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Exam 16: Accounting for Income Taxes

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Question 31

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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.

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Question 32

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Typical Corp. reported a deferred tax liability of $6,000,000 for the year ended December 31, 2017, when the tax rate was 40%. The deferred tax liability was related to a temporary difference of $15,000,000 caused by an installment sale in 2017. The temporary difference is expected to reverse in 2019 when the income deferred from taxation will become taxable. There are no other temporary differences. Assume a new tax law passed in 2018 and the tax rate, which will remain at 40% through December 31, 2018, will become 48% for tax years beginning after December 31, 2018. Pretax accounting income and taxable income for the year 2018 is $30,000,000. -Prepare two disclosure notes for Typical's year 2018 financial statements to: (a.) Show the composition of Typical's income tax expense for the year. (b.) Explain the classification and description of the deferred tax liability. Give supporting computations to show how you arrived at the dollar amounts disclosed in your disclosure notes.

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Question 33

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Information for Hobson Corp. for the current year ($ in millions) : The applicable enacted tax rate for all periods is 40%. - What is Hobson's income tax payable for the current year?

Before considering a net operating loss carryforward of $80 million, Fama Corporation reported $200 million of pretax accounting and taxable income in the current year. The income tax rate for all previous years was 40%. On January 1 of the current year, a new tax law was enacted, reducing the rate to 30% effective immediately. Fama's income tax payable for the current year would be:

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:

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?

Financial statement disclosure of the components of income tax expense:

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. -Interest earned on investments in state and local government bonds.

What disclosures for deferred taxes, pertaining to the income statement, are required by GAAP regarding accounting for income taxes?

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars) : The applicable tax rate is 40%. There are no other temporary or permanent differences. -Franklin Freightways experienced ($ in millions) a:

Cabot Company reported a pretax operating loss of $50,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40% for 2018 and subsequent years. Assume that Cabot requests a refund of taxes already paid by electing a loss carryback. Taxable income, tax rates, and income taxes paid in Cabot's first four years of operations were as follows: $\begin{array}{rrrc} & \begin{array}{c}\text { Taxable } \\\text { income }\end{array} & \begin{array}{c}\text { Tax } \\\text { rates }\end{array} & \begin{array}{c}\text { Taxes } \\\text { paid }\end{array} \\2014 & \$ 30,000& 30 \% & \$ 9,000 \\2015 & 35,000 & 30 \% & 10,50 \\2016 & 42,00 0 & 35 \% & 14,70 \\2017 & 40,000 & 40 \% & 16,00\end{array}$ Required: 1.) Prepare the journal entry to record Cabot's income taxes for the year 2018. Show well-labeled computations. 2.) Compute Cabot's net loss for 2018.

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

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:

The information below pertains to Mondavi Corporation: (a.) For the current year temporary differences existed between the financial statement carrying amounts and the tax basis of the following: (b.) No temporary differences existed at the beginning of the year. (c.) Pretax accounting income was $300,000,000 and taxable income was $120,000,000 for the year and the tax rate is 40%. Required: Prepare one journal entry to record the tax provision for the current year. Provide supporting computations.

A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as current to the extent that the NOL will be recovered in the following year.

Of the following temporary differences, which one ordinarily creates a deferred tax asset?

Future taxable amounts result in deferred tax assets.

Which of the following causes a permanent difference between taxable income and pretax accounting income?

Changes in enacted tax rates only affect income tax expense in the years those changes affect tax payable.

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. -Permanent difference