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Exam 16: Accounting for Income Taxes

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Question 61

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Pocus Inc. reports bad debt expense using the allowance method. For tax purposes the direct write-off method is used. At the end of the current year, Pocus has accounts receivable and an allowance for uncollectible accounts of $10,000,000 and $500,000, respectively, 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 bad debts, 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.

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Question 62

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At December 31, 2009, the account balances of HD Services showed income taxes payable of $80 million and a deferred tax asset of $120 million before assessing the need for a valuation allowance. In 2008, HD had reported a deferred tax asset of $90 million with no valuation allowance. 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 2009. What amount should HD report as income tax expense in its 2009 income statement?

A) $50 million.
B) $80 million.
C) $86 million.
D) $116 million.The tax expense of $80 million is adjusted for two items.(1) it is reduced by the $30 million increase in the deferred tax asset, and (2) it is increased by the $36 million increase in the valuation allowance (30% $120 million) .

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Question 63

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At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A footnote 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:

For its first year of operations Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%. What should Tringali report as its deferred income tax liability as of the end of its first year of operations?

A deferred tax asset represents the tax effect of the temporary difference between the financial carrying value of an asset or liability and its tax basis.

A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record:

For its first year of operations Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%. Assume that no estimated taxes have been paid. What should Tringali report as income tax payable for its first year of operations?

Which of the following would never require reporting deferred tax assets or deferred tax liabilities?

Theodore Enterprises had the following pretax income (loss) over its first three years of operations: For each year there were no deferred income taxes and the tax rate was 30%. In its 2008 tax return, Theodore elected a loss carryback. No valuation account was deemed necessary for the deferred tax asset as of December 31, 2008. What was Theodore's income tax expense for 2009?

Indicate why LMC lists Net operating loss carryforwards as a component of deferred tax assets.

A reconciliation of pretax financial statement income to taxable income is shown below for See Shipping for the year ended December 31, 2009, its first year of operations. The income tax rate is 40%. What amount should See report as a current item related to deferred income taxes in its 2009 balance sheet?

What should Hobson International report as income from continuing operations?

In 2009, 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 2007 when the tax rate was 40%. Bodily's income tax payable for 2009 would be

A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31, 2009, its first year of operations. The income tax rate is 40%. What amount(s) should Fieval report related to deferred income taxes in its 2009 balance sheet?

Will LMC report $819.9 million as a liability in its balance sheet at December 31, 2009? Explain.

A temporary difference originates in one period and reverses, or turns around, in one or more later periods.

What is a valuation allowance for deferred tax assets and when is it used?

Estimate the effective tax rate for Black Inc. in 2009. Why is it different than the 35% federal statutory rate?

At the end of the prior year, Doubtful Inc. had a deferred tax asset of $20,000,000 attributable to its only timing difference, a temporary difference of $50,000,000 in a liability for estimated expenses. At that time a valuation allowance of $4,000,000 was established. At the end of the current year, the temporary difference is $45,000,000, and Doubtful determines that the balance in the valuation account should now be $5,000,000. Taxable income is $15,000,000 and the tax rate is 40% for all years. Required: Prepare journal entries to record Doubtful's income tax expense for the current year. Show well-labeled supporting computations for the income tax payable, the valuation allowance, and the change in the deferred tax asset account.

Future taxable amounts result in deferred tax assets.