,000 for the year ended December 31, X1. The only temporary difference
is accrued product warranty costs which are expected to be paid as follows:
     X2                 $100,000
     X3                   50,000
     X4                   50,000
     X5                  100,000
   Black has never had any net operating losses (book or tax) and does not expect any in the
future. There were no temporary differences in prior years. The enacted income tax rates are 35%
for X1, 30% for X2 through X4, and 25% for X5. In Black's December 31, X1, balance sheet, the
deferred income tax asset should be
a. $60,000
b. $70,000
c. $85,000
d. $105,000
16. A temporary difference that would result in a deferred tax liability is
a. Interest revenue on municipal bonds.
b. Accrual of warranty expense.
c. Excess of tax depreciation over financial accounting depreciation.
d. Subscriptions received in advance.

17. Orleans Co., a cash basis taxpayer, prepares accrual basis financial statements. In its X2
balance sheet, Orleans' deferred income tax liabilities increased compared to X1. Which of the
following changes would cause this increase in deferred income tax liabilities?
    I. An increase in prepaid insurance.
    II. An increase in rent receivable.
    III. An increase in warranty obligations.
a. I only.
b. I and II.
c. II and III.
d. III only.

18. At the end of year 1, Cody Co. reported a profit on a partially completed construction contract
by applying the percentage-of-completion method. By the end of year 2, the total estimated profit
on the contract at completion in year 3 had been drastically reduced from the amount estimated at
the end of year 1. Consequently, in year 2, a loss equal to one-half of the year 1 profit was
recognized. Cody used the completed-contract method for income tax purposes and had no other
contracts. The year 2 balance sheet should include a deferred tax
      Asset Liability
a.       Yes      Yes
b.       No       Yes
c.       Yes       No
d.       No        No
19. A deferred tax liability is computed using
a. The current tax laws, regardless of expected or enacted future tax laws.
b. Expected future tax laws, regardless of whether those expected laws have been enacted.
c. Current tax laws, unless enacted future tax laws are different.
d. Either current or expected future tax laws, regardless of whether those expected laws have been
enacted.

20. For the year ended December 31, X1, Grim Co.'s pretax financial statement income was
$200,000 and its taxable income was $150,000. The difference is due to the following:
      Interest on municipal bonds                               $70,000
      Premium expense on keyman life insurance                  (20,000)
      Total                                                     $50,000

   Grim's enacted income tax rate is 30%. In its X1 income statement, what amount should Grim
report as current provision for income tax expense?
a. $45,000
b. $51,000
c. $60,000
d. $66,000
Items 21 and 22 are based on the following:
Venus Corp.'s worksheet for calculating current and deferred income taxes for X1 follows:
                                   X1              X2              X3
Pretax income                      $1,400


Temporary differences:
 Depreciation                      (800)           ($1,200)        $2,000
 Warranty costs                    400             (100)           (300)
Taxable income                     $1,000
Enacted rate                       30%             30%             25%


Deferred tax liability(asset):
 Current                           $ (30)
Noncurrent (before netting)        $ (75)                          $140

Venus had no prior deferred tax balances. In its X1 income statement, what amount should Venus
report as:
21. Current income tax expense?
a. $420
b. $350
c. $300
d. $0

22. Deferred income tax expense?
a. $350
b. $300
c. $120
d. $35

23. Shear, Inc. began operations in X1. Included in Shear's X1financial statements were bad debt
expenses of $1,400 and profit from an installment sale of $2,600. For tax purposes, the bad debts
will be deducted and the profit from the installment sale will be recognized in X2. The enacted
tax rates are 30% in X1 and 25% in X2. In its X1 income statement, what amount should Shear
report as deferred income tax expense?
a. $300
b. $360
c. $650
d. $780

								
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