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1.

Question :

(TCO B) Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, Year 1, its first year of operations: Pretax financial income $160,000 Nontaxable interest received on municipal securities (5,000) Long-term loss accrual in excess of deductible amount 10,000 Depreciation in excess of financial statement amount (25,000) Taxable income $140,000 Zeff's tax rate for Year 1 is 40%. In its Year 1 income statement, what amount should Zeff report as income tax expense-current portion?

Student Answer:

$52,000

$56,000

$62,000

$64,000 Instructor Explanation: CPA-00782 Becker Explanation Choice "b" is correct. The current portion of the income tax expense equals $56,000, income tax payable on taxable income [$140,000 x 40%]. SFAS 109 Choice "a" is incorrect. The tax rate is applied to taxable income, not to pretax financial income less the permanent difference and tax depreciation in excess of accounting depreciation. Choice "c" is incorrect. The tax rate is applied to taxable income, not to pretax financial income less the permanent difference. Choice "d" is incorrect. The tax rate is applied to taxable income, not to pretax financial income.

Points Received: Comments:

8 of 8

2. Question :

(TCO B) On its December 31, Year 2, balance sheet, Shin Co. had income taxes payable of $13,000 and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, Year 1. No estimated tax payments were made during Year 2. At December 31, Year 2, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its Year 2 income statement, what amount should Shin report as total income tax expense?

Student Answer:

$8,000

$8,500

$10,000

$13,000 Instructor Explanation: CPA-00781 Becker Explanation Choice "c" is correct. Total income tax expense for Year 2:

Points Received: Comments:

8 of 8

3. Question :

(TCO B) Hut Co. has temporary taxable differences that will reverse during the next year and add to taxable income. These differences relate to noncurrent assets. Under U.S. GAAP, deferred income taxes based on these temporary differences should be classified in Hut's balance sheet as a:

Student Answer:

Current asset.

Noncurrent asset.

Current liability.

Noncurrent liability.

Instructor Explanation:

CPA-00779 Becker Explanation Choice "d" is correct. Hut's temporary taxable differences add to taxable income, making them deferred tax liabilities. Under U.S. GAAP, deferred tax liabilities are classified in the balance sheet based on the classification of the related assets. In this case, the related asset is a noncurrent asset, so the deferred tax liability is classified as a noncurrent liability. Choice "a" is incorrect. Hut's temporary taxable differences add to taxable income, making them deferred tax liabilities, not deferred tax assets. Choice "b" is incorrect. Hut's temporary taxable differences add to taxable income, making them deferred tax liabilities, not deferred tax assets. Choice "c" is incorrect. Under U.S. GAAP, deferred tax liabilities are classified in the balance sheet based on the classification of the related assets. In this case, the related asset is a noncurrent asset.

Points Received: Comments:

0 of 8

4. Question :

(TCO B) For the year ended December 31, 1993, Grim Co.'s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following: Interest on municipal bonds $70,000 Premium expense on keyman life insurance (20,000) Total $50,000 Grim's enacted income tax rate is 30%. In its 1993 income statement, what amount should Grim report as current provision for income tax expense?

Student Answer:

$45,000

$51,000

$60,000

$66,000

Instructor Explanation:

CPA-00802 Becker Explanation Choice "a" is correct, $45,000 current provision for income tax expense ($150,000 x 30%) representing the taxes to be paid for 1993. Note: The items causing the difference between taxable income and financial statement income are permanent and will never reverse; therefore, no deferred tax is involved.

Points Received: Comments:

8 of 8

5. Question :

(TCO B) Stone Co. began operations in Year 1 and reported $225,000 in income before income taxes for the year. Stone's Year 1 tax depreciation exceeded its book depreciation by $25,000. Stone also had nondeductible book expenses of $10,000 related to permanent differences. Stone's tax rate for Year 1 was 40%, and the enacted rate for years after Year 1 is 35%. In its December 31, Year 1, balance sheet, what amount of deferred income tax liability should Stone report?

Student Answer:

$8,750

$10,000

$12,250

$14,000 Instructor CPA-00806 Becker Explanation Explanation: Choice "a" is correct, $8,750 deferred tax liability at 12/31. Temporary Book Tax difference Tax depreciation in excess of book 0 25,000 25,000 Tax rate for years after Year 1 - When the diff reverses x 35% Deferred tax liability at 12/31 8,750

Points Received: Comments:

0 of 8