Chapter

17 Homework

Solutions

38.
d. Property taxes paid to the city of Detroit are not income taxes because they are
assessed based on value and not income.
39.
d. Both the FASB and SEC can issue rules that govern accounting for income taxes.
Congress also can issue rules that govern accounting for income taxes, but the IRS is
restricted to writing rules and procedures related to the federal income tax.

41.
Pre-tax book income
$1,000,000

Favorable temporary differences
(200,000)

Unfavorable temporary differences
50,000

Favorable permanent differences
(100,000)

Taxable income
750,000

34%
34%

Current income tax expense
$255,000

43.
Pre-tax book income
$600,000

Excess tax depreciation
(400,000)

Tax-exempt interest income
(300,000)

Net operating loss
$(100,000)


NOL carryback to prior year
$50,000

34%
34%

Current income tax benefit
$17,000


The remaining $50,000 NOL carryover will be recorded as a deferred tax asset
(benefit) of $17,000.

45.
e. Taxable temporary difference and favorable book-tax difference. Future taxable
income will increase by $800,000 compared to future book income as the excess
book basis is recovered, resulting in a future tax payable.

46.
c. Deductible temporary difference. Future taxable income will decrease by $100,000
compared to future book income as the bad debts are charged off, resulting in a future
tax benefit.


47.
d. Nondeductible stock option compensation from exercising an ISO (incentive stock
option). A company does not receive a tax deduction when an employee exercises an
incentive stock option, making the book stock compensation deduction a permanent
difference.

49.
b. Unfavorable (increases taxable income). Book income would be $150,000 less than
taxable income in the current year.

51.
Favorable temporary differences
$(200,000)

Unfavorable temporary differences
50,000

Net increase in favorable temporary diff.
$(150,000)

34%
34%

Net increase in deferred income tax liability
$ (51,000)


The net increase in the deferred income tax liability is recorded as the
companys deferred tax expense in the current year. Permanent differences do not
affect the deferred income tax provision.

52.
Increase in bad debt reserve
$100,000

Excess tax depreciation
(200,000)

Excess tax gain
25,000

Net increase in favorable temporary diff.
$ (75,000)

34%
34%

Net increase in deferred income tax liability
$ (25,500)


The net increase in the deferred income tax liability is recorded as the
companys deferred tax expense in the current year. Permanent differences do not
affect the deferred tax provision.

54.

Temporary Permanent
No
Item
Difference
Difference Difference
Reserve for warranties

Accrued pension liability

Goodwill not amortized for tax purposes

but subject to impairment under ASC 350


Meal and entertainment expenses

Life insurance proceeds

Net capital loss carryover

Nondeductible fines and penalties

Accrued vacation pay liability paid within

X
the first 2 months of the next tax year

55.
e. First year expensing under 179. First year expensing will eventually be recovered
over time as book depreciation.

56.
Pre-tax book income
$1,000,000

Favorable permanent differences
(100,000)

Book equivalent of taxable income
900,000

34%
34%

Total income tax provision
$306,000


Book equivalent of taxable income takes into account only permanent
differences.

58.
b.
More likely than not

66.
$272,000, the amount that has a cumulative probability of more than 50% of
occurring. Cadillac Square Corporation would record an increase in its income taxes
payable (income tax expense) of $68,000, the difference between the full benefit
received on the tax return and the expected benefit to be received after audit by the
IRS.

71.
b. Significant

72.
e. Both a and d create a current deferred tax asset. Deferred tax accounts are classified
based on the balance sheet classification of the item to which they relate. Accounts
receivable and inventory are both classified as current assets.

73.
d. Income tax provision / Pre-tax income from continuing operations


74.
c. Accrued pension liabilities. Accrued pension liabilities is a temporary difference and
does not appear in the effective tax rate reconciliation unless the company makes an
adjustment to the account that relates to a prior period.