CHAPTER 13 Income Tax Reporting 185
Chapter 13: Income Tax Reporting
True-False
1. Taxable income is governed by the doctrine of constructive receipt or ability to pay.
2. Statutory depletion in excess of cost depletion is an example of a permanent difference.
3. Treating the taxes paid each year as an expense in the income statement could result in an
inappropriate matching between pre-tax book income and income tax expense.
4. Income tax expense when interperiod tax allocation is used creates a more stable effective tax rate over
time relative to using tax payments as income tax expense.
5. When using interperiod tax allocation, tax expense based on pre-tax income results in a proper
matching of revenues and expenses in the income statement.
6. Creation of the deferred tax asset valuation allowance account is subjective and therefore provides
management the opportunity to manage earnings.
7. Once a deferred tax asset valuation allowance is established, it can be either increased or decreased in
future years.
8. When the income tax rate changes, the full change in the amount of future liability for income taxes is
recognized as a change to income tax expense in the year that the change becomes effective.
9. When future income tax rates change, the effect of the change on net income will be consistent across
most companies regardless of their deferred tax balances.
10. A corporation that incurs a net operating loss must carry the loss back to earlier years before it can
carry the loss forward.
11. The income tax benefit associated with a loss carryback or carryforward is recorded as an adjustment
to income tax expense in the year of the loss.
12. GAAP requires a disclosure that reconciles a company’s effective income tax rate and the U.S.
statutory income tax rate.
13. Financial statement disclosures concerning income taxes provides financial analysts with information
regarding the transactions that had an impact on the year-end deferred income taxes balance.
14. A significant decrease in the deferred tax asset account is relevant with respect to assessing earnings
quality.
CHAPTER 13 Income Tax Reporting 188
15. Under IFRS rules, deferred tax assets and deferred tax liabilities are always reported as noncurrent in
a classified balance sheet.
Multiple Choice Questions
16. The GAAP solution for avoiding distortions that would result from setting income tax expense equal
to taxes owed is called
a. intraperiod tax allocation.
b. interperiod tax allocation.
c. book income allocation.
d. intraperiod book allocation of income.
17. The allocation of income tax expense across periods when book and tax income differ is called
a. interperiod tax allocation.
b. intraperiod tax allocation.
c. current income tax allocation.
d. constructive receipt allocation.
18. Changes in deferred tax assets and liabilities from one year to the next that are not included in the
income tax entry based on continuing operations are explained by
a. interperiod tax allocation.
b. intraperiod tax allocation.
c. current income tax allocation.
d. constructive receipt allocation.
19. The two broad categories of differences that result from determining the pre-tax book income and the
taxable income are
a. temporary differences and originating differences.
b. temporary differences and reversing differences.
c. temporary differences and permanent differences.
d. permanent differences and deferred differences.
20. Temporary differences that will cause taxable income in future periods to be higher than pre-tax book
income in future periods give rise to
a. deferred tax assets.
b. deferred tax liabilities.
c. permanent differences.
d. tax refund receivable.
21. Temporary differences that will cause taxable income in future periods to be lower than pre-tax book
income in future periods give rise to
a. deferred tax assets.
b. deferred tax liabilities.
c. permanent differences.
d. expense.
22. Which one of the following is a permanent difference between book and taxable income?
a. Interest received on municipal bonds
b. Installment sales
c. Bad debts expense
d. Warranty expense
23. A temporary difference that causes book income to be greater than or less than taxable income when
it is initially recorded is a/an
a. reversing temporary difference.
b. originating temporary difference.
c. permanent difference.
d. minor difference.
24. Which of the following would not create a temporary difference?
a. A revenue included in the determination of book income this year but not included in taxable income
until next year
b. An expense included in the determination of taxable income this year but not included in book
income until next year
CHAPTER 13 Income Tax Reporting 191
c. A revenue included in the determination of book income this year but never included in taxable
income
d. A revenue item that causes book income to be more (less) than taxable income when it is initially
recorded
25. Which of the following items does not create a temporary difference?
a. The accrual of pension and OPEB expenses
b. Installment sales
c. Revenues received in advance
d. The payment of life insurance premiums on company executives
26. A temporary difference created this year causes book income to be greater than taxable income; in
future years, book income will be less than taxable income. The temporary difference in the future years’
incomes is referred to as
a. reversing temporary difference.
b. originating temporary difference.
c. permanent difference.
d. minor difference.
27. Which of the following transactions would not create a temporary difference?
a. The cash payment to acquire a three-year insurance policy.
b. The accrual of warranty expense.
c. The accrual of bad debt expense.
d. The cash collection of interest earned on a municipal bond.
CHAPTER 13 Income Tax Reporting 192
28. Which of the following transactions would create a deferred tax liability on foreign income?
a. A U.S. company sells its products in a foreign country.
b. A U.S. company earns income in a different country and pays the foreign government an income tax
less than the U.S. corporate tax rate.
c. A U.S. company earns income in a foreign country that it does not expect to repatriate back to the U.S.
d. A foreign-based company sells its products to customers in the U.S.
29. Which of the following statements is not correct?
a. Temporary differences causing taxable income in future periods to be higher than book income in
future periods create deferred tax liabilities.
b. Temporary differences causing taxable income in future periods to be lower than book income in
future periods create deferred tax assets.
c. A permanent difference results when a revenue enters into the determination of book income in one
period but affects taxable income in a different period.
d A temporary difference causing book income to be less than taxable income when initially recorded is
described as an originating difference.
30. The accounting principle violated if temporary differences are not taken into account is the
a. historical cost principle.
b. matching principle.
c. conservatism principle.
d. cost/benefit principle.
31. When income tax expense equals current income tax payable to the government plus (minus) the
increase (decrease) in deferred tax liabilities, income tax expense is properly matched for the
a. current period.
b. previous period.
c. future period.
d. tax return.
Use the following to answer questions 32–34:
REFERENCE: Ref. 13_01
Smith Company reported $350,000 in book income before income tax during 2018, its first year of
operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2018 and all
future years was 40%.
[QUESTION]
REFER TO: Ref. 13_01
32. What amount of deferred tax liability should Smith report in its December 31, 2018, balance sheet?
a. $ 8,000
b. $ 9,000
c. $ 10,000
d. $ 12,000
33. If Smith paid no estimated taxes, what amount of income tax payable should Smith report in its
December 31, 2018, balance sheet?
a. $100,000
CHAPTER 13 Income Tax Reporting 194
b. $120,000
c. $128,000
d. $140,000
34. Income tax expense reported in the income statement for the year ending December 31, 2018 would
be
a. $100,000.
b. $120,000.
c. $128,000.
d. $140,000.
Use the following to answer questions 35–37:
REFERENCE: Ref. 13_02
Stone Company reported pre-tax book income of $700,000 in 2018, the first year of operation. The tax
depreciation exceeded the book depreciation by $90,000. The tax rate for 2018 and all future years was
30%.
[QUESTION]
REFER TO: Ref. 13_02
35. What amount of deferred tax liability should Stone report in its December 31, 2018, balance sheet?
a. $ 5,000
b. $ 9,000
c. $ 20,000
d. $ 27,000
36. If Stone paid no estimated taxes, what amount of income tax payable should Stone report in its
December 31, 2018, balance sheet?
a. $150,000
b. $160,000
c. $183,000
d. $210,000
37. Income tax expense reported in the income statement for the year ending December 31, 2018 would
be
a. $100,000.
b. $120,000.
c. $183,000.
d. $210,000.
38. During 2018, a company reported an increase in the deferred tax liability account of $77,990, an
increase in the deferred tax asset account of $35,325, and an income tax liability as per the 2018 income
tax return of $398,555. What is the income tax expense to be reported in the income statement for the
year ending December 31, 2018?
a. $398,555
b. $441,220
CHAPTER 13 Income Tax Reporting 196
c. $511,870
d. $285,555
39. During 2018, a company reported an increase in the deferred tax liability account of $47,790, a
decrease in the deferred tax asset account of $17,225, and an income tax liability as per the 2018 income
tax return of $198,375. What is the income tax expense to be reported on the income statement for the
year ending December 31, 2018?
a. $263,390
b. $228,940
c. $167,810
d. $198,375
40. Beginning in 2017 for calendar-year public firms, all deferred tax assets and liabilities are classified
as
a. current assets and liabilities.
b. noncurrent assets and liabilities.
c. income tax expense.
d. none of these answer choices are correct.
41. During its first year of operations a company recorded accrued expenses totaling $250,000 for book
purposes. For tax purposes, $100,000 of the expenses are deductible during the first year of operations
and $150,000 are deductible during the second year of operations. The income tax rate for both years is
45%. The balance sheet at the end of the first year of operations will report a deferred tax
a. asset of $67,500.
b. liability of $67,500.
c. liability of $45,000.
d. asset of $100,00.
42. During its first year of operations a company recorded accrued expenses totaling $175,000 for book
purposes. For tax purposes, $175,000 of the expenses are deductible during the first year of operations
and $200,000 are deductible during the second year of operations. The enacted income tax rate was 40%
during the first year of operations and 45% during the second year of operations. The balance sheet at the
end of the first year of operations will report a deferred tax
a. asset of $80,000.
b. liability of $80,000.
c. liability of $90,000.
d. asset of $90,000.
43. During its first year of operations a company recorded accrued warranty expense totaling $75,000 for
book purposes. For tax purposes, $25,000 of the expenses are deductible during the first year of
operations and $50,000 are deductible during the second year of operations. Book income from operations
during the first year was $750,000. The enacted income tax rate was 40% during the first year of
operations and 45% during the second year of operations. The income tax expense to be reported in the
income statement for the first year of operations is
a. $297,500.
CHAPTER 13 Income Tax Reporting 198
b. $300,000.
c. $277,500.
d. $280,000.
44. During 2018, its first year of operations, a company recorded depreciation expense of $50,000 for
book purposes. For tax purposes during 2018, $100,000 of depreciation expense was deducted. The
temporary difference created during 2018 will reverse equally during 2019 and 2020. Book income from
operations during the first year was $570,000. The income tax rate is 40%. The income tax expense to be
reported in the income statement for the first year of operations is
a. $228,000.
b. $208,000.
c. $248,000.
d. $188,000.
45. For the year ending December 31, 2018, the RJ Corporation reported book income before taxes of
$579,000. During 2018: RJ’s book depreciation expense was $25,000 greater than what was allowed for
tax purposes due to a reversing difference; RJ accrued $17,750 of warranty expense which is not
deductible for tax purposes until 2019; RJ recognized a $29,000 unrealized loss on an investment which is
not deductible for tax purposes until the investment is sold; and RJ’s book income included municipal
bond interest of $19,500. What was RJ Corporation’s 2018 income tax expense assuming a tax rate of
40%?
a. $252,500
b. $215,100
CHAPTER 13 Income Tax Reporting 199
c. $243,800
d. $232,500
Use the following to answer questions 46 – 50:
REFERENCE: Ref. 13_03
Sand engaged in operations at the start of 2018 and reported $550,000 in pre-tax book income for the
year. Tax depreciation for Sand exceeded book depreciation by $50,000. The tax rate for 2018 was 30%,
and Congress had enacted a tax rate of 20% for the years after 2018.
[QUESTION]
REFER TO: Ref. 13_03
46. What is the deferred tax liability for Sand at December 31, 2018?
a. $10,000
b. $15,000
c. $20,000
d. $40,000
[QUESTION]
REFER TO: Ref. 13_03
47. What is the current portion of the income tax expense for Sand for 2018?
a. $100,000
b. $150,000
c. $160,000
d. $165,000
48. What is the total income tax expense for Sand for 2018?
a. $100,000
b. $150,000
c. $160,000
d. $175,000
49. If Sand paid no estimated taxes, what is the amount of income tax payable for Sand at the end of
2018?
a. $ 40,000
b. $ 45,000
c. $ 100,000
d. $ 150,000
50. The journal entry to record the taxes for Sand Company at December 31, 2018 would be
a. DR Income tax expense 170,000
CHAPTER 13 Income Tax Reporting 201
CR Deferred tax liability 10,000
CR Income tax payable 160,000
b. DR Income tax expense 150,000
CR Cash 150,000
c. DR Income tax expense 160,000
CR Cash 160,000
d. DR Income tax expense 160,000
CR Deferred tax liability 10,000
CR Income tax payable 150,000
Use the following to answer questions 51 – 53:
REFERENCE: Ref. 13_04
Taylor Company began manufacturing operations on January 2, 2018. During 2018 Taylor reported
pre-tax book income of $150,000 and had taxable income of $200,000. Taylor had a temporary
difference relating to accrued product warranty costs which are expected to be paid as follows:
2019 $ 30,000
2020 $ 15,000
2021 $ 5,000
[QUESTION]
REFER TO: Ref. 13_04
51. The enacted tax rates are 30% for 2018 and 2019; and 40% for 2020 and 2021. The deferred tax
asset at the end of 2018 is
a. $ 9,000.
b. $ 12,000.
c. $ 17,000.
d. $ 20,000.
52. If Taylor paid no estimated taxes, the income tax payable at the end of 2018 is
a. $60,000.
b. $62,500.
c. $65,000.
d. $67,000.
53. Income tax expense for 2018 is
a. $43,000.
b. $45,000.
c. $65,000.
d. $67,000.
Use the following to answer questions 54 – 56:
REFERENCE: Ref. 15_05
Davis Company began manufacturing operations on January 2, 2018. During 2018 Davis reported pre-
tax book income of $85,000 and had taxable income of $75,000. Davis had a temporary difference
relating to a prepaid asset which will be expensed as follows for book purposes:
2019 $ 7,500
2020 $ 2,500
The enacted tax rates are 30% for 2018 and 2019; and 40% for subsequent years.
[QUESTION]
REFER TO: Ref. 13_05
54. If no other temporary differences occurred subsequent to 2018, the deferred tax asset at the beginning
of 2020 is
a. $ 750.
b. $ 1,000.
c. $ 4,000.
d. $ 2,500.
55. If Davis paid no estimated taxes, income tax payable at the end of 2018 is
a. $22,500.
b. $30,000.
c. $36,000.
d. $27,500.
56. Income tax expense for 2018 is
a. $30,000.
b. $25,750.
c. $22,500.
d. $19,250.
57. GAAP specifies that when the tax rates change, the
a. asset approach be adopted.
b. balance sheet approach be adopted.
c. retained earnings approach be adopted.
d. income approach be adopted.
58. Under the balance sheet approach, the full change in the amount of future liability is recognized as an
increase or decrease in income tax expense in the year the
a. tax rate change is debated.
b. tax law is proposed.
c. tax law becomes effective.
d. tax law is enacted.
59. At December 31, 2018, the Rare Corporation reported a $40,000 deferred tax liability pertaining to a
$100,000 temporary difference which will reverse equally during the next four years. On December 31,
2018, after determining the deferred tax liability, Rare’s management was informed that the income tax
rate for years subsequent to 2018 had been changed to 42%. As a result of the tax rate change, Rare’s
2018 income tax expense will
a. not change.
b. increase $800.
c. increase $2,000.
d. increase $1,200.