CHAPTER 16 – SOLVING

MULTIPLE CHOICE—Computational
At the beginning of 2016, Pitman Co. purchased an asset for $600,000 with an estimated useful
life of 5 years and an estimated residual value of $50,000. For financial reporting purposes the
asset is being depreciated using the straight-line method; for tax purposes the double-declining-
balance method is being used. Pitman Co.’s tax rate is 40% for 2016 and all future years.

61. At the end of 2016, what is the book basis and the tax basis of the asset?
Book basis Tax basis
a. $440,000 $310,000
b. $490,000 $310,000
c. $490,000 $360,000
d. $440,000 $360,000

$600,000 – [($600,000 – $50,000)  5)] = $490,000;

$600,000 – (600,000  1/5  2) = $360,000.

62. At the end of 2016, which of the following deferred tax accounts and balances is
reported on Pitman’s statement of financial position?
Account _ Balance
a. Deferred tax asset $52,000
b. Deferred tax liability $52,000
c. Deferred tax asset $78,000
d. Deferred tax liability $78,000

($490,000 – $360,000)  .40 = $52,000.

63. Lehman Corporation purchased a machine on January 2, 2013, for $2,000,000. The
machine has an estimated 5-year life with no residual value. The straight-line method of
depreciation is being used for financial statement purposes and the following
accelerated depreciation amounts will be deducted for tax purposes:
2013 $400,000 2016 $230,000
2014 640,000 2017 230,000
2015 384,000 2018 116,000
Assuming an income tax rate of 30% for all years, the net deferred tax liability that
should be reflected on Lehman's statement of financial position at December 31, 2014,
should be
Deferred Tax Liability
Current Noncurrent
a. $0 $72,000
b. $4,800 $67,200
c. $67,200 $4,800
d. $72,000 $0

($640,000 – $400,000) × 30% = $72,000.

Use the following information for questions 64 and 65.

Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income $ 500,000
Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income $ 750,000

The estimated litigation expense of $1,250,000 will be deductible in 2016 when it is expected to
be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in
each of the next two years. The estimated liability for litigation is classified as non-current and
the installment accounts receivable are classified as $500,000 current and $500,000
noncurrent. The income tax rate is 30% for all years.

64. The income tax expense is

a. $150,000.
b. $225,000.
c. $250,000.
d. $500,000.

Income taxes payable = ($750,000 × 30%) = $225,000

Change in deferred tax liability = ($1,000,000 × 30%) = $300,000
Change in deferred tax asset = ($1,250,000 × 30%) = $375,000
$225,000 + $300,000 – $375,000 = $150,000.

65. The net deferred tax asset to be recognized is

a. $75,000.
b. $150,000.
c. $375,000.
d. $225,000.

($1,250,000 – $1,000,000) × 30% = $75,000.

Use the following information for questions 66 and 77.

Hopkins Co. at the end of 2015, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income $ 750,000
Estimated litigation expense 1,000,000
Extra depreciation for taxes (1,500,000)
Taxable income $ 250,000
The estimated litigation expense of $1,000,000 will be deductible in 2016 when it is expected to
be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the
next three years. The income tax rate is 30% for all years.
66. Income taxes payable is
a. $0.
b. $75,000.
c. $150,000.
d. $225,000.

($250,000 × 30%) = $75,000.

67. The net deferred tax liability to be recognized is (same with 65?)
a. $750,000.
b. $450,000.
c. $300,000.
d. $150,000.

($1,000,000 – $1,500,000) × 30% = $150,000.

68. Eckert Corporation's partial income statement after its first year of operations is as
follows:
Income before income taxes $3,750,000
Income tax expense
Current $1,035,000
Deferred 90,000 1,125,000
Net income $2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes and
accelerated depreciation for tax purposes. The amount charged to depreciation expense
on its books this year was $1,500,000. No other differences existed between book
income and taxable income except for the amount of depreciation. Assuming a 30% tax
rate, what amount was deducted for depreciation on the corporation's tax return for the
current year?
a. $1,200,000
b. $1,425,000
c. $1,500,000
d. $1,800,000

(30% × Temporary Difference) = $90,000;

Temporary Difference = ($90,000 ÷ 30%) = $300,000;
$1,500,000 + $300,000 = $1,800,000.

69. Cross Company reported the following results for the year ended December 31, 2015, its
first year of operations:
2015
Income (per books before income taxes) $ 750,000
Taxable income 1,200,000
The disparity between book income and taxable income is attributable to a temporary
difference which will reverse in 2016. What should Cross record as a net deferred tax
 asset or liability for the year ended December 31, 2015, assuming that the enacted tax
rates in effect are 40% in 2015 and 35% in 2016?
a. $180,000 deferred tax liability
b. $157,500 deferred tax asset
c. $180,000 deferred tax asset
d. $157,500 deferred tax liability

($1,200,000 – $750,000) × 35% = $157,500.

70. In 2015, Krause Company accrued, for financial statement reporting, estimated losses
on disposal of unused plant facilities of $1,500,000. The facilities were sold in March
2016 and a $1,500,000 loss was recognized for tax purposes. Also in 2015, Krause paid
$100,000 in fines for violation of environmental regulations. Assuming that the enacted
tax rate is 30% in both 2015 and 2016, and that Krause paid $780,000 in income taxes
in 2015, the amount reported as net deferred income taxes on Krause's statement of
financial position at December 31, 2015, should be a
a. $420,000 asset.
b. $360,000 asset.
c. $360,000 liability.
d. $450,000 asset.

($1,500,000 × 30%) = $450,000. (? Basis?)

71. Stephens Company has a deductible temporary difference of $2,000,000 at the end of
its first year of operations. Its tax rate is 40 percent. Stephens has $1,800,000 of income
taxes payable. After a careful review of all available evidence, Stephens determines that
it is probable that it will not realize $200,000 of this deferred tax asset. On Stephens
Company’s statement of financial position at the end of its first year of operations, what
is the amount of deferred tax asset?
a. $2,000,000
b. $1,800,000
c. $800,000
d. $720,000

($2,000,000 – $200,000) × .40 = $720,000.

72. Stephens Company has a deductible temporary difference of $2,000,000 at the end of its
first year of operations. Its tax rate is 40 percent. Stephens has $1,800,000 of income taxes
payable. At the end of the first year, after a careful review of all available evidence, Stephens
determines that it is probable that it will not realize $200,000 of this deferred tax asset. At the
end of the second year of operations, Stephens Company determines that it expects to realize
$1,850,000 of this deferred tax assets. On Stephens Company’s statement of financial position
at the end of its second year of operations, what is the amount of deferred tax asset?
a. $800,000.
b. $740,000..
c. $60,000.
d. $720,000

$1,850,000 × .40 = $740,000.

73. Link Sink Manufacturing has a deferred tax asset account with a balance of $300,000 at
the end of 2015 due to a single cumulative temporary difference of $750,000. At the end
of 2016, this same temporary difference has increased to a cumulative amount of
$1,000,000. Taxable income for 2016 is $1,700,000. The tax rate is 40% for all years.
Assuming it’s probable that 70% of the deferred tax asset will be realized, what amount
will be reported on Link Sink’s statement of financial position for the deferred tax asset at
December 31, 2016?
a. $400,000.
b. $280,000.
c. $700,000.
d. $680,000.

($1,000,000 × .70) × .40 = $280,000.

74. Stephens Company has a deductible temporary difference of $2,000,000 at the end of
its first year of operations. Its tax rate is 40 percent. Stephens has $1,800,000 of income
taxes payable. At the end of the first year, after a careful review of all available evidence,
Stephens determines that it is probable that it will not realize $200,000 of this deferred
tax asset. At the end of the second year of operations, Stephens Company determines
that it expects to realize $1,850,000 of this deferred tax assets. On Stephens Company’s
income statement for the second year, what amount of income tax expense will it report
related to the temporary difference, and is the amount a debit or credit?
a. $40,000 credit.
b. $40,000 debit.
c. $20,000 debit.
d. $20,000 credit.

($1,850,000 × .40) – ($1,800,000 × .40) = $20,000 dr. (positive side)

75. Link Sink Manufacturing has a deferred tax asset account with a balance of $300,000 at
the end of 2015 due to a single cumulative temporary difference of $750,000. At the end
of 2016, this same temporary difference has increased to a cumulative amount of
$1,000,000. Taxable income for 2016 is $1,700,000. The tax rate is 40% for 2016, but
enacted tax rates for all future years are 35%. Assuming it’s probable that 70% of the
deferred tax asset will be realized, what amount will be reported on Link Sink’s
statement of financial position for the deferred tax asset at December 31, 2016?
a. $262,500.
b. $280,000.
c. $245,000.
d. $595,000.

($1,000,000 × .70) × .35 = $245,000.

76. Watson Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2015 $1,200,000
Tax exempt interest (100,000)
Originating temporary difference (300,000)
 Taxable income $800,000
The temporary difference will reverse evenly over the next two years at an enacted tax
rate of 40%. The enacted tax rate for 2015 is 28%. What amount should be reported in
its 2015 income statement as the current portion of its provision for income taxes?
a. $224,000
b. $320,000
c. $336,000
d. $480,000

$800,000  .28 = $224,000.

Use the following information for questions 77 and 78.

Mitchell Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2015 $ 900,000
Tax exempt interest (75,000)
Originating temporary difference (225,000)
Taxable income $600,000
The temporary difference will reverse evenly over the next two years at an enacted tax rate of
40%. The enacted tax rate for 2015 is 35%.

77. What amount should be reported in its 2015 income statement as the deferred portion of
income tax expense?
a. $90,000 debit
b. $120,000 debit
c. $90,000 credit
d. $105,000 credit

$225,000 × .40 = $90,000 credit.

78. In Mitchell’s 2015 income statement, what amount should be reported for total income
tax expense?
a. $330,000
b. $315,000
c. $300,000
d. $210,000

($600,000 × .35) + ($225,000 × .40) = $300,000.

79. Ferguson Company has the following cumulative taxable temporary differences:
12/31/16 12/31/15
$1,350,000 $960,000
The tax rate enacted for 2016 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2016 is $2,400,000 and there are no permanent differences.
Ferguson's pretax financial income for 2016 is
a. $3,750,000.
b. $2,790,000.
c. $2,010,000.
d. $1,050,000.
$2,400,000 + ($1,350,000 – $960,000) = $2,790,000. (!!!!)

Use the following information for questions 80 through 82.

Lyons Company deducts insurance expense of $84,000 for tax purposes in 2015, but the
expense is not yet recognized for accounting purposes. In 2016, 2017, and 2018, no insurance
expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported
for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and
income taxes payable of $72,000 at the end of 2015. There were no deferred taxes at the
beginning of 2015.

80. What is the amount of the deferred tax liability at the end of 2015?
a. $33,600
b. $28,800
c. $12,000
d. $0

$84,000 × .40 = $33,600.

81. What is the amount of income tax expense for 2015?

a. $105,600
b. $100,800
c. $84,000
d. $72,000

$72,000 + ($84,000 × .40) = $105,600.

82. Assuming that income taxes payable for 2016 is $96,000, the income tax expense for
2016 would be what amount?
a. $129,600
b. $107,200
c. $96,000
d. $84,800

$96,000 – ($28,000 × .40) = $84,800. (watch-out!!)

Use the following information for questions 83 and 84.

Kraft Company made the following journal entry in late 2015 for rent on property it leases to
Danford Corporation.
Cash 60,000
Unearned Rent Revenue 60,000 (30,000 each year)
The payment represents rent for the years 2016 and 2017, the period covered by the lease.
Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $92,000 at the end of
2015, and its tax rate is 35%.

83. What amount of income tax expense should Kraft Company report at the end of 2015?
a. $53,000
 b. $71,000
c. $81,500
d. $113,000

$92,000 – ($60,000 × .35) = $71,000.

84. Assuming the income taxes payable at the end of 2016 is $102,000, what amount of
income tax expense would Kraft Company record for 2016?
a. $81,000
b. $91,500
c. $112,500
d. $123,000

$102,000 + ($30,000 × .35) = $112,500. (watch-out!! I minus natu)

85. The following information is available for Kessler Company after its first year of
operations:
Income before taxes $250,000
Federal income tax payable $104,000
Deferred income tax (4,000)
Income tax expense 100,000
Net income $150,000
Kessler estimates its annual warranty expense as a percentage of sales. The amount
charged to warranty expense on its books was $95,000. Assuming a 40% income tax
rate, what amount was actually paid this year for warranty claims?
a. $105,000
b. $100,000
c. $95,000
d. $85,000

$95,000 – ($4,000 ÷ .40) = $85,000.

Use the following information for questions 86–88.

At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $4,000 and a deferred tax
liability of $6,000. Pre-tax accounting income for 2015 was $300,000 and the enacted tax rate is
40%. The following items are included in Elephant’s pre-tax income:

Interest income from government obligations $24,000

Accrued warranty costs, estimated to be
paid in 2016 $52,000 Asset
Operating loss carryforward $38,000
Installment sales revenue, will be collected
in 2016 $26,000 Liab
Prepaid rent expense, will be used in 2016 $12,000 Liab

86. What is Elephant, Inc.’s taxable income for 2015?

a. $300,000
b. $252,000
c. $348,000
 d. $452,000
$300,000 – $24,000 + $52,000 – $38,000 – $26,000 – $12,000 = $252,000.

87. Which of the following is required to adjust Elephant, Inc.’s deferred tax asset to its
correct balance at December 31, 2015?
a. A debit of $20,800
b. A credit of $15,200
c. A debit of $15,200
d. A debit of $16,800

($52,000  .40) – $4,000 = $16,800.

88. The ending balance in Elephant, Inc’s deferred tax liability at December 31, 2015 is
a. $9,200
b. $15,200
c. $10,400
d. $31,200

($26,000 + $12,000)  .40 = $15,200.

Use the following information for questions 89 and 90.

Rowen, Inc. had pre-tax accounting income of $900,000 and a tax rate of 40% in 2010, its first
year of operations. During 2015 the company had the following transactions:

Received rent from Jane, Co. for 2016 $32,000 (added)

asset
Government bonds interest income $40,000 deducted
Depreciation for tax purposes in excess of book
depreciation $20,000 deducted
Installment sales revenue to be collected in
2016 $54,000 deducted

89. For 2015, what is the amount of income taxes payable for Rowen, Inc?
a. $301,600
b. $327,200
c. $343,200
d. $386,400

$900,000 + $32,000 – $40,000 – $20,000 – $54,000 = $818,000

$818,000  .40 = $327,200.

90. At the end of 2015, which of the following deferred tax accounts and balances is
reported on Rowen, Inc.’s statement of financial position?
Account _ Balance
a. Deferred tax asset $12,800
b. Deferred tax liability $12,800
 c. Deferred tax asset $20,800
d. Deferred tax liability $20,800
$32,000  .40 = $12,800 DTA.

91. Based on the following information, compute 2015 taxable income for South Co.
assuming that its pre-tax accounting income for the year ended December 31, 2015 is
$230,000.
Future taxable
Temporary difference (deductible) amount
Installment sales $192,000 deducted
Depreciation $60,000 deducted
Unearned rent ($200,000) added

a. $282,000
b. $178,000
c. $482,000
d. $222,000

$230,000 - $192,000 – $60,000 + $200,000 = $178,000.

92. Fleming Company has the following cumulative taxable temporary differences:
12/31/16 12/31/15
$640,000 $900,000

The tax rate enacted for 2016 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2016 is $1,600,000 and there are no permanent differences.
Fleming’s pretax financial income for 2016 is:
a. $960,000
b. $1,340,000
c. $1,730,000
d. $2,240,000

$1,600,000 – ($900,000 – $640,000) = $1,340,000. (watch-out!!)

93. Larsen Corporation reported $100,000 in revenues in its 2015 financial statements, of
which $44,000 will not be included in the tax return until 2016. The enacted tax rate is
40% for 2015 and 35% for 2016. What amount should Larsen report for deferred tax
liability in its statement of financial position at December 31, 2015?
a. $15,400
b. $17,600
c. $19,600
d. $22,400

$44,000  .35 = $15,400.

94. Duncan Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment (cash) basis of accounting for income tax purposes.
Profits of $300,000 recognized for books in 2014 will be collected in the following years:
 Collection of Profits
2015 $ 50,000
2016 $100,000
2017 $150,000
The enacted tax rates are: 40% for 2014, 35% for 2015, and 30% for 2016 and 2017.
Taxable income is expected in all future years. What amount should be included in the
December 31, 2014, statement of financial position for the deferred tax liability related to
the above temporary difference?
a. $17,500
b. $75,000
c. $92,500
d. $120,000

($50,000  .35) + [($100,000 + $150,000)  .30] = $92,500.

95. At December 31, 2014 Raymond Corporation reported a deferred tax liability of $90,000
which was attributable to a taxable temporary difference of $300,000. The temporary
difference is scheduled to reverse in 2018. During 2015, a new tax law increased the
corporate tax rate from 30% to 40%. Raymond should record this change by debiting
a. Retained Earnings for $30,000.
b. Retained Earnings for $9,000.
c. Income Tax Expense for $9,000.
d. Income Tax Expense for $30,000.

$300,000  (.40 – .30) = $30,000 Income Tax Expense.

96. Palmer Co. had a deferred tax liability balance due to a temporary difference at the
beginning of 2014 related to $600,000 of excess depreciation. In December of 2014, a
new income tax act is signed into law that lowers the corporate rate from 40% to 35%,
effective January 1, 2016. If taxable amounts related to the temporary difference are
scheduled to be reversed by $300,000 for both 2015 and 2016, Palmer should increase
or decrease deferred tax liability by what amount?
a. Decrease by $30,000
b. Decrease by $15,000
c. Increase by $15,000
d. Increase by $30,000

$300,000 × (.35 – .40) = $15,000 decrease.

97. A reconciliation of Gentry Company's pretax accounting income with its taxable income
for 2015, its first year of operations, is as follows:
Pretax accounting income $3,000,000
Excess tax depreciation (90,000)
Taxable income $2,910,000
The excess tax depreciation will result in equal net taxable amounts in each of the next
three years. Enacted tax rates are 40% in 2015, 35% in 2016 and 2017, and 30% in
2018. The total deferred tax liability to be reported on Gentry's statement of financial
position at December 31, 2015, is
 a. $36,000.
b. $30,000.
c. $31,500.
d. $27,000.

($30,000 × 35%) + ($30,000 × 35%) + ($30,000 × 30%) = $30,000.

98. Khan, Inc. reports a taxable and financial loss of $650,000 for 2016. Its pretax financial
income for the last two years was as follows:
2014 $300,000
2015 400,000
The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2016,
assuming that it uses the carryback provisions, and that the tax rate is 30% for all
periods affected, is
a. $650,000 loss.
b. $ -0-.
c. $195,000 loss.
d. $455,000 loss.

$650,000 – (30% × $650,000) = $455,000 loss.

Use the following information for questions 99 and 100.

Wilcox Corporation reported the following results for its first three years of operation:
2014 income (before income taxes) $ 100,000
2015 loss (before income taxes) (900,000)
2016 income (before income taxes) 1,000,000
There were no permanent or temporary differences during these three years. Assume a
corporate tax rate of 30% for 2014 and 2015, and 40% for 2016.

99. Assuming that Wilcox elects to use the carryback provision, what net income (loss) is
reported in 2015? (Assume that any deferred tax asset recognized is probable to be
realized.)
a. $(900,000)
b. $ -0-
c. $(870,000)
d. $(550,000)

($100,000 × 30%) = $30,000; $800,000 (??) × 40% = $320,000;

($900,000 – $30,000 – $320,000) = $550,000. (watch out!!!!)

100. Assuming that Wilcox elects to use the carryforward provision and not the carryback
provision, what net income (loss) is reported in 2015?
a. $(900,000)
b. $(540,000)
c. $ -0-
d. $(870,000)
 ($900,000 × 40%) = $360,000; $900,000 – $360,000 = $540,000.

101. Rodd Co. reports a taxable and pretax financial loss of $400,000 for 2016. Rodd's
taxable and pretax financial income and tax rates for the last two years were:
2014 $400,000 30%
2015 400,000 35%
The amount that Rodd should report as an income tax refund receivable in 2016,
assuming that it uses the carryback provisions and that the tax rate is 40% in 2016, is
a. $120,000.
b. $140,000.
c. $160,000.
d. $180,000.

($400,000 × 30%) = $120,000.

102. Nickerson Corporation began operations in 2014. There have been no permanent or
temporary differences to account for since the inception of the business. The following
data are available:
Year Enacted Tax Rate Taxable Income Taxes Paid
2014 45% $750,000 $337,500
2015 40% 900,000 360,000
2016 35%
2017 30%
In 2016, Nickerson had an operating loss of $930,000. What amount of income tax
benefits should be reported on the 2016 income statement due to this loss?
a. $409,500
b. $373,500
c. $372,000
d. $279,000

($750,000 × .45) + [($930,000 – $750,000) × .40] = $409,500. (tricky huh??)

Use the following information for questions 103 and 104.

Operating income and tax rates for C.J. Company’s first three years of operations were as
follows:
Income _ Enacted tax rate
2015 $100,000 35%
2016 ($250,000) 30%
2017 $420,000 40%

103. Assuming that C.J. Company opts to carryback its 2016 NOL, what is the amount of
income taxes payable at December 31, 2017?
a. $68,000
b. $168,000
c. $123,000
d. $108,000

[$420,000 – ($250,000 – $100,000)]  .40 = $108,000. (!!!!!)

104. Assuming that C.J. Company opts only to carryforward its 2016 NOL, what is the amount
of deferred tax asset or liability that C.J. Company would report on its December 31,
2016 balance sheet?
Amount _ Deferred tax asset or liability
a. $75,000 Deferred tax liability
b. $87,500 Deferred tax liability
c. $100,000 Deferred tax asset
d. $75,000 Deferred tax asset

$250,000  .40 = $100,000. (makalibog)

105. Georgia, Inc. has no temporary or permanent differences. The company experiences the
following:

Year Taxable income/loss Tax rate Tax paid

2014 $ 100,000 35% $ 35,000
2015 200,000 30% 60,000
2016 400,000 40% 160,000
2017 (500,000) ---- -0-

In 2017, Georgia, Inc. decides to carry back its NOL. What amount of income tax refund
receivable will Georgia record for 2017?
a. $200,000
b. $180,000
c. $190,000
d. $ -0-

$60,000 + [($500,000 – $200,000)  .40] = $180,000. (watch out!!)

106. Lincoln Company has the following four deferred tax items at December 31, 2016. The
deferred tax assets and the deferred tax liabilities relate to income taxes levied by the
same tax authority. On Lincoln’s December 31, 2016 statement of financial position, it
will report

Temporary Difference Deferred Tax Deferred Tax

Asset Liability
Rent collected in advance: recognized when
earned for accounting purposes and when $84,000
received for tax purposes

Use of straight-line depreciation for accounting

purposes and accelerated depreciation for tax $428,000
purposes

Recognition of profits on installment sales

during period of sale for accounting purposes
90,000
and during period of collection for tax
purposes
 Warranty liabilities: recognized for accounting
purposes at time of sale; for tax purposes at 24,000
time paid

a. $108,000 current deferred tax asset.

b. $626,000 non-current deferred tax liability.
c. $410,000 non-current deferred tax liability.
d. $518,000 current tax payable

($428,000 + $90,000) – ($84,000 + $24,000) = $410,000.

107. Lincoln Company has the following four deferred tax items at December 31, 2016. The
deferred tax assets and the deferred tax liabilities relate to income taxes levied by the
same tax authority. On Lincoln’s December 31, 2016 statement of financial position, it
will report

Temporary Difference Deferred Tax Deferred Tax

Asset Liability
Rent collected in advance: recognized when
earned for accounting purposes and when $652,000
received for tax purposes

Use of straight-line depreciation for accounting

purposes and accelerated depreciation for tax $330,000
purposes

Recognition of profits on installment sales

during period of sale for accounting purposes
64,000
and during period of collection for tax
purposes

Warranty liabilities: recognized for accounting

purposes at time of sale; for tax purposes at 37,000
time paid

a. $394,000 current deferred tax liability.

b. $689,000 current deferred tax asset.
c. $295,000 non-current deferred tax asset.
c. $394,000 current tax receivable.

($652,000 + $37,000) – ($330,000 + $64,000) = $295,000.

 MULTIPLE CHOICE—CPA Adapted
108. Munoz Corp.'s books showed pretax financial income of $1,500,000 for the year ended
December 31, 2016. In the computation of income taxes, the following data were
considered:
Gain on an involuntary conversion $650,000
(Munoz has elected to replace the property within the statutory
period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation
deducted for book purposes 100,000
Estimated tax payments, 2016 125,000 deducted from
Enacted tax rate, 2016 30%
What amount should Munoz report as its current income tax liability on its December 31,
2016 statement of financial position?
a. $100,000
b. $130,000
c. $225,000
d. $255,000

($1,500,000 – $650,000 – $100,000) × 30% = $225,000;

$225,000 – $125,000 = $100,000.

109. Haag Corp.'s 2016 income statement showed pretax accounting income of $750,000. To
compute the income tax liability, the following 2016 data are provided:
Income from government bonds $ 30,000 deducted
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 60,000
Estimated income tax payments made 150,000 deducted from
Enacted corporate income tax rate 30%
What amount of current income tax liability should be included in Hagg's December 31,
2016 statement of financial position?
a. $48,000
b. $66,000
c. $75,000
d. $198,000

($750,000 – $30,000 – $60,000) × 30% = $198,000;

$198,000 – $150,000 = $48,000.

110. On January 1, 2016, Gore, Inc. purchased a machine for $720,000 which will be
depreciated $72,000 per year for financial statement reporting purposes. For income tax
reporting, Gore elected to expense $80,000 and to use straight-line depreciation which
will allow a depreciation deduction of $64,000 for 2016. Assume a present and future
enacted income tax rate of 30%. What amount should be added to Gore's deferred tax
liability for this temporary difference at December 31, 2016?
a. $43,200
 b. $24,000
c. $21,600
d. $19,200

($80,000 + $64,000 – $72,000) × 30% = $21,600.

111. On January 1, 2016, Piper Corp. purchased 40% of the voting common stock of Betz,
Inc. and appropriately accounts for its investment by the equity method. During 2016,
Betz reported earnings of $360,000 and paid dividends of $120,000. Piper assumes that
all of Betz's undistributed earnings will be distributed as dividends in future periods when
the enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current
enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for
this temporary difference is
a. $72,000.
b. $60,000.
c. $43,200.
d. $28,800.

($360,000 – $120,000) × 40% = $96,000;

$96,000 × 30% = $28,800.

112. Foltz Corp.'s 2014 income statement had pretax financial income of $250,000 in its first
year of operations. Foltz uses an accelerated depreciation method on its tax return and
straight-line depreciation for financial reporting. The differences between the book and
tax deductions for depreciation over the five-year life of the assets acquired in 2014, and
the enacted tax rates for 2014 to 2018 are as follows:
Book Over (Under) Tax Tax Rates
2014 $(50,000) 35%
2015 (65,000) 30%
2016 (15,000) 30%
2017 60,000 30%
2018 70,000 30%
There are no other temporary differences. In Foltz's December 31, 2014 statement of
financial position, the non-current deferred tax liability and the income taxes currently
payable should be

Non-current Deferred Income Taxes

Tax Liability Currently Payable
a. $39,000 $50,000
b. $39,000 $70,000
c. $15,000 $60,000
d. $15,000 $70,000

($50,000 × 30%) = $15,000 //// ($250,000 – $50,000) × 35% = $70,000.

113. Didde Corp. prepared the following reconciliation of income per books with income per
tax return for the year ended December 31, 2015:
Book income before income taxes $1,200,000
 Add temporary difference
Construction contract revenue which will reverse in 2016 160,000
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years (640,000)
Taxable income $720,000
Didde's effective income tax rate is 34% for 2015. What amount should Didde report in
its 2015 income statement as the current provision for income taxes?
a. $54,400
b. $244,800
c. $408,000
d. $462,400

($720,000 × 34%) = $244,800.

114. In its 2015 income statement, Cohen Corp. reported depreciation of $1,110,000 and
interest revenue on government obligations of $210,000. Cohen reported depreciation of
$1,650,000 on its 2015 income tax return. The difference in depreciation is the only
temporary difference, and it will reverse equally over the next three years. Cohen's
enacted income tax rates are 35% for 2015, 30% for 2016, and 25% for 2017 and 2018.
What amount should be included in the deferred income tax liability in Hertz's December
31, 2015 statement of financial position?
a. $144,000
b. $186,000
c. $225,000
d. $262,500
($1,650,000 – $1,110,000)  3 = $180,000;
($180,000 × 30%) + ($180,000 × 25%) + ($180,000 × 25%) = $144,000.

115. Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment (cash) method of accounting for income tax purposes.
Installment income of $900,000 will be collected in the following years when the enacted
tax rates are:
Collection of Income Enacted Tax Rates
2015 $ 90,000 35%
2016 180,000 30%
2017 270,000 30%
2018 360,000 25%
The installment income is Dunn's only temporary difference. What amount should be
included in the deferred income tax liability in Dunn's December 31, 2015 statement of
financial position?
a. $225,000
b. $256,500
c. $283,500
d. $315,000

($180,000 × 30%) + ($270,000 × 30%) + ($360,000 × 25%) = $225,000.

116. For calendar year 2015, Kane Corp. reported depreciation of $1,200,000 in its income
statement. On its 2015 income tax return, Kane reported depreciation of $1,800,000.
Kane's income statement also included $225,000 accrued warranty expense that will be
deducted for tax purposes when paid. Kane's enacted tax rates are 30% for 2015 and
2016, and 24% for 2017 and 2018. The depreciation difference and warranty expense
will reverse over the next three years as follows:

Depreciation Difference (Liab) Warranty Expense(Asset)

2016 $240,000 $ 45,000
2017 210,000 75,000
2018 150,000 105,000
$600,000 $225,000
These were Kane's only temporary differences. In Kane's 2015 income statement, the
deferred portion of its provision for income taxes should be
a. $200,700.
b. $112,500.
c. $101,700.
d. $109,800.

($240,000 – $45,000) × 30% = $58,500;

($210,000 – $75,000) × 24% = $32,400;
($150,000 – $105,000) × 24% = $10,800;
$58,500 + $32,400 + $10,800 = $101,700.

117. Wright Co., organized on January 2, 2014, had pretax accounting income of $880,000
and taxable income of $1,600,000 for the year ended December 31, 2010 The only temporary
difference is accrued product warranty costs which are expected to be paid as follows:
2015 $240,000
2016 120,000
2017 120,000
2018 240,000
The enacted income tax rates are 35% for 2014, 30% for 2015 through 2017, and 25%
for 2018. If Wright expects taxable income in future years, the deferred tax asset in
Wright's December 31, 2014 statement of financial position should be
a. $144,000.
b. $168,000.
c. $204,000.
d. $252,000.

($240,000 + $120,000 + $120,000) × 30% = $144,000;

$240,000 × 25% = $60,000;
$144,000 + $60,000 = $204,000.