Chapter 16 Accounting for Income Taxes
a. An increase in a deferred tax asset.
b. A decrease in a deferred tax asset.
c. An increase in a deferred tax liability.
d. A decrease in a deferred tax liability.
57. In 2016, Magic Table Inc. decides to add a 36-month warranty on its new product sales.
Warranty costs are tax deductible when claims are settled. In its financial statements for 2016,
Magic Table Inc incurs:
a. An increase in a deferred tax asset.
b. A decrease in a deferred tax asset.
c. An increase in a deferred tax liability.
d. A decrease in a deferred tax liability.
58. Which of the following usually results in an increase in a deferred tax asset?
a. Accelerated depreciation for tax reporting and straight-line depreciation for financial
reporting.
b. Prepaid insurance.
c. Subscriptions delivered for which customers had paid in advance.
d. None of these answer choices are correct.
59. At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in
advance included in its balance sheet. A disclosure note reveals that the entire $400,000 will
be earned in the next year. In the absence of other temporary differences, in the balance sheet
one would also expect to find a:
a. Noncurrent deferred tax liability.
Chapter 16 Accounting for Income Taxes
b. Noncurrent deferred tax asset.
c. Current deferred tax liability.
d. Current deferred tax asset.
60. The valuation allowance account that is used in conjunction with deferred tax assets is a(n):
a. Liability.
b. Component of shareholders’ equity.
c. Asset.
d. Contra asset.
61. The valuation allowance account that is used in conjunction with deferred taxes relates:
a. Only to deferred tax liabilities.
b. To both deferred tax assets and liabilities.
c. Only to deferred tax assets.
d. Only to income taxes receivable due to net operating loss carrybacks.
62. In 2015, HD had reported a deferred tax asset of $90 million with no valuation allowance. At
December 31, 2016, the account balances of HD Services showed a deferred tax asset of $120
million before assessing the need for a valuation allowance and income taxes payable of $80
million. HD determined that it was more likely than not that 30% of the deferred tax asset
ultimately would not be realized. HD made no estimated tax payments during 2016. What
amount should HD report as income tax expense in its 2016 income statement?
a. $50 million.
Chapter 16 Accounting for Income Taxes
b. $80 million.
c. $86 million.
d. $116 million.
63. For classification purposes, a valuation allowance:
a. Is allocated proportionately between deferred tax assets and deferred tax liabilities.
b. Is allocated proportionately between the current and noncurrent portions of the deferred
tax asset.
c. Is allocated proportionately between the current and noncurrent portions of the deferred
tax liability.
d. Is added to the deferred tax asset.
64. If a company’s deferred tax asset is not reduced by a valuation allowance, the company
believes it is:
a. Probable that sufficient taxable income will be generated in future years to realize the full
tax benefit.
b. Probable that sufficient financial income will be generated in future years to realize the
full tax benefit.
c. More likely than not that sufficient taxable income will be generated in future years to
realize the full tax benefit.
d. More likely than not that sufficient financial income will be generated in future years to
realize the full tax benefit.
65. Which of the following causes a permanent difference between taxable income and pretax
accounting income?
a. The installment method used for sales of property.
b. MACRS depreciation method used for equipment.
c. Interest income on municipal bonds.
d. Percentage-of-completion method for long-term construction contracts.
66. In reconciling net income to taxable income, interest earned on municipal bonds is:
a. Ignored.
b. A temporary difference.
c. A reversing difference.
d. A permanent difference.
67. Which of the following causes a permanent difference between taxable income and pretax
accounting income?
a. Advance collections of revenues.
b. MACRS depreciation method used for equipment.
c. The installment method used for sales of merchandise.
d. Interest earned on municipal securities.
68. Which of the following would never require reporting deferred tax assets or deferred tax
liabilities?
a. Depreciation on equipment.
Chapter 16 Accounting for Income Taxes
b. Accrual of warranty expense.
c. Life insurance premiums for the payer’s benefit.
d. Rent revenue received in advance.
69. When tax rates are changed subsequent to the creation of a deferred tax asset or liability,
GAAP requires that:
a. All deferred tax accounts be adjusted to reflect the new tax rates.
b. The beginning deferred tax accounts are left unchanged.
c. Only the current deferred tax accounts are adjusted to reflect the new tax rates.
d. Only the noncurrent deferred tax accounts are adjusted to reflect the new tax rates.
70. Pretax accounting income for the year ended December 31, 2016, was $50 million for Truffles
Company. Truffles’ taxable income was $60 million. This was a result of differences between
straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The
enacted tax rate is 30% for 2016 and 40% thereafter. What amount should Truffles report as
the current portion of income tax expense for 2016?
a. $15 million.
b. $18 million.
c. $20 million.
d. $24 million.
71. The financial reporting carrying value of Boze Music’s only depreciable asset exceeded its tax
basis by $150,000 at December 31, 2016. This was a result of differences between straight-
line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was
acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is
30% for 2016 and 40% thereafter. Boze should report the deferred tax effect of this difference
in its December 31, 2016, balance sheet as:
a. A liability of $45,000.
b. A liability of $60,000.
c. An asset of $45,000.
d. An asset of $60,000.
72. The effect of a change in tax rates:
a. Results in a prior period adjustment.
b. Is allocated between discontinued operations and continuing operations.
c. Is reported separately after discontinued operations.
d. Is reflected in income from continuing operations.
73. Giada Foods reported $940 million in income before income taxes for 2016, its first year of
operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100
million. The company also had non-tax-deductible expenses of $80 million relating to
permanent differences. The income tax rate for 2016 was 35%, but the enacted rate for years
after 2016 is 40%. The balance in the deferred tax liability in the December 31, 2016, balance
sheet is:
a. $16 million.
b. $35 million.
c. $40 million.
d. $56 million.
74. In its first year of operations, Woodmount Corporation reported pretax accounting income of
$500 million for the current year. Depreciation reported in the tax return in excess of
depreciation in the income statement was $60 million. The excess tax will reverse itself evenly
over the next three years. The current year’s tax rate of 40% will be reduced under the current
law to 35% next year and 30% for all subsequent years. At the end of the current year, the
deferred tax liability related to the excess depreciation will be:
a. $21 million.
b. $24 million.
c. $18 million.
d. $19 million.
75. Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book
depreciation of $2,000, and accrued warranty expense of $400 on the books although no
warranty work was performed. What is Bumble Bee’s pretax accounting income?
a. $4,400.
b. $3,600.
c. $9,600.
d. $2,600.
76. For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income.
This included warranty expense of $6 and $20 in depreciation expense. Two million of
warranty costs were incurred, and MACRS depreciation amounted to $35. In the absence of
other temporary or permanent differences, what was Centipede’s income tax payable currently,
assuming a tax rate of 40%?
a. 19.6 million.
b. 25.2 million.
c. 27.6 million.
d. 29.2 million.
77. For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income.
This included warranty expense of $6 and $20 in depreciation expense. Two million of
warranty costs were incurred, and MACRS depreciation amounted to $35. In the absence of
other temporary or permanent differences, what was Centipede’s taxable income?
a. $73 million.
b. $69 million.
c. $63 million.
d. $49 million.
78. Under current tax law, generally a net operating loss may be carried back:
a. 2 years.
b. 5 years.
c. 15 years.
d. 20 years.
79. Under current tax law a net operating loss may be carried forward up to:
a. 5 years.
b. 10 years.
c. 15 years.
d. 20 years.
80. If a company’s deferred tax asset is not reduced by a valuation allowance, the company
believes it is more likely than not that:
a. Sufficient accounting income will be generated in future years to realize the full tax
benefit.
b. Sufficient accounting and taxable income will exist in future years to realize the full tax
benefit.
c. Sufficient taxable income will be generated in future years to realize the full tax benefit.
d. Tax rates will not change in future years.
81. A net operating loss (NOL) carryforward cannot result in the balance sheet at the end of the
NOL year showing:
Chapter 16 Accounting for Income Taxes
a. A receivable under current assets for an income tax refund.
b. A current deferred tax asset.
c. A noncurrent deferred tax asset.
d. Both a current and a noncurrent deferred tax asset.
82. The tax effect of a net operating loss (NOL) carryback usually:
a. Results in a current receivable at the end of the NOL year.
b. Is subject to a valuation allowance.
c. Is reflected as deferred tax asset at the end of the NOL year.
d. Is reflected as a deferred tax liability at the end of the NOL year.
83. Recognizing tax benefits in a loss year due to a net operating loss carryforward requires:
a. Creating a tax refund receivable.
b. Note disclosure only.
c. Creating a deferred tax asset.
d. Creating a deferred tax liability.
84. In its first four years of operations Peridot Jewelers reported the following operating income
(loss) amounts:
2013 $150,000
2014 100,000
2015 (425,000)
2016 450,000
Chapter 16 Accounting for Income Taxes
There were no other deferred income taxes in any year. In 2015, Peridot elected to carry back
its operating loss. The enacted income tax rate was 40%. In its 2016 income statement, what
amount should Peridot report as income tax expense?
a. $ 80,000.
b. $110,000.
c. $170,000.
d. $180,000.
85. The Kelso Company had the following operating results:
Year Income (loss) Tax rate Income tax
2014 30,000 35% 10,500 first year of operations
2015 45,000 30% 13,500
2016 (60,000) 30% 0
What is the income tax refund receivable?
a. $18,000
b. $19,500
c. $18,750
d. $24,000
86. In 2016, Bodily Corporation reported $300,000 pretax accounting income. The income tax
rate for that year was 30%. Bodily had an unused $120,000 net operating loss carryforward
from 2014 when the tax rate was 40%. Bodily’s income tax payable for 2016 would be
a. $54,000
b. $42,000
c. $90,000
d. $72,000
87. In its first three years of operations Sharp Chairs reported the following operating income
(loss) amounts:
2014 $ 1,350,000
2015 (3,150,000)
2016 5,400,000
There were no deferred income taxes in any year. In 2015, Sharp elected to carry back its
operating loss. The enacted income tax rate was 35% in 2014 and 40% thereafter. In its 2016
balance sheet, what amount should Sharp report as current income tax payable?
a. $ 900,000.
b. $1,260,000.
c. $1,440,000.
d. $2,160,000.
88. In its first four years of operations Peridot Jewelers reported the following operating income
(loss) amounts:
2013 $150,000
2014 100,000
2015 (425,000)
2016 450,000
There were no other deferred income taxes in any year. In 2015, Peridot elected to carry back
its operating loss. The enacted income tax rate was 40%. In its 2016 income statement, what
amount should Peridot report as current income tax payable?
a. $ 80,000.
b. $110,000.
c. $170,000.
d. $180,000.
89. According to GAAP for accounting for income taxes, when a company has a net operating
loss carryforward:
a. A deferred tax liability is recognized.
b. A receivable is created.
c. A deferred tax equity account is created.
d. A deferred tax asset is recorded along with any applicable valuation allowance.
Use the following to answer questions 90–92:
Puritan Corp. reported the following pretax accounting income and taxable income for its first
three years of operations:
2015
2016
)
2017
Puritan’s tax rate is 40% for all years. Puritan elected a loss carryback.
As of December 31, 2016.Puritan was certain that it would recover the full tax benefit of the
NOL that remained after the operating loss carryback.
90. What did Puritan report on December 31, 2016, as the deferred tax asset for the NOL
carryforward?
a. $280,000.
b. $200,000.
c. $100,000.
d. $ 0.
91. What would Puritan report as net income for 2017?
Chapter 16 Accounting for Income Taxes
a. $620,000.
b. $420,000.
c. $270,000.
d. $460,000.
92. What would be the net loss in 2016 reported in Puritan’s income statement?
a. $360,000.
b. $240,000.
c. $460,000.
d. $500,000.
93. Before considering a net operating loss carryforward of $80 million, Fama Corporation
reported $200 million of pretax accounting and taxable income in the current year. The
income tax rate for all previous years was 40%. On January 1 of the current year, a new tax
law was enacted, reducing the rate to 30% effective immediately. Fama’s income tax payable
for the current year would be:
a. $48 million.
b. $28 million.
c. $60 million.
d. $36 million.
94. Reliable Corp. had a pretax accounting income of $30 million this year. This included the
collection of $40 million of life insurance proceeds when several key executives died in a
plane crash. Temporary differences for the current year netted out to zero. Reliable has had a
40% tax rate and taxable income of $120 million over the previous two years and plans to
elect a net operating loss carryback for tax purposes. In the current year financial statements,
Reliable would report:
a. Net income of $34 million.
b. A tax benefit of $10 million.
c. Net income of $26 million.
d. A deferred tax asset of $4 million.
Accounting income
Permanent difference: Life insurance
)
Taxable income (NOL)
$(10
)
Enacted rate for carryback years
%
Income tax refundable
Accounting income
Tax benefit from NOL
Net income
95. Theodore Enterprises had the following pretax income (loss) over its first three years of
operations:
2014
2015
)
2016
Taxable income before NOL
NOL Carryforward
)
Taxable income
Enacted tax rate
%
Chapter 16 Accounting for Income Taxes
For each year there were no deferred income taxes and the tax rate was 30%. In its 2015 tax
return, Theodore elected a net operating loss carryback. No valuation account was deemed
necessary for the deferred tax asset as of December 31, 2015. What was Theodore’s income
tax expense for 2016?
a. $450,000.
b. $330,000.
c. $270,000.
d. $180,000.
96. Clinton Corp. had the following pretax income (loss) over its first three years of operations:
2014
$1,200,000
2015
(900,000
)
2016
1,500,000
For each year there were no deferred income taxes and the tax rate was 40%. For its 2015 tax
return, Clinton did not elect a net operating loss carryback. No valuation account was deemed
necessary for the deferred tax asset as of December 31, 2015. What was Clinton’s income tax
expense in 2016?
a. 600,000.
b. 480,000.
c. 240,000.
d. 160,000.
97. The Bell Company had the following operating results:
Year Income (loss) Tax rate Income tax
2013 40,000 35% 14,000
2014 20,000 35% 7,000
2015 50,000 40% 20,000
2016 (60,000) 40% 0
What is the income tax refund receivable?
a. $27,000.
b. $24,000.
c. $23,000.
d. $21,000.
98. For reporting purposes, current deferred tax assets and current deferred tax liabilities are:
a. Netted against one another in the balance sheet.
b. Reported separately in the balance sheet.
c. Reflected only in the notes to the financial statements.
d. Combined respectively with noncurrent deferred tax assets and noncurrent deferred tax
liabilities in the balance sheet.
99. Financial statement disclosure of the components of income tax expense:
a. Must be made on the face of the income statement.
b. Usually is included in the disclosure notes.
c. Is not necessary when only permanent differences exist.
d. Must include the amount of cash paid for taxes.
100. At December 31, 2016, Moonlight Bay Resorts had the following deferred income tax items:
Deferred tax asset of $54 million related to a current liability
Deferred tax asset of $36 million related to a noncurrent liability
Deferred tax liability of $120 million related to a noncurrent asset
Deferred tax liability of $72 million related to a current asset
Moonlight Bay should report in the current section of its December 31, 2016, balance sheet a:
a. Noncurrent asset of $90,000 and a non-current liability of $192,000.
b. Current tax liability of $18,000.
c. Noncurrent asset of $84,000 and a non-current liability of $45,000.
d. Noncurrent liability of $30,000.
101. Due to differences between depreciation reported in the income statement and depreciation
deducted for tax purposes, Lucas Corp. has $2 million in temporary differences that will
increase taxable income next year. Assuming that Lucas has no other temporary differences,
deferred income taxes should be reported in this year’s ending balance sheet as a:
a. Current deferred asset.
b. Noncurrent deferred tax liability.
c. Current deferred tax liability.
d. Noncurrent deferred tax asset.
102. A reconciliation of pretax financial statement income to taxable income is shown below for
Fieval Industries for the year ended December 31, 2016, its first year of operations. The
income tax rate is 40%.
Pretax accounting income (income statement) $300,000
Chapter 16 Accounting for Income Taxes
Interest revenue on municipal securities (15,000)
Warranty expense in excess of deductible amount 25,000
Depreciation in excess of financial statement amount (70,000)
Taxable income (tax return) $240,000
What amount(s) should Fieval report related to deferred income taxes in its 2016 balance sheet?
a. Current asset of $10,000 and noncurrent liability of $28,000.
b. Noncurrent liability of $18,000.
c. Current asset of $4,000 and noncurrent liability of $28,000.
d. Noncurrent liability of $24,000.
103. A reconciliation of pretax financial statement income to taxable income is shown below for
See Shipping for the year ended December 31, 2016, its first year of operations. The income
tax rate is 40%.
Pretax accounting income (income statement) $600,000
Installment income taxable upon receipt next year (30,000)
Warranty expense in excess of deductible amount 5,000
Tax depreciation in excess of income statement amount (20,000)
Taxable income (tax return) $555,000
What amount should See report as a current item related to deferred income taxes in its 2016
balance sheet?
a. Deferred income tax asset of $12,000.
b. Deferred income tax asset of $2,000.
c. Deferred income tax liability of $12,000.
d. Deferred income tax liability of $10,000.
104. On its tax return at the end of the current year Webnet Inc. has $6 million of tax depreciation
in excess of depreciation in its income statement. A disclosure note reveals that $1 million of
the $6 million difference will reverse itself next year, and the remainder will reverse over the
next 4 years. In the absence of other temporary differences, in the balance sheet at the end of
the current year Webnet would report:
a. Both a current deferred tax asset and a noncurrent deferred tax asset.
b. A noncurrent deferred tax asset.
c. Both a current deferred tax liability and a noncurrent deferred tax liability.
d. A noncurrent deferred tax liability.
105. Madison Company has taken a position in its tax return to claim a tax credit of $60 million
(direct reduction in taxes payable) and has determined that its sustainability is “more likely
than not,” based on its technical merits. The tax credit would be a direct reduction in current
taxes payable. Madison believes the likelihood that a $60 million, $36 million, or $12 million
tax benefit will be sustained is 25%, 30%, and 45%, respectively. Madison’s taxable income is
$510 million for the year. Its effective tax rate is 40%. What is Madison’s income tax expense
for the year?
a. $ 24 million.
b. $ 144 million.
c. $ 168 million.
d. $204 million.