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Exam 3: Taxation on the Financial Statements

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Question 51

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After applying the balance sheet method to determine the GAAP income tax expense of Cutter Inc., the following account balances are found.Determine the balance sheet presentation of these amounts.Hint: Which of the accounts should you combine for the final balance sheet disclosure? $\begin{array} { l c } \text { Deferred tax assets, current } & \$ 100,000 \\\text { Deferred tax liabilities, current } & 415,000 \\\text { Deferred tax assets, noncurrent } & 120,000 \\\text { Deferred tax liabilities, noncurrent } & 30,000\\\end{array}$

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On its balance sheet, Cutter r...

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Question 52

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

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Question 53

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

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 35% corporate tax rate and no valuation allowance. ​ Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences.It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible meals and entertainment expense.Provide the journal entry to record Black's current tax expense.

Book-tax differences can be explained in part by examining the objectives underlying financial accounting and taxable income computations.Evaluate this statement.

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current year GAAP financial statements.

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

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

The release of a valuation allowance may relate to a tax planning strategy adopted by the taxpayer that will produce taxable income in the future.

Budlow, Inc., reported the following results for the current year. Book income (before tax).............................$500,000 Tax depreciation in excess of book...............75,000 Warranty expense, not deductible currently..17,500 Municipal bond interest income....................10,000 Determine Budlow's taxable income for the current year.Identify any temporary or permanent book-tax differences.

Which of the following items represents a temporary book-tax difference?

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return, if a proper election is made.

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?

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.

You are the tax adviser to a publicly traded U.S.corporation.How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?

Amelia, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. $\begin{array}{lrr}&\text { Tax Debit/(Credit) }&\text { Book Debit/(Credit) }\\\text { Assets }\\\text { Cash } & \$ 1,200 & \$ 1,200 \\\text { Accounts Receivable } & 20,000 & 20,000 \\\text { Buildings } & 1,200,000 & 1,200,000 \\\text { Acc. Depreciation } & (600,000) & (320,000) \\\text { Furniture \& Fixtures } & 160,000 & 160,000 \\\text { Acc. Depreciation } & \underline{(84,000)} & (60,000) \\\text { Total Assets } & \$ 697,200 & \$ 1.001 .200\\\text { Liabilities }\\\text { Accrued Vacation Pay } & \$-0- & (\$ 108,000) \\\text { Note Payable } & \underline{(464,000)} & (\$ 464,000) \\\text { Total Liabilities } & \underline{\$464,000)} & \underline{(\$ 572,000)}\\\text { Stockholders' Equity }\\\text { Paid in Capital } & (\$ 4,000) & (\$ 4,000) \\\text { Retained Earnings } & (229,200) & (425,200) \\\text { Total Liabilities and } & \underline{(\$ 697.200)} & (\$ 1.001 .200) \\\end{array}$ $\text { Amelia, Inc.'s, gross deferred tax assets and liabilities at the beginning of Amelia's year are listed below. }$ $\begin{array}{lr}& \text { Beginning of Year }\\\text { Accrued Vacation Pay }& \underline{\$ 84,000} \\\text { Subtotal } & \$ 84,000 \\\text { Applicable Tax Rate } & \times 34 \% \\\text { Gross Deferred Tax Asset } & \$ 28,560 \\\text { Building - Acc. Depreciation } & (\$ 244,000)\\\text { Furniture \& fixtures - Acc. Depreciation } & (12,800) \\\text { Subtotal } & (\$ 256,800)\\\text { Applicable tax rate } & \times \quad 34 \%\\\text { Gross deferred tax liability } &(\$87.312)\\\end{array}$ Amelia, Inc.'s, book income before tax is $25,200.Amelia records two permanent book-tax differences.It earned $1,000 in tax-exempt municipal bond interest and $1,840 in nondeductible meals and entertainment expense.Provide the income tax footnote rate reconciliation for Amelia.

How are deferred tax liabilities and assets categorized on the balance sheet?

A deferred tax liability represents a potential future tax benefit associated with income reported in the current year GAAP financial statements.

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?

At the beginning of the year, Schrader, Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000.At the end of the year, the balance in the deferred tax asset account has not changed, but Schrader's auditors want to record a $90,000 valuation allowance against this amount, because of a persistent downturn in Schrader's profitability.Develop the journal entry to record the valuation allowance.