41) Woody Corp. had taxable income of $8,000 in the current year. The amount of MACRS
depreciation was $3,000, while the amount of depreciation reported in the income statement was
$1,000. Assuming no other differences between tax and accounting income, Woody’s pretax
accounting income was:
A) $5,000.
B) $6,000.
C) $10,000.
D) $11,000.
42) Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a
decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60
million. The company is subject to a tax rate of 40%. The total income tax expense for the year
was:
A) $390 million.
B) $210 million.
C) $150 million.
D) $180 million.
43) Wayne Co. had a decrease in deferred tax liability of $20 million, a decrease in deferred tax
assets of $10 million, and an increase in tax payable of $100 million. The company is subject to a
tax rate of 40%. The total income tax expense for the year was:
A) $90 million.
B) $100 million.
C) $110 million.
D) $130 million.
44) Plutonic Inc. had $400 million in taxable income for the current year. Plutonic also had an
increase in deferred tax liabilities of $50 million and recognized tax expense of $80 million. The
company is subject to a tax rate of 40%. The change in deferred tax assets (ignoring any
valuation allowance) was a/an:
A) increase of $30 million.
B) increase of $130 million.
C) decrease of $30 million.
D) decrease of $130 million.
45) During the current year, Stern Company had pretax accounting income of $45 million.
Stern’s only temporary difference for the year was rent received for the following year in the
amount of $15 million. Stern’s taxable income for the year would be:
A) $30 million.
B) $60 million.
C) $50 million.
D) $45 million.
46) Information for Kent Corp. for the year 2018:
Reconciliation of pretax accounting income and taxable income:
Pretax accounting income
$
180,000
Permanent differences
(15,000
)
165,000
Temporary difference-depreciation
(12,000
)
Taxable income
$
153,000
Cumulative future taxable amounts all from depreciation temporary differences:
As of December 31, 2017
$
13,000
As of December 31, 2018
$
25,000
The enacted tax rate was 30% for 2017 and thereafter.
What should be the balance in Kent’s deferred tax liability account as of December 31, 2018?
A) $5,200.
B) $7,500.
C) $25,000.
D) None of these answer choices are correct.
47) Information for Kent Corp. for the year 2018:
Reconciliation of pretax accounting income and taxable income:
Pretax accounting income
$
180,000
Permanent differences
(15,000
)
165,000
Temporary difference-depreciation
(12,000
)
Taxable income
$
153,000
Cumulative future taxable amounts all from depreciation temporary differences:
As of December 31, 2017
$
13,000
As of December 31, 2018
$
25,000
The enacted tax rate was 30% for 2017 and thereafter.
What should Kent report as the current portion of its income tax expense in the year 2018?
A) $45,900.
B) $49,500.
C) $54,000.
D) None of these answer choices are correct.
48) Information for Kent Corp. for the year 2018:
Reconciliation of pretax accounting income and taxable income:
Pretax accounting income
$
180,000
Permanent differences
(15,000
)
165,000
Temporary difference-depreciation
(12,000
)
Taxable income
$
153,000
Cumulative future taxable amounts all from depreciation temporary differences:
As of December 31, 2017
$
13,000
As of December 31, 2018
$
25,000
The enacted tax rate was 30% for 2017 and thereafter.
What would Kent’s income tax expense be in the year 2018?
A) $42,300.
B) $45,900.
C) $49,500.
D) None of these answer choices are correct.
Income tax expense (to balance)
Deferred liability
*
Income tax payable ($153,000 × 30%)
*[($25,000 × 30%) – ($13,000 × 30%)]
49) Of the following temporary differences, which one ordinarily creates a deferred tax asset?
A) Completed-contract method for long-term construction contracts for tax reporting.
B) Installment sales for tax reporting.
C) Accrued warranty expense.
D) Accelerated depreciation for tax reporting.
50) Using straight-line depreciation for financial reporting purposes and MACRS for tax
purposes in the first year of an asset’s life creates a:
A) Future deductible amount.
B) Permanent difference not requiring inter-period tax allocation.
C) Deferred tax asset.
D) Deferred tax liability.
51) A deferred tax asset represents a:
A) Future income tax benefit.
B) Future cash collection.
C) Future tax refund.
D) Future amount of money to be paid out.
52) Of the following temporary differences, which one ordinarily creates a deferred tax asset?
A) Intangible drilling costs.
B) MACRS depreciation.
C) Rent received in advance.
D) Installment sales.
53) Which of the following differences between financial accounting and tax accounting
ordinarily creates a deferred tax asset?
A) Tax depreciation in excess of book depreciation.
B) Revenue collected in advance.
C) The installment sales method for tax purposes.
D) None of these answer choices are correct.
54) Which of the following creates a deferred tax asset?
A) An unrealized loss from recording investments at fair value.
B) Prepaid insurance.
C) An unrealized gain from recording investments at fair value.
D) Accelerated depreciation in the tax return.
55) Which of the following circumstances creates a future deductible amount?
A) Earning of non-taxable interest on municipal bonds.
B) Sales of property (installment method for tax purposes).
C) Prepaid advertising expense.
D) Accrued warranty expenses.
56) Estimated employee compensation expenses earned during the current period but expected to
be paid in the next period causes:
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) A magazine publisher collects one year in advance for subscription revenue. In the year of
providing the magazines to customers, the company would record:
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) In 2018, 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 2018,
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.
59) 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.
60) 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
recognized in the income statement 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.
B) Noncurrent deferred tax asset.
C) Current deferred tax liability.
D) Current deferred tax asset.
61) The valuation allowance account that is used in conjunction with deferred tax assets is a(an):
A) Liability.
B) Component of shareholders’ equity.
C) Asset.
D) Contra asset.
62) 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.
63) In 2017, HD had reported a deferred tax asset of $90 million with no valuation allowance. At
December 31, 2018, 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 2018. What
amount should HD report as income tax expense in its 2018 income statement?
A) $50 million.
B) $80 million.
C) $86 million.
D) $116 million.
64) 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 contra to the deferred tax asset and classified as noncurrent.
D) Is added to the deferred tax asset and classified as current.
65) 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.
66) 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.
67) 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.
68) Which of the following causes a permanent difference between taxable income and pretax
accounting income?
A) Investment expenses incurred to obtain tax-exempt income.
B) Unrealized gains from recording investments at fair value.
C) Rent collected in advance.
D) Prepaid expenses.
69) Which of the following would never require reporting deferred tax assets or deferred tax
liabilities?
A) Depreciation on equipment.
B) Accrual of warranty expense.
C) Life insurance premiums for the payer’s benefit.
D) Rent revenue received in advance.
70) 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.
71) Pretax accounting income for the year ended December 31, 2018, 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 2018 and 40% thereafter. What amount should Truffles report as
the current portion of income tax expense for 2018?
A) $15 million.
B) $18 million.
C) $20 million.
D) $24 million.
72) The financial reporting carrying value of Boze Music’s only depreciable asset exceeded its
tax basis by $150,000 at December 31, 2018. 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 2018 and 40% thereafter. Boze should report the deferred tax effect of this difference in
its December 31, 2018, 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.
73) 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.
74) Giada Foods reported $940 million in income before income taxes for 2018, 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 2018 was 35%, but the enacted rate for years after 2018 is
40%. The balance in the deferred tax liability in the December 31, 2018, balance sheet is:
A) $16 million.
B) $35 million.
C) $40 million.
D) $56 million.
75) 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.
76) 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) $2,600.
77) For the current year ($ 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 $35. In the absence of other
temporary or permanent differences, what was Centipede’s income tax payable currently,
assuming a tax rate of 40%?
A) 19.6 million.
B) 25.2 million.
C) 27.6 million.
D) 29.2 million.
78) For the current year ($ 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.
79) 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.
80) 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.
81) 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.
82) Assuming no other deferred tax items exist in a particular year, a net operating loss (NOL)
carryforward can only be result in the balance sheet at the end of the NOL year showing:
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.