M131Bch19additionalpracticeproblemswithsolutions

Intermediate Accounting

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M131B: INTERMEDIATE ACCOUNTING CHAPTER 19 – ADDITIONAL PRACTICE PROBLEMS 1. Smiley Corporation purchased a machine on January 2, 2006, for $2,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2006 $400,000 2009 $230,000 2007 640,000 2010 230,000 2008 384,000 2011 116,000 Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Smiley's balance sheet at December 31, 2007, 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 a ($640,000 – $400,000) × 30% = $72,000. Use the following information for questions 2 through 4. Frizell Co. at the end of 2007, 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 2008 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of
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