Accounting for Income Taxes
19 – 21
80. At the end of 2015, which of the following deferred tax accounts and balances is reported
on Rowen, Inc.’s balance sheet?
Account _ Balance
a. Deferred tax asset $25,600
b. Deferred tax liability $25,600
c. Deferred tax asset $41,600
d. Deferred tax liability $41,600
81. Based on the following information, compute 2015 taxable income for South Co. assuming
that its pre-tax accounting income for the year ended December 31, 2015 is $345,000.
Future taxable
Temporary difference (deductible) amount
Installment sales
$288,000
Depreciation
$ 90,000
Unearned rent
($300,000)
a. $423,000
b. $267,000
c. $723,000
d. $333,000
82. Fleming Company has the following cumulative taxable temporary differences:
12/31/15 12/31/14
$1,280,000 $1,800,000
The tax rate enacted for 2015 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2015 is $3,200,000 and there are no permanent differences.
Fleming’s pretax financial income for 2015 is:
a. $1,920,000
b. $2,680,000
c. $3,460,000
d. $4,480,000
83. Larsen Corporation reported $100,000 in revenues in its 2014 financial statements, of
which $33,000 will not be included in the tax return until 2015. The enacted tax rate is
40% for 2014 and 35% for 2015. What amount should Larsen report for deferred income
tax liability in its balance sheet at December 31, 2014?
a. $11,550
b. $13,200
c. $14,700
d. $16,800
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 22
84. Duncan Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment method of accounting for income tax purposes. Profits
of $600,000 recognized for books in 2014 will be collected in the following years:
Collection of Profits
2015 $100,000
2016 $200,000
2017 $300,000
The enacted tax rates are: 40% for 2014, 35% for 2015, and 30% for 2016 and 2017.
Taxable income is expected in all future years. What amount should be included in the
December 31, 2014, balance sheet for the deferred tax liability related to the above
temporary difference?
a. $ 35,000
b. $150,000
c. $185,000
d. $240,000
85. At December 31, 2014 Raymond Corporation reported a deferred tax liability of $180,000
which was attributable to a taxable type temporary difference of $600,000. The temporary
difference is scheduled to reverse in 2018. During 2015, a new tax law increased the
corporate tax rate from 30% to 40%. Raymond should record this change by debiting
a. Retained Earnings for $60,000.
b. Retained Earnings for $18,000.
c. Income Tax Expense for $18,000.
d. Income Tax Expense for $60,000.
86. Palmer Co. had a deferred tax liability balance due to a temporary difference at the
beginning of 2014 related to $900,000 of excess depreciation. In December of 2014, a
new income tax act is signed into law that lowers the corporate rate from 40% to 35%,
effective January 1, 2016. If taxable amounts related to the temporary difference are
scheduled to be reversed by $450,000 for both 2015 and 2016, Palmer should increase or
decrease deferred tax liability by what amount?
a. Decrease by $45,000
b. Decrease by $22,500
c. Increase by $22,500
d. Increase by $45,000
87. A reconciliation of Gentry Company’s pretax accounting income with its taxable income for
2014, its first year of operations, is as follows:
Pretax accounting income $3,000,000
Excess tax depreciation (150,000)
Taxable income $2,850,000
The excess tax depreciation will result in equal net taxable amounts in each of the next
three years. Enacted tax rates are 40% in 2014, 35% in 2015 and 2016, and 30% in 2017.
The total deferred tax liability to be reported on Gentry’s balance sheet at December 31,
2014, is
a. $60,000.
b. $50,000.
c. $52,500.
d. $45,000.
Accounting for Income Taxes
19 – 23
88. Khan, Inc. reports a taxable and financial loss of $1,950,000 for 2015. Its pretax financial
income for the last two years was as follows:
2013 $900,000
2014 1,200,000
The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2015,
assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods
affected, is
a. $1,950,000 loss.
b. $ -0-.
c. $585,000 loss.
d. $1,365,000 loss.
Use the following information for questions 89 and 90.
Wilcox Corporation reported the following results for its first three years of operation:
2014 income (before income taxes) $ 200,000
2015 loss (before income taxes) (1,800,000)
2016 income (before income taxes) 2,000,000
There were no permanent or temporary differences during these three years. Assume a corporate
tax rate of 30% for 2014 and 2015, and 40% for 2016.
89. Assuming that Wilcox elects to use the carryback provision, what income (loss) is reported
in 2015? (Assume that any deferred tax asset recognized is more likely than not to be
realized.)
a. $(1,800,000)
b. $ -0-
c. $(1,740,000)
d. $(1,100,000)
90. Assuming that Wilcox elects to use the carryforward provision and not the carryback
provision, what income (loss) is reported in 2015?
a. $(1,800,000)
b. $(1,080,000)
c. $ -0-
d. $(1,740,000)
91. Rodd Co. reports a taxable and pretax financial loss of $800,000 for 2015. Rodd’s taxable
and pretax financial income and tax rates for the last two years were:
2013 $800,000 30%
2014 800,000 35%
The amount that Rodd should report as an income tax refund receivable in 2015,
assuming that it uses the carryback provisions and that the tax rate is 40% in 2015, is
a. $240,000.
b. $280,000.
c. $320,000.
d. $360,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 24
92. Nickerson Corporation began operations in 2013. There have been no permanent or
temporary differences to account for since the inception of the business. The following
data are available:
Year
2013
2014
2015
2016
Enacted Tax Rate
45%
40%
35%
30%
Taxable Income
$1,500,000
1,800,000
In 2015, Nickerson had an operating loss of $1,860,000. What amount of income tax
benefits should be reported on the 2015 income statement due to this loss assuming that
it uses the carryback provision?
a. $819,000
b. $747,000
c. $744,000
d. $558,000
Use the following information for questions 93 and 94.
Operating income and tax rates for C.J. Company’s first three years of operations were as
follows:
Income _ Enacted tax rate
2014 $300,000 35%
2015 ($750,000) 30%
2016 $1,260,000 40%
93. Assuming that C.J. Company opts to carryback its 2015 NOL, what is the amount of
income taxes payable at December 31, 2016?
a. $204,000
b. $504,000
c. $369,000
d. $324,000
94. Assuming that C.J. Company opts only to carryforward its 2015 NOL, what is the amount
of deferred tax asset or liability that C.J. Company would report on its December 31, 2015
balance sheet?
Amount _ Deferred tax asset or liability
a. $225,000 Deferred tax liability
b. $262,500 Deferred tax liability
c. $300,000 Deferred tax asset
d. $225,000 Deferred tax asset
Accounting for Income Taxes
19 – 25
Multiple Choice Answers—Computational
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE—CPA Adapted
95. Munoz Corp.’s books showed pretax financial income of $2,700,000 for the year ended
December 31, 2015. In the computation of federal income taxes, the following data were
considered:
Gain on an involuntary conversion $1,170,000
(Munoz has elected to replace the property within the statutory
period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation
deducted for book purposes 180,000
Federal estimated tax payments, 2015 225,000
Enacted federal tax rate, 2015 30%
What amount should Munoz report as its current federal income tax liability on its
December 31, 2015 balance sheet?
a. $180,000
b. $234,000
c. $405,000
d. $459,000
96. Haag Corp.’s 2015 income statement showed pretax accounting income of $1,500,000.
To compute the federal income tax liability, the following 2015 data are provided:
Income from exempt municipal bonds $ 60,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 120,000
Estimated federal income tax payments made 300,000
Enacted corporate income tax rate 30%
What amount of current federal income tax liability should be included in Hagg’s
December 31, 2015 balance sheet?
a. $ 96,000
b. $132,000
c. $150,000
d. $396,000
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 26
97. On January 1, 2015, Gore, Inc. purchased a machine for $1,350,000 which will be
depreciated $135,000 per year for financial statement reporting purposes. For income tax
reporting, Gore elected to expense $150,000 and to use straight-line depreciation which
will allow a cost recovery deduction of $120,000 for 2015. Assume a present and future
enacted income tax rate of 30%. What amount should be added to Gore’s deferred
income tax liability for this temporary difference at December 31, 2015?
a. $81,000
b. $45,000
c. $40,500
d. $36,000
98. On January 1, 2015, Piper Corp. purchased 40% of the voting common stock of Betz, Inc.
and appropriately accounts for its investment by the equity method. During 2015, Betz
reported earnings of $720,000 and paid dividends of $240,000. Piper assumes that all of
Betz’s undistributed earnings will be distributed as dividends in future periods when the
enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper’s current
enacted income tax rate is 25%. The increase in Piper’s deferred income tax liability for
this temporary difference is
a. $144,000.
b. $120,000.
c. $ 86,400.
d. $ 57,600.
99. Foltz Corp.’s 2014 income statement had pretax financial income of $250,000 in its first
year of operations. Foltz uses an accelerated cost recovery method on its tax return and
straight-line depreciation for financial reporting. The differences between the book and tax
deductions for depreciation over the five-year life of the assets acquired in 2014, and the
enacted tax rates for 2014 to 2018 are as follows:
Book Over (Under) Tax Tax Rates
2014 $(50,000) 35%
2015 (65,000) 30%
2016 (15,000) 30%
2017 60,000 30%
2018 70,000 30%
There are no other temporary differences. In Foltz’s December 31, 2014 balance sheet, the
noncurrent deferred income tax liability and the income taxes currently payable should be
Noncurrent Deferred Income Taxes
Income Tax Liability Currently Payable
a. $39,000 $50,000
b. $39,000 $70,000
c. $15,000 $60,000
d. $15,000 $70,000
Accounting for Income Taxes
19 – 27
100. Didde Corp. prepared the following reconciliation of income per books with income per tax
return for the year ended December 31, 2015:
Book income before income taxes $1,800,000
Add temporary difference
Construction contract revenue which will reverse in 2016 160,000
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years (640,000)
Taxable income $1,320,000
Didde’s effective income tax rate is 34% for 2015. What amount should Didde report in its
2015 income statement as the current provision for income taxes?
a. $ 54,400
b. $448,800
c. $612,000
d. $666,400
101. In its 2014 income statement, Cohen Corp. reported depreciation of $1,850,000 and interest
revenue on municipal obligations of $350,000. Cohen reported depreciation of $2,750,000
on its 2014 income tax return. The difference in depreciation is the only temporary
difference, and it will reverse equally over the next three years. Cohen’s enacted income tax
rates are 35% for 2014, 30% for 2015, and 25% for 2016 and 2017. What amount should be
included in the deferred income tax liability in Hertz‘s December 31, 2014 balance sheet?
a. $240,000
b. $310,000
c. $375,000
d. $437,500
102. Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment method of accounting for income tax purposes.
Installment income of $1,800,000 will be collected in the following years when the enacted
tax rates are:
Collection of Income Enacted Tax Rates
2014 $180,000 35%
2015 360,000 30%
2016 540,000 30%
2017 720,000 25%
The installment income is Dunn‘s only temporary difference. What amount should be
included in the deferred income tax liability in Dunn’s December 31, 2015 balance sheet?
a. $450,000
b. $513,000
c. $567,000
d. $630,000
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 28
103. For calendar year 2014, Kane Corp. reported depreciation of $1,200,000 in its income
statement. On its 2014 income tax return, Kane reported depreciation of $1,800,000.
Kane’s income statement also included $225,000 accrued warranty expense that will be
deducted for tax purposes when paid. Kane’s enacted tax rates are 30% for 2014 and
2015, and 24% for 2016 and 2017. The depreciation difference and warranty expense will
reverse over the next three years as follows:
Depreciation Difference Warranty Expense
2015 $240,000 $ 45,000
2016 210,000 75,000
2017 150,000 105,000
$600,000 $225,000
These were Kane’s only temporary differences. In Kane’s 2014 income statement, the
deferred portion of its provision for income taxes should be
a. $200,700.
b. $112,500.
c. $101,700.
d. $109,800.
104. Wright Co., organized on January 2, 2014, had pretax accounting income of $640,000 and
taxable income of $2,080,000 for the year ended December 31, 2014 The only temporary
difference is accrued product warranty costs which are expected to be paid as follows:
2015 $480,000
2016 240,000
2017 240,000
2018 480,000
The enacted income tax rates are 35% for 2014, 30% for 2015 through 2017, and 25% for
2018. If Wright expects taxable income in future years, the deferred tax asset in Wright’s
December 31, 2014 balance sheet should be
a. $288,000.
b. $336,000.
c. $408,000.
d. $504,000.
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Accounting for Income Taxes
19 – 29
DERIVATIONS — Computational
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 30
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Accounting for Income Taxes
19 – 31
DERIVATIONS — CPA Adapted
No. Answer Derivation
BRIEF EXERCISES
BE. 19-105—Computation of taxable income.
The records for Bosch Co. show this data for 2015:
• Gross profit on installment sales recorded on the books was $420,000. Gross profit from
collections of installment receivables was $280,000.
• Life insurance on officers was $3,800.
• Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year
life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Bosch
may deduct 14% for 2015.
• Interest received on tax exempt Iowa State bonds was $9,000.
• The estimated warranty liability related to 2015 sales was $21,600. Repair costs under
warranties during 2015 were $13,600. The remainder will be incurred in 2016.
• Pretax financial income is $600,000. The tax rate is 30%.
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 32
BE. 19-105 (cont.)
Instructions
(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2015.
Solution 19-105
BE. 19-106—Future taxable and deductible amounts.
Define temporary differences, future taxable amounts, and future deductible amounts.
Solution 19-106
BE. 19-107—Deferred income taxes.
Pole Co. at the end of 2015, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income $ 420,000
Extra depreciation taken for tax purposes (1,050,000)
Estimated expenses deductible for taxes when paid 890,000
Taxable income $ 260,000
Accounting for Income Taxes
19 – 33
BE. 19-107 (cont.)
Use of the depreciable assets will result in taxable amounts of $350,000 in each of the next three
years. The estimated litigation expenses of $890,000 will be deductible in 2018 when settlement
is expected.
Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes
payable for 2015, assuming a tax rate of 40% for all years.
Solution 19-107
EXERCISES
Ex. 19-108—Deferred income taxes.
Hunt Co. at the end of 2015, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income $ 750,000
Estimated warranty expenses deductible for taxes when paid 1,200,000
Extra depreciation (1,650,000)
Taxable income $ 300,000
Estimated warranty expense of $800,000 will be deductible in 2016, $300,000 in 2017, and
$100,000 in 2018. The use of the depreciable assets will result in taxable amounts of $550,000 in
each of the next three years.
Instructions
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2015, assuming an income tax rate of 40% for all years.
Solution 19-108