Practice Problems-income Tax ing 402f3

Smith Company (1-3) reported $350,000 in income before income tax for book (GAAP) purposes in 2010, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2010 and all future years was 40%. Assume depreciation expense is the only difference between GAAP I/S and Tax I/S. 1. What amount of deferred income tax liability should Smith report in its December 31, 2010, balance sheet? $ 12,000 2. What amount of income taxes payable (i.e., current tax expense) should Smith report in its December 31, 2010, balance sheet? $128,000 3. Income tax expense reported on the income statement would be? $140,000.

Taylor Company (4-5) began manufacturing operations on January 2, 2010. In 2010 Taylor earned a pretax book income of $150,000 and had taxable income of $200,000. Taylor had a temporary difference relating to accrued product warranty costs that are expected to be paid as follows: 2011 $ 30,000 2012 $ 15,000 2013 $ 5,000 The enacted tax rates are 30% for 2010 - 2013. 4. The income tax payable at the end of 2010 is ( $60,000 5. Income tax expense for 2010 is ( $45,000

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6. During 2009, a company reported an increase in the deferred tax liability of $77,990, an increase in the deferred tax asset of $35,325, and an income tax payable liability as per the 2009 income tax return of $398,555. What is the income tax expense to be reported on the income statement for the year ending December 31, 2009? A. $398,555 B. $441,220 C. $511,870 D. $285,555 7. During 2009, a company reported an increase in the deferred tax liability of $47,790, a decrease in the deferred tax asset of $17,225, and an income tax payable liability as per the 2009 income tax return of $198,375. What is the income tax expense to be reported on the income statement for the year ending December 31, 2009? A. $263,390 B. $228,940 C. $167,810 D. $198,375

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8. During its first year of operations a company recorded revenues totaling $6,000,000 for book purposes. For tax purposes, $2,400,000 of the revenue is taxable during the first year of operations and $3,600,000 is taxable during the second year of operations. The income tax rate for both years is 40%. The balance sheet at the end of the first year of operations will report a deferred tax liability of A. $2,400,000 B. $1,440,000 C. $ 960,000 D. $ 480,000 $3,600,000 x 40% = $1,440,000 9. During its first year of operations a company recorded accrued expenses totaling $250,000 for book purposes in its income statement. For tax purposes, $100,000 of the expenses are deductible during the first year of operations and $150,000 are deductible during the second year of operations. The income tax rate for both years is 45%. The balance sheet at the end of the first year of operations will report a deferred tax A. asset of $67,500. B. liability of $67,500. C. liability of $45,000. D. asset of $100,000. $150,000 X 45% = $67,500 10. During its first year of operations a company recorded accrued expenses totaling $375,000 for book purposes in its income statement. For tax purposes, $175,000 of the expenses are deductible during the first year of operations and $200,000 are deductible during the second year of operations. Assume income tax rate of 40% for both years. The balance sheet at the end of the first year of operations will report a deferred tax A. asset of $70,000. B. liability of $70,000. C. liability of $80,000. D. asset of $80,000. $200,000 X 40% = $80,000 11. During 2008, its first year of operations, a company recorded depreciation expense of $50,000 for book purposes. For tax purposes during 2008, $100,000 of depreciation expense was deducted. The temporary difference created during 2008 will reverse equally during 2009 and 2010. Book income from operations during the first year was $570,000. The income tax rate is 40%. The income tax expense to be reported in the income statement for the first year of operations is A. $228,000.

B. $208,000.

C. $248,000.

D. $188,000.

Income tax exp = current tax payable + increase in DTL – increase in DTA = ($570,000-$50,000)*40% + $50,000*40%

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12. Deferred taxes arise due to temporary timing differences in recognizing items for tax and financial reporting purposes. TRUE

13. If a company depreciates an asset at a faster rate for tax purposes than for financial reporting purposes this will give rise to a deferred tax liability. TRUE

14. A deferred tax liability imposes an obligation on the business to pay taxes. FALSE

15. Some items appear on a company's income statement but never appear on its tax return. TRUE 16. The 2008 annual report of Dow Chemical disclosed the following: Deferred tax assets increased by $1,205 million and deferred tax liabilities decreased by $726 milliion. How do these changes affect tax expense for the year? Dow’s increase in deferred tax assets and decrease in deferred tax liabilities, both decrease tax expense for the year by $1,931 million ( $1,205 million + $726 million = $ 1,931 million decrease in tax expense).

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