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Use the following information for questions 1a & 1b. Milo Co.

Use the following information for questions 1a & 1b.

Milo 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 $500,000 in each of the next three years. The income tax rate is 30% for all years.

1a. The deferred tax asset to be recognized is
a. $75,000 current.
b. $150,000 current.
c. $225,000 current.
d. $300,000 current.

1b. The deferred tax liability to be recognized is
Current Noncurrent
a. $150,000 $300,000
b. $150,000 $225,000
c. $0 $450,000
d. $0 $375,000

Use the following information for questions 2a and 2b.

Barley Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2008 $ 975,000
Tax exempt interest (75,000)
Originating temporary difference (300,000)
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 2008 is 35%.

2a. What amount should be reported in its 2008 income statement as the deferred portion of the provision for income taxes?
a. $90,000 credit
b. $120,000 debit

2b. In Barley’s 2008 income statement, what amount should be reported for total income tax expense?
a. $330,000
b. $315,000
c. $300,000

Use the following information for questions 3a through 3b
Oats Company deducts insurance expense of $84,000 for tax purposes in 2008, but the expense is not yet recognized for accounting purposes. In 2009, 2010, and 2011, 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. Oats Company has a tax rate of 40% and income taxes payable of $72,000 at the end of 2008. There were no deferred taxes at the beginning of 2008.
3a. What is the amount of income tax expense for 2008?
a. $105,600
b. $84,000

3b. Assuming that income tax payable for 2009 is $107,200, the income tax expense for 2009 would be what amount?
a. $96,000
b. $84,800

4. The following information is available for Hops 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
Hops estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $105,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims?
a. $100,000
b. $95,000
c. $85,000

5. Rice Corp.'s books showed pretax financial income of $1,700,000 for the year ended December 31, 2008. In the computation of federal income taxes, the following data were considered:
Gain on an involuntary conversion $650,000
(Rice 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
Federal estimated tax payments, 2008 155,000
Enacted federal tax rate, 2008 30%
What amount should Rice report as its current federal income tax liability on its December 31, 2008 balance sheet?
a. $100,000
b. $130,000
c. $255,000







6. On January 1, 2007, Corn Corp. purchased 40% of the voting common stock of Cob, Inc. and appropriately accounts for its investment by the equity method. During 2007, Cob reported earnings of $380,000 and paid dividends of $140,000. Corn assumes that all of Cob's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Corn's current enacted income tax rate is 25%. The increase in corn's deferred income tax liability for this temporary difference is
a. $114,000.
b.. $42,000
c. $28,800.

7. Cain Corp.'s 2008 income statement showed pretax accounting income of $750,000. To compute the federal income tax liability, the following 2008 data are provided:
Income from exempt municipal bonds $ 30,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 60,000
Estimated federal income tax payments made 132,000
Enacted corporate income tax rate 30%
What amount of current federal income tax liability should be included in Cain's December 31, 2008 balance sheet?
a. $48,000
b. $66,000
c. $75,000
d. $198,000

8. Fescue 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
Fescue 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 $1,200,000. 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. $1,425,000
b. $1,500,000






9. Wheat, Inc. reports a taxable and financial loss of $650,000 for 2008. Its pretax financial income for the last two years was as follows:
2006 $300,000
2007 400,000
The amount that Wheat, Inc. reports as a net loss for financial reporting purposes in 2008, 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

10. In 2007, Hay Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $1,500,000. The facilities were sold in March 2008 and a $1,500,000 loss was recognized for tax purposes. Also in 2007, Hay paid $100,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2007 and 2008, and that Admire paid $780,000 in income taxes in 2007, the amount reported as net deferred income taxes on Hay balance sheet at December 31, 2007, should be a
a. $420,000 asset.
b. $360,000 liability
c. $450,000 asset

11. Alfa Company has the following cumulative taxable temporary differences:
12/31/08 12/31/07
$1,350,000 $960,000
The tax rate enacted for 2008 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2008 is $2,400,000 and there are no permanent differences. Cromwell's pretax financial income for 2008 is
a. $2,790,000.
b. $2,010,000
c. $1,050,000

12. Rhy Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2007 related to $600,000 of excess depreciation. In December of 2007, a new income tax act is signed into law that lowers the corporate rate from 40% to 30%, effective January 1, 2009. If taxable amounts related to the temporary difference are scheduled to be reversed by $300,000 for both 2008 and 2009, Rhy 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




13. Grass Corporation began operations in 2004. There have been no permanent or temporary differences to account for since the inception of the business. The following data are available:
Year
2006
2007
2008
2009 Enacted Tax Rate
45%
40%
35%
30% Taxable Income
$750,000
900,000 Taxes Paid
$337,500
360,000
In 2008, Grass had an operating loss of $930,000. What amount of income tax benefits should be reported on the 2008 income statement due to this loss?
a. $409,500
b. $372,000
c. $279,000

14. Maze Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Jesse's gross profit on installment sales equals 40% of the selling price of the furniture.
For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Jesse's income tax rate is 30%.
If Maze's December 31, 2007, balance sheet includes a deferred tax liability of $300,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of (Hint the temporary difference must be divided by 40% to arrive at correct answer)
a. $2,500,000.
b. $1,500,000.
c. $750,000.
d. $300,000.






SEE THE BONUS QUESTIONS ON THE NEXT PAGE













BONUS QUESTIONS WEEK 4

15. Grain Corp.'s 2007 income statement had pretax financial income of $250,000 in its first year of operations. Grain uses an accelerated cost recovery 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 2007, and the enacted tax rates for 2007 to 2011 are as follows:
Book Over (Under) Tax Tax Rates
2007 $(50,000) 35%
2008 (65,000) 30%
2009 (15,000) 30%
2010 60,000 30%
2011 70,000 30%
There are no other temporary differences. In Grain's December 31, 2007 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be
Noncurrent Deferred Income Taxes
Income Tax Liability Currently Payable
a. $39,000 $50,000
b. $15,000 $70,000


16. For calendar year 2007, Stalk Corp. reported depreciation of $1,000,000 in its income statement. On its 2007 income tax return, Stalk reported depreciation of $1,600,000. Stalk's income statement also included $225,000 accrued warranty expense that will be deducted for tax purposes when paid. Stalks enacted tax rates are 30% for 2007 and 2008, and 24% for 2009 and 2010. The depreciation difference and warranty expense will reverse over the next three years as follows:
Depreciation Difference Warranty Expense
2008 $250,000 $ 55,000
2009 190,000 55,000
2010 160,000 115,000
$600,000 $225,000
These were Stalk's only temporary differences. In Stalk's 2007 income statement, the deferred portion of its provision for income taxes should be
a. $200,700.
b. $101,700
c. $109,800
.

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