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ACCOUNTING FOR INCOME TAX

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. The Indy Company had taxable income of 12,000 during 2020. Indy used accelerated depreciation for
tax purposes (3,400) and straight-line depreciation for accounting purposes ( 2,000). Assuming Indy had
no other temporary differences, what would the company's pretax accounting income be for 2020?
a. 1,400
b. 6,600
c. 13,400
d. 17,400

2. The following information is taken from Blackhawk Corporation's 2020 financial records:

Pretax accounting income ............................. 1,500,000 

Excess tax depreciation ..............................    (45,000)
Taxable income ....................................... 1,455,000 

Assume the taxable temporary difference was created entirely in 2020 and will reverse in equal net
taxable amounts in each of the next three years. If tax rates are 40 percent in 2020, 35 percent in 2021,
35 percent in 2022, and 30 percent in 2023, then the total deferred tax liability Blackhawk should report
on its December 31, 2020, balance sheet is
a. 13,500.
b. 15,000.
c. 15,750.
d. 18,000.

3. Schaeffer Products, Inc., reported an excess of warranty expense over warranty deductions of 72,000
for the year ended December 31, 2020. This temporary difference will reverse in equal amounts over the
years 2021 to 2023. The enacted tax rates are as follows:

2020 ............................ 40%

2021 ............................ 35%
2022 ............................ 30%
2023 ............................ 25%

The reporting for this temporary difference at December 31, 2020, would be
a. a deferred tax liability of 28,800.
b. a deferred tax asset of 28,800.
c. a deferred tax liability of 21,600.
d. a deferred tax asset of 21,600.

4. In 2021, The Worf Company, reported pretax financial income of 500,000. Included in that pretax
financial income was 90,000 of nontaxable life insurance proceeds received as a result of the death of
an officer; 120,000 of warranty expenses accrued but unpaid as of December 31, 2021; and 20,000 of
life insurance premiums for a policy for an officer. Assuming that no income taxes were previously paid
during the year and assuming an income tax rate of 40 percent, the amount of income taxes payable on
December 31, 2021, would be
a. 180,000.
b. 200,000.
c. 212,000.
d. 220,000.

5. Viking Corporation reported depreciation of 250,000 on its 2020 tax return. However, in its 2020 income
statement, Viking reported depreciation of 100,000. The difference in depreciation is a temporary
difference that will reverse over time. Assuming Viking's tax rate is constant at 30 percent, what amount
should be added to the deferred income tax liability in Viking's December 31, 2020, balance sheet?
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a. 30,000
b. 37,500
c. 45,000
d. 75,000

6. Cowboy Corporation reported depreciation of 450,000 on its 2020 tax return. However, in its 2020
income statement, Cowboy reported depreciation of 300,000--as well as 30,000 interest revenue on
tax-free bonds. The difference in depreciation is only a temporary difference, and it will reverse equally
over the next three years. Cowboy's enacted income tax rates are as follows:

2020 ............................ 35%

2021 ............................ 30%
2022 ............................ 25%
2023 ............................ 20%

What amount should be included in the deferred income tax liability in Cowboy's December 31, 2020,
balance sheet?
a. 30,000
b. 37,500
c. 45,000
d. 52,500

7. The books of the Tracker Company for the year ended December 31, 2020, showed pretax income of
360,000. In computing the taxable income for federal income tax purposes, the following timing
differences were taken into account:

Depreciation deducted for tax purposes in excess of

depreciation recorded on the books ..................... 16,000
Income from installment sale reportable for tax purposes
in excess of income recognized on the books ............ 12,000

What should Tracker record as its current federal income tax liability at December 31, 2020, assuming a
corporate income tax rate of 30 percent?
a. 99,600
b. 103,200
c. 106,800
d. 108,000

8. Frey Corporation's income statement for the year ended December 31, 2020, shows pretax income of
1,000,000. The following items are treated differently on the tax return and in the accounting records:

Tax Accounting
Return Records
Rent income ........................... 70,000 120,000
Depreciation expense .................. 280,000 220,000
Premiums on officers' life insurance .. -- 90,000

Assume that Frey's tax rate for 2020 is 30 percent. What is the amount of income tax payable for 2020?
a. 360,000
b. 320,000
c. 294,000
d. 267,000

9. Inventive Corporation's income statement for the year ended December 31, 2020, shows pretax income
of 300,000. The following items are treated differently on the tax return and in the accounting records:

Tax Accounting
Return Records
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Warranty expense ...................... 170,000 185,500

Depreciation expense .................. 150,000 100,000
Premiums on officers' life insurance .. -- 60,000

Assume that Inventive's tax rate for 2020 is 40 percent. What is the current portion of Inventive's total
income tax expense for 2020?
a. 106,200
b. 120,200
c. 130,200
d. 144,200

10. For the current year, Santa Fe Company reported income tax expense of 195,000. Income taxes
payable at the end of the prior year were 125,000 and at the end of the current year were 130,000. The
deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and
straight-line depreciation for financial reporting purposes increased from 120,000 at the beginning of the
current year to 123,000 at the end of the current year. How much cash was paid for income taxes
during the year?
a. 187,000
b. 197,000
c. 195,000
d. 190,000

11. Bench Company reported 7,500,000 income before provision for income tax.
The following data are provided for the current year:
Rent received in advance 1,800,000
Income from exempt municipal bonds 2,300,000
Depreciation deduction for income tax purposes in excess
of depreciation reported for financial reporting 1,200,000
Tax payment during the current year 700,000
Income Tax Rate 30%

What amount of current income tax liability should be reported at year-end?

a. 1,020,000
b. 1,030,000
c. 1,040,000
d. 1,050,000

12. Hammer Company reported pretax financial income of 6,200,000 for the current year. Included in other
income was 200,000 of interest revenue from the government bonds held by the entity. The income
statement included depreciation expense of 500,000 with a machine cost of 3,000,000. The income tax
return reported 600,000 as a depreciation on the machine. The enacted tax rate is 30% for the current
year and future years. What is the current tax expense for the current year?
a. 1,860,000 c. 1,770,000
b. 1,800,000 d. 1,830,000

13. EZ Company provides the following data for their first year of operations:

Pretax financial income 1,500,000

Nontaxable interest received (100,000)
Depreciation in excess of financial depreciation 50, 000
Rent received in advance 150,000
Corporate tax rate 30%

What amount should be reported as total income tax expense?

a. 420,000
b. 540,000
c. 450,000
d. 0
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14. Malyn Company reported 350,000 in income before the income tax. Life insurance proceeds amounting
to 50,000 and life insurance for officer amounting to 20,000. How much is the income subject to tax?
a. 220,000
b. 320,000
c. 370,000
d. 70,000

15. The following information is available for Simon 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

Simon estimated 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

16. Which of the following is not a permanent difference?

a. Surcharges paid due to negligence
b. Passive income that has different tax rates
c. Expenses related to nontaxable revenue
d. Depreciation expense

17. Why do you need not to include permanent difference in computing deferred tax expenses?
a. It was need to include in computing deferred tax expenses.
b. Because it is having different tax rates.
c. Because permanent differences are not taxable.
d. Because deferred tax expenses has a choice whether to include permanent difference or not.

18. A deferred tax asset arises from the following, except:

a. When the taxable income is higher than accounting income because of timing differences.
b. When the tax base of asset is higher than the carrying amount.
c. Initial recognition of an asset in a transaction that is not a business combination.
d. When the tax base of a liability is lower than the carrying amount.

19. If the temporary differences resulted to a higher taxable income, then there is a:
a. Deferred tax asset
b. Deferred tax liability
c. Higher current tax expense
d. None of the above

20. A temporary difference which would result in a deferred tax asset

a. Tax penalty and surcharge
b. Dividend received on shared investment
c. Excess tax depreciation over accounting depreciation
d. Rent received in advance included in taxable income at the time of receipt but deferred for
accounting purposes.

21. The deferred tax expense is equal to:

a. Increase in deferred tax asset less than the increase in deferred tax liability.
b. Increase in deferred tax liability less than the increase in deferred tax asset.
c. Increase in deferred tax asset
d. Increase in deferred tax liability
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22. Recording a deferred tax asset will include a

a. Debit to income tax payable
b. Credit to deferred tax liability
c. Debit to income tax expense
d. Credit to income tax expense

23. Statement 1: A deferred tax asset and a deferred tax liability shall be classified as
noncurrent asset and noncurrent liability respectively, regardless of reversal period.
Statement 2: A deferred tax asset and a deferred tax liability shall be discounted.

Which among the statements is true?

a. Statement 1 only.
b. Statement 2 only.
c. Both statements are correct.
d. Neither of the statements is correct.

24. It is the profit for a period determined in accordance with the rules established by tax authorities upon
which income taxes are payable.
a. Net profit
b. Accounting profit
c. Accounting profit subject to tax
d. Taxable profit

25. It is the deferred tax consequence attributable to a deductible temporary difference and operating loss
carry forward.
a. Deferred tax asset
b. Deferred tax liability
c. Current tax liability
d. Current tax asset

26. It is the amount attributable to an asset or liability for tax purposes.

a. Measurement base
b. Carrying amount
c. Tax base
d. Taxable amount

27. In computing the change in deferred tax asset or liability, which tax rate is used?
a. Current tax rate
b. Enacted future tax rate
c. Estimated future tax rate
d. Prior tax rate

28. It is the amount of income tax paid or payable for the year as determined in applying the provisions of
the enacted tax law to the taxable income.
a. Current tax expense
b. Deferred tax benefit
c. Deferred tax expense
d. Income tax expense

29. When taxable income is higher than accounting income, this will give rise to a what?
a. Deferred tax asset
b. Deferred tax liability
c. Tax asset
d. Investment

30. An example of a permanent difference is

a. proceeds from life insurance in officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expenses for a life insurance policy on officers.
d. all of these.