Chapter 19—Accounting for Income Taxes Key
1. Which statement regarding the objectives of financial accounting and the Internal Revenue Code is true?
2. Differences between pretax financial income and taxable income in an accounting period that will not reverse
in a later accounting period are called
3. Differences between pretax financial accounting and taxable income that are expected to reverse in one or
more future accounting periods are called
4. Permanent differences between pretax financial income and taxable income result when
5. Which of the following would not result in a permanent difference between pretax financial income and
taxable income?
6. Which of the following is not a timing difference that would cause pretax financial accounting income to
differ from taxable income?
7. In accounting for income taxes, percentage depletion in excess of cost depletion is an example of
8. Each of the following can result in a temporary difference between pretax financial income and taxable
income except
9. The amount owed the IRS is recorded in the accounting records in which account?
10. Exhibit 19-1
On December 31, 2009, Fort Stockton, Inc. had no temporary differences that created deferred income taxes.
On January 2, 2010, a new machine was purchased for $30,000. Straight-line depreciation over a four-year life
(no residual value) was used for financial accounting. Depreciation expense for tax purposes was $11,000 in
2010, $9,000 in 2011, $6,000 in 2012, and $4,000 in 2013. In each year, the income tax rate was 20% and Fort
Stockton had no other items that created differences between pretax financial income and taxable income. Fort
Stockton reported the following pretax financial income for 2010 through 2013:
2010
$50,000
2011
40,000
2012
30,000
2013
60,000
Refer to Exhibit 19-1. The entry to record income taxes on December 31, 2011, would include a
11. Exhibit 19-1
On December 31, 2009, Fort Stockton, Inc. had no temporary differences that created deferred income taxes.
On January 2, 2010, a new machine was purchased for $30,000. Straight-line depreciation over a four-year life
(no residual value) was used for financial accounting. Depreciation expense for tax purposes was $11,000 in
2010, $9,000 in 2011, $6,000 in 2012, and $4,000 in 2013. In each year, the income tax rate was 20% and Fort
Stockton had no other items that created differences between pretax financial income and taxable income. Fort
Stockton reported the following pretax financial income for 2010 through 2013:
2010
$50,000
2011
40,000
2012
30,000
2013
60,000
Refer to Exhibit 19-1. The entry to record income taxes on December 31, 2012, would include a
12. Interperiod income tax allocation is based on the assumption that
13. In 2010, Weatherford Corporation reported pretax financial income of $400,000. Included in that pretax
financial income was $150,000 of nontaxable life insurance proceeds received as a result of the death of an
officer; $120,000 of warranty expenses accrued but unpaid as of December 31, 2010; and $10,000 of bad debts
estimated to be uncollectible (but not written off as of December 31, 2010). Assuming that no income taxes
were previously paid during the year and an income tax rate of 30%, the amount of income taxes payable on
December 31, 2010, would be
14. Which of the following transactions would typically result in the creation of a deferred tax liability?
15. Which of the following statements regarding the allocation of income taxes is not true?
16. In pushing for comprehensive allocation of income taxes, FASB argued that
17. Current GAAP requires which of the following tax allocation approaches and methods?
Approach
Method
I.
partial
asset/liability
II.
comprehensive
deferred
III.
comprehensive
asset/liability
IV.
partial
deferred
18. When Congress changes the tax laws or rates, a corporation’s deferred tax liability and asset accounts
19. The asset/liability method of tax allocation should be followed for
Interperiod Income
Tax Allocation
I.
Yes
II.
No
III.
Yes
IV.
No
20. Assuming there are no prior period adjustments during the fiscal year, net income would be affected by
Interperiod Income
Tax Allocation
I.
Yes
II.
No
III.
Yes
IV.
No
21. The interperiod tax allocation method that is balance-sheet oriented, reports deferred taxes based on the
future enacted tax rates, and more closely meets the conceptual definitions of assets and liabilities established
by the FASB is the
22. The Clear Lake Corporation reported the following differences between its taxable income and pretax
financial income for the year ended December 31, 2010: $30,000 of additional depreciation for tax purposes,
$40,000 of rent collected in advance (taxable when received), and $38,000 of tax-exempt municipal interest
revenue. Assuming an income tax rate of 30% for all years and a taxable income of $190,000 for the year ended
December 31, 2010, income tax expense for 2010 would be
23. Langtry Corporation began operations in 2009 and appropriately recorded a deferred tax liability at the end
of 2009 and 2010 based on the following depreciation temporary differences between pretax financial income
and taxable income:
Income Tax
Financial
Year
Depreciation
Depreciation
2009
$800
$400
2010
600
400
2011
400
400
2012
200
400
2013
0
400
The income tax rate for 2009 and 2010 was 30%. In February 2011, due to budget constraints, Congress enacted an income tax rate of 35%. The
journal entry required to adjust the Deferred Tax Liability account in February 2011 would be
24. Which of the following statements regarding current and deferred income taxes is not correct?
25. All of the following involve a temporary difference for purposes of income tax allocation except
26. All of the following involve a temporary difference for purposes of income tax allocation except
27. Interperiod tax allocation is required for all of the following situations except
28. Which one of the following would require interperiod tax allocation?
29. Life insurance proceeds payable to a corporation upon the death of an insured employee are an example of
30. Temporary differences arise when revenues or gains are included in pretax financial income
Prior to the Time
After the Time
They Are Included in
They Are Included
Taxable Income
in Taxable Income
I.
Yes
Yes
II.
Yes
No
III.
No
Yes
IV.
No
No
31. Temporary differences arise when expenses or losses are deducted to compute taxable income
Prior to the Time They
After the Time They Are
Are Deducted to Compute
Deducted to Compute
Pretax Financial Income
Pretax Financial Income
I.
Yes
Yes
II.
No
Yes
III.
Yes
No
IV.
No
No
32. Permanent differences impact
33. For the year ended December 31, 2010, the Huntsville Company reported income of $350,000 before
provision for income tax. In arriving at taxable income for income tax purposes, the following differences were
identified:
Bad debt expense (but not written off)
$ 8,000
Depreciation deducted for tax purposes in excess of
depreciation for accounting purposes
50,000
Income for installment sales reportable for income tax
purposes in excess of income reported for financial
reporting purposes
30,000
Assuming a corporate income tax rate of 30%, Huntsville’s current income tax liability as of December 31, 2010, is
34. All of the following are conclusions reached by the FASB regarding accounting for deferred taxes except
35. In 2010, the San Marcos Company received insurance proceeds of $300,000 payable upon the death of its
previous top executive officer. For financial reporting purposes, San Marcos included the $300,000 in pretax
accounting income. The life insurance proceeds are exempt from income taxes. Assuming an income tax rate of
30%, what should be reported as deferred income taxes in the 2010 income statement of San Marcos for this
event?
36. Duncanville Company appropriately uses the installment sales method for tax purposes and the accrual
method for revenue recognition for accounting purposes. Pertinent data at December 31, 2010, the close of the
first year of operations, are as follows:
Revenue Recognized
Revenue Recognized
Customer
for Accounting Purposes
for Tax Purposes
Ace’s Builders
$200,000
$100,000
Tip Top Plumbing
500,000
350,000
Clearly Windows
600,000
350,000
Duncanville’s tax rate is 30%. What amount should be included in the deferred tax account at December 31, 2010 for these installment sales?
37. The Alamo Heights Company installs sprinkler systems for large manufacturing enterprises and golf
courses. Due to the design of their systems, some projects frequently extend over a two-year period. Alamo
Heights uses the percentage-of-completion method for financial accounting purposes and the
completed-contract method for tax purposes. As of December 31, 2010, all projects were completed. The
following information relates to projects started but not completed as of December 31, 2011:
Income Recognized in 2011
Customer
Contract Amount
for Accounting Purposes
The Quarry Golf Course
$150,000
$ 0
Northern Hills Golf Course
200,000
80,000
Brackenridge Golf Course
300,000
220,000
Assuming an income tax rate of 30%, what amount should be included in the deferred tax liability account at December 31, 2011?
38. Sherman Company uses an accelerated depreciation method for income tax purposes and the straight-line
depreciation method for financial reporting purposes. As of December 31, 2010, Sherman has a deferred tax
liability balance related to depreciation temporary differences of $80,000. In 2011, depreciation for income tax
purposes was $260,000, while depreciation for financial reporting purposes was $200,000. If the income tax
rate is 30%, no other temporary or permanent differences exist, and taxable income is $300,000, the entry to
record income tax expense on December 31, 2011, would include a
39. In 2010, its first year of operations, Bandera Corporation reported pretax financial income of $80,000 for
the year ended December 31. Bandera depreciates its fixed assets using an accelerated cost recovery method for
tax purposes and straight-line depreciation for financial reporting. On assets acquired in 2010, the following are
differences between depreciation on the tax return and accounting income during the asset’s five-year life:
Tax Depreciation in Excess
Enacted
of Book Depreciation
Tax Rates
2010
$18,000
30%
2011
10,000
30%
2012
2,000
35%
2013
(13,000)
35%
2014
(17,000)
40%
Assuming no other temporary or permanent differences, Bandera’s December 31, 2010 balance sheet should include
Noncurrent Deferred
Income Taxes
Income Tax Liability
Payable
I.
$5,400
$18,600
II.
$7,650
$18,600
III.
$7,650
$29,400
IV.
$5,400
$24,000
40. During its first year of operations ending on December 31, 2010, the Laredo Company reported pretax
accounting income of $600,000. The only difference between taxable income and accounting income was
$80,000 of accrued warranty costs. These warranty costs are expected to be paid as follows:
Enacted
Year
Amount
Tax Rate
2010
$ 0
30%
2011
60,000
35%
2012
20,000
40%
Assuming an income tax rate of 30% in 2010, Laredo should report income tax expense on its 2010 income statement in the amount of
41. On January 1, 2010, Bedford Company began recognizing revenues from all sales under the accrual method
for financial reporting purposes and under the installment sales method for income tax purposes. Bedford
reported the following gross margin on sales for 2010 and 2011:
Accrual
Installment
Year
Method
Sales Method
2010
$1,200,000
$1,000,000
2011
1,800,000
1,400,000
The enacted tax rate for both 2010 and 2011 was 30%. Assuming there are no other temporary differences, Bedford’s December 31, 2011 balance
42. Boerne Company received rent in advance of $9,000 on December 31, 2010, which was taxable when
received for income tax purposes. The company’s effective tax rate was 30%, and this was the only temporary
difference. Which of the following should be reported on the December 31, 2010 balance sheet?
43. In 2010, its first year of operations, Wichita Falls Company reported pretax accounting income of $60,000.
Included in the $60,000 was an expense for accrued, unpaid warranty costs of $8,000, which are not deductible
until paid for income tax purposes. Wichita Falls’ income tax rate was 20%. The entry to record the income tax
expense would include a
44. As of December 31, 2010, the Austin Company reported a deferred tax asset of $60,000 related to accrued,
unpaid warranty costs. However, since profits have been declining, Austin decides that it is more likely than not
that $24,000 of the deferred tax asset will not be realized. The entry to record the valuation allowance would
include a
45. Which one of the following requires interperiod tax allocation?
46. A deferred tax asset would result if
47. Revenue from installment sales is recognized in the period received for tax purposes and recognized in the
period earned for accounting purposes. If these periods are different, this is an example of a
48. The Channelview Company incurred the following expenses in 2010, which are reported differently for
financial reporting purposes and taxable income:
Estimate of bad debts expense (but not written off)
$40,000
Estimated product warranty costs (but not paid)
20,000
If the tax rate is 40%, the total temporary difference is
49. Examples of positive evidence cited by the FASB to indicate that a valuation allowance for the tax benefits
from a deferred tax asset is not needed include all of the following except
50. An operating loss carryforward occurs when
51. Which one of the following statements regarding operating losses is not true?
52. When accounting for the current impact of loss carrybacks and carryforwards it is proper to
53. At the end of its first year of operations on December 31, 2010, the Belton Company reported taxable
income of $100,000 and had a pretax financial loss of $60,000. Differences between taxable income and pretax
financial income included interest revenue received from municipal obligations of $20,000 and warranty
expense accruals of $180,000. Warranty expenses of $90,000 are expected to be paid in 2011 and $110,000 in
2012. The enacted income tax rates for 2010, 2011, and 2012 are 30%, 35%, and 40%, respectively. The journal
entry to record income tax expense on December 31, 2010, would be
54. During its first year of operations, 2010, the Hico Company reported both a pretax financial and a taxable
loss of $200,000. The income tax rate is 30% for the current and future years. Due to a sufficient backlog of
sales orders, Hico did not establish a valuation allowance to reduce the $60,000 deferred tax asset. However,
early in 2011, one major customer, representing 60% of the 2011 year-end sales backlog, went bankrupt. Hico
now believes that it is more likely than not that 70% of the deferred tax asset will not be realized. The entry to
record the valuation allowance would be