111) Information for Hobson Corp. for the current year ($ in millions):
Income from continuing operations before tax
$
150
Loss on discontinued operation (pretax)
30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of expense
included in operating income
10
Depreciation deducted on tax return in excess of
depreciation expense
25
Permanent differences (all related to operating income):
Nondeductible portion of entertainment expense
5
The applicable enacted tax rate for all periods is 40%.
What is Hobson’s income tax payable for the current year?
A) $52 million.
B) $50 million.
C) $48 million.
D) $44 million.
Income from continuing operations before tax
$
150
Loss on discontinued operation (pretax)
(30
)
Accrued warranty expense
10
Depreciation expense
(25
)
Nondeductible portion of entertainment expense
5
Taxable income
110
Enacted rate
40
%
Income tax payable
$
44
112) Information for Hobson Corp. for the current year ($ in millions):
Income from continuing operations before tax
$
150
Loss on discontinued operation (pretax)
30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of expense
included in operating income
10
Depreciation deducted on tax return in excess of
depreciation expense
25
Permanent differences (all related to operating income):
Nondeductible portion of entertainment expense
5
The applicable enacted tax rate for all periods is 40%.
How should Hobson report tax on the discontinued operation?
A) A tax receivable of $12 million in the balance sheet.
B) A tax benefit of $12 million to net against the $30 million pretax loss.
C) A deferred tax asset of $12 million in the balance sheet.
D) None of these answer choices are correct.
Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the most correct term.
A) Is the basis for computing the tax liability for taxes currently payable.
B) Is a process of allocating income tax expense among income from continuing operations.
C) Reduces the net deferred tax asset and is classified as noncurrent in abalance sheet.
D) Arises when future deductible amounts are created by temporary differences.
E) Will generate a refund of taxes paid in prior years.
113) Operating loss carryback
114) Valuation allowance
115) Taxable income
116) Deferred tax asset
117) Intraperiod tax allocation
Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the most correct term.
A) Is usually a revenue or expense item that is excluded or not deductible in determining taxable
income.
B) Is reduced by a valuation allowance if realization of future tax benefit is not more likely than
not.
C) Arises when future taxable amounts are created by temporary differences.
D) Is the process of allocating income taxes among two or more reporting periods.
E) Will always create a deferred tax asset.
118) Interperiod tax allocation
119) Deferred tax asset
120) Deferred tax liability
121) Operating loss carryforward
122) Permanent difference
Listed below are five independent situations. For each situation indicate (by letter) whether it
will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither.
A) A
B) N
C) L
123) Research and development costs reported in the income statement but elected to be
capitalized and amortized over five years for tax purposes.
124) An operating loss carryforward.
125) Organization costs reported in the income statement but amortized and deducted over five
years for tax purposes.
126) Premiums paid on life insurance policies covering key corporate executives.
127) The nondeductible portion of travel and entertainment expenses.
Listed below are five independent situations. For each situation indicate (by letter) whether it
will create (A) a deferred tax asset, (L) a deferred tax liability, or (N) neither.
A) L
B) N
C) A
128) An operating loss carryback.
129) Warranty expense, tax deductible when paid.
130) Interest earned on investments in state and local government bonds.
131) Current year charitable contributions not currently deductible due to tax limitations but
which can be carried forward to future tax years.
132) Prepaid expenses, tax deductible when paid.
Listed below are 5 terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the most correct term.
A) No tax consequences.
B) Produces future taxable amounts or future deductible amounts.
C) “More likely than not” test.
D) Noncurrent.
E) A “plug” for the net effect of the current tax liability and changes in deferred tax assets and
liabilities.
133) Permanent difference
134) Valuation allowance
135) Balance sheet classification
136) Income tax expense
137) Temporary difference
138) Roberts Corp. reports pretax accounting income of $200,000, but due to a single temporary
difference, taxable income is only $150,000. At the beginning of the year, no temporary
differences existed. Roberts is subject to a tax rate of 40%.
Required:
Prepare the compound journal entry to record Roberts Corp.’s income taxes. Show well-labeled
computations.
72
Use the following to answer the question(s) below:
In its 2018 annual report to shareholders, Black Inc. disclosed the following information about
income taxes.
A reconciliation of income taxes computed at the United States federal statutory income tax rate
(35%) to the provision (benefit) for income taxes reflected in the Consolidated Statement of
Operations for the years ended December 31, 2018, 2017, and 2016 is as follows ($ in millions):
2018
2017
2016
Provision (benefit) for income taxes at United States
federal statutory rate of 35%
$5.2
$ (4.9)
$(11.3)
State and local income taxes, net of federal income tax benefit
(4.1)
(4.3)
(3.9)
Taxes on foreign income which differ from the
United States statutory rate
(2.5)
0.6
(0.7)
Losses with no tax benefit
2.8
4.2
6.2
Benefit of foreign sales corporation.
—
—
(0.5)
Other
0.5
(3.2)
—
____
____
_____
$1.9
$ (7.6)
$(10.2)
The significant components of the net deferred tax assets at December 31, 2018 and 2017 were
as follows ($ in millions):
2018
2017
Deferred Tax Assets:
Net operating loss carry forwards
$141.6
$139.0
Sales incentive discounts.
30.6
22.8
Inventory valuation reserves
15.0
8.3
Postretirement benefits
7.8
8.2
Other
64.2
74.1
Valuation allowance
(52.7)
(71.8)
Total deferred tax assets
206.5
180.6
Deferred Tax Liabilities:
Tax over book depreciation
23.5
24.2
Tax over book amortization of patent
18.2
17.9
Other
19.1
16.3
Total deferred tax liabilities
60.8
58.4
Net deferred tax assets
$145.7
$122.2
139) Why are the depreciation and patent amortization listed as deferred tax liabilities?
140) Estimate the effective tax rate for Black Inc. in 2018. Why is it different from the 35%
federal statutory rate?
141) Several years ago, Western Electric Corp. purchased equipment for $20,000,000. Western
uses straight-line depreciation for financial reporting and MACRS for tax purposes. At
December 31, 2017, the carrying value of the equipment was $18,000,000 and its tax basis was
$15,000,000. At December 31, 2018, the carrying value of the equipment was $16,000,000 and
the tax basis was $11,000,000. There were no other temporary differences and no permanent
differences. Pretax accounting income for the current year was $25,000,000. A tax rate of 35%
applies to all years.
Required:
Prepare one journal entry to record Western’s income tax expense for the current year. Show
well-labeled computations for the income tax payable and the change in the deferred tax account.
142) North Dakota Corporation began operations in January 2017 and purchased a machine for
$20,000. North Dakota uses straight-line depreciation over a four-year period for financial
reporting purposes. For tax purposes, the deduction is 50% of cost in 2017, 30% in 2018, and
20% in 2019. Pretax accounting income for 2017 was $150,000, which includes interest revenue
of $20,000 from municipal bonds. The enacted tax rate is 30% for all years. There are no other
differences between accounting and taxable income.
Required:
Prepare a journal entry to record income taxes for the year 2017. Show well-labeled
computations for the amount of income tax payable and the change in the deferred tax account.
143) The following information is for Hulk Gyms’ first year of operations. Amounts are in
millions of dollars. The enacted tax rate is 30%.
Year
Future
Future Taxable Amounts
Amounts
2018
2019
2020
2021
2022
Total
Accounting income
$60
Temporary difference:
Prepaid insurance
(12)
$ 3
$ 3
$ 3
$ 3
$ 12
Taxable income
$ 48
Required:
Prepare a compound journal entry to record the income tax expense for the year 2018. Show
well-labeled computations.
Year
Total
Accounting income
Temporary difference:
Prepaid insurance
$ 3
Taxable income
Enacted tax rate
Tax payable currently
Deferred tax liability December 31, 2018 (change & ending balance)
Income tax expense (to balance)
Deferred tax liability
(increase in deferred tax liability)
Income tax payable (tax currently payable)
144) Gallo Light began operations in 2018. The company sometimes sells used warehouses on
an installment basis. In those cases, Gallo Light reports income in its income statement in the
year of the sale. In its income tax return, though, Gallo Light reports installment income by the
installment method. Installment income in 2018 was $90,000, which Gallo Light expects to
collect equally over the next three years. The tax rate is 30%, but based on an enacted law, is
scheduled to become 35% in 2020.
Gallo Light’s pretax accounting income from the 2018 income statement was $830,000, which
includes $40,000 of interest revenue from an investment in municipal bonds. There were no
differences between accounting income and taxable income other than those described above.
Required:
(1.) Prepare the appropriate journal entry to record Gallo Light’s 2018 income taxes. Show
calculations.
(2.) What is Gallo Light’s 2018 net income?
145) EZ, Inc., reports pretax accounting income of $400,000, but due to a single temporary
difference, taxable income is $500,000. At the beginning of the year, no temporary differences
existed. EZ is subject to a tax rate of 40%.
Required:
Prepare the appropriate journal entry to record EZ’s income taxes. Show well-labeled
computations.
146) In the current year, Bruno Corporation collected rent of $3,600,000. For income tax
reporting, the rent is taxed when collected. For financial reporting, the rent is recognized as
income in the period earned. At the end of the current year, the unearned portion of the rent
collected in the current year amounted to $400,000. Bruno had no temporary differences at the
beginning of the current year. Assume an income tax rate of 30%.
Required:
The current year’s income tax liability from the tax return is $800,000. Prepare the journal entry
to record income taxes for the year. Show well-labeled computations.
147) At the end of its first year of operations, Prince Charming Corporation had a current
liability of $300,000 for unearned rent. This was the only difference between pretax accounting
income and taxable income. Assume an income tax rate of 40%.
Required:
The tax liability from the tax return is $750,000. Prepare the journal entry to record income taxes
for Prince Charming’s first year of operations. Show well-labeled computations.
148) Pocus, Inc., reports warranty expense when related products are sold. For tax purposes, the
warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty
liability of $200,000 and taxable income of $20,000,000. At the end of the previous year, Pocus
reported a deferred tax asset of $80,000 related to the difference in reporting warranty expense,
its only temporary difference. The enacted tax rate is 30% each year.
Required:
Prepare the appropriate journal entry for Pocus to record the income tax provision for the current
year. Show well-labeled supporting computations.
149) Pocus Inc. reports warranty expense when related products are sold. For tax purposes, the
warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty
liability of $500,000 and taxable income of $50,000,000. At the beginning of the current year,
Pocus reported a deferred tax asset of $210,000 related to the difference in reporting warranty
expense, its only temporary difference. The enacted tax rate is 40% each year.
Required:
Prepare the appropriate journal entry for Pocus to record the income tax provision for the current
year. Show well-labeled computations to support the three amounts in your journal entry.