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Exam 3: Taxes on the Financial Statements

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Question 1

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Gravel,Inc. ,earns book net income before tax of $600,000.Gravel puts into service a depreciable asset this year,and first year tax depreciation exceeds book depreciation by $120,000.Gravel has recorded no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35%,what is Gravel's current income tax expense reported on its GAAP financial statements?

A) $252,000
B) $210,000
C) $168,000
D) $42,000

E) A) and B)
F) B) and C)

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Question 2

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Which of the following items are not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?

A) Hypothetical tax on book income at U.S.Federal corporate tax rate.
B) Total tax expense per the GAAP financial statements.
C) Tax effect of temporary differences.
D) Tax effect of permanent differences.

E) A) and C)
F) B) and C)

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Question 3

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Clipp,Inc. ,earns book net income before tax of $600,000.Clipp puts into service a depreciable asset this year,and first year tax depreciation exceeds book depreciation by $120,000.Clipp has recorded no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35%,what is Clipp's deferred income tax liability reported on its GAAP financial statements?

Which of the following items is not included in the income tax footnote for a publicly traded company?

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

South,Inc. ,earns book net income before tax of $400,000 in year 1.South acquires a depreciable asset in year 1,and first year tax depreciation exceeds book depreciation by $50,000.At the end of year 1,South's deferred tax liability account balance is $17,500.In year 2,South earns $500,000 book net income before tax,and its book depreciation exceeds tax depreciation by $20,000.South records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35%,what is South's balance in its deferred tax liability account at the end of year 2?

Bryden Corporation is considering two tax planning strategies.Both would produce a $1 million tax savings.One of the strategies would structure the plan so that the $1 million would represent a temporary book-tax difference,while the other would generate a permanent difference.In general,which plan would the Bryden CFO prefer? A stock analyst reviewing the Bryden valuation?

Which of the following taxes are included in the total income tax liability of a corporation reported on its Federal tax return?

Placard,a multinational corporation based in the U.S. ,has used ASC 740-30 (APB 23)to avoid reporting any U.S.deferred tax expense on $50 million of the earnings of its foreign subsidiaries.All of these subsidiaries operate in countries with lower tax rates than those of the U.S.When the profits eventually are repatriated,how is Placard's effective tax rate affected on its GAAP financial statements?

South,Inc. ,earns book net income before tax of $400,000 in year 1.South acquires a depreciable asset in year 1,and first year tax depreciation exceeds book depreciation by $50,000.At the end of year 1,South's deferred tax liability account balance is $17,500.In year 2,South earns $500,000 book net income before tax,and its book depreciation exceeds tax depreciation by $20,000.South records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35%,what is South's current income tax expense reported on its GAAP financial statements for year 2?

Hot,Inc.'s primary competitor is Cold,Inc.When comparing relative deferred tax asset and liability accounts with Cold,which of the following benchmarking activities should Hot undertake?

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23)benefits were previously adopted will decrease a corporation's current year effective tax rate.

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

A valuation allowance reflects uncertainty that the taxpayer will be able to recover a deferred tax asset.

If a valuation allowance is decreased (released)in the current year,the corporation's effective tax rate is lower than if the valuation allowance had not increased.

"Temporary differences" are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return,but not in the same reporting period.

Qute,Inc. ,earns book net income before tax of $500,000.In computing its book income,Qute deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes.Qute records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35% and no valuation allowance is required,what is Qute's total income tax expense reported on its GAAP financial statements?

The Jacobsen Corporation has determined the appropriate changes to its deferred tax accounts.The Jacobsen auditor now is discussing whether to place a valuation allowance against the deferred tax asset on the balance sheet.List some of the factors that the Jacobsen auditor will consider in this regard.

The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.

ASC 740 (FIN 48)addresses how an entity should report uncertain tax positions in their financial statements.