Deferred Tax Paper 3

1

Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, year 1, its first year of operations:
Pretax financial income $160,000
Nontaxable interest received on municipal securities (5,000)
Long-term loss accrual in excess of deductible amount 10,000
Depreciation in excess of financial statement amount (25,000)
Taxable income $140,000
Zeff’s tax rate for year 1 is 40%.
In its year 1 income statement, what amount should Zeff report as income tax expense—current portion?






2

Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, year 1, its first year of operations:
Pretax financial income $160,000
Nontaxable interest received on municipal securities (5,000)
Long-term loss accrual in excess of deductible amount 10,000
Depreciation in excess of financial statement amount (25,000)
Taxable income $140,000
Zeff’s tax rate for year 1 is 40%. In its December 31, year 1 balance sheet, what should Zeff report as deferred income tax liability?






3

West Corp. leased a building and received the $36,000 annual rental payment on June 15, year 1. The beginning of the lease was July 1, year 1. Rental income is taxable when received. West’s tax rates are 30% for year 1 and 40% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should West report in its December 31, year 1 balance sheet?






4

Black Co., organized on January 2, year 1, had pretax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, year 1. The only temporary difference is accrued product warranty costs that are expected to be paid as follows:
Year 2 $100,000
Year 3 50,000
Year 4 50,000
Year 5 100,000
Black has never had any net operating losses (book or tax) and does not expect any in the future. There were no temporary differences in prior years. The enacted income tax rates are 35% for year 1, 30% for year 2 through year 4, and 25% for year 5. In Black’s December 31, year 1 balance sheet, the deferred income tax asset should be






5

A temporary difference that would result in a deferred tax liability is






6

Orleans Co., a cash-basis taxpayer, prepares accrual basis financial statements. In its year 2 balance sheet, Orleans’ deferred income tax liabilities increased compared to year 1. Which of the following changes would cause this increase in deferred income tax liabilities?
I. An increase in prepaid insurance.
II. An increase in rent receivable.
III. An increase in warranty obligations.






7

At the end of year one, Cody Co. reported a profit on a partially completed construction contract by applying the percentage-of-completion method. By the end of year two, the total estimated profit on the contract at completion in year three had been drastically reduced from the amount estimated at the end of year one. Consequently, in year two, a loss equal to onehalf of the year one profit was recognized. Cody used the completed-contract method for income tax purposes and had no other contracts. The year two balance sheet should include a deferred tax
Asset
Liability






8

A deferred tax liability is computed using






9

For the year ended December 31, year 1, Grim Co.’s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following:
Interest on municipal bonds $70,000
Premium expense on keyman life insurance (20,000)
Total $50,000
Grim’s enacted income tax rate is 30%. In its year 1 income statement, what amount should Grim report as current provision for income tax expense?






10

Shear, Inc. began operations in year 1. Included in Shear’s year 1 financial statements were bad debt expenses of $1,400 and profit from an installment sale of $2,600. For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in year 2. The enacted tax rates are 30% in year 1 and 25% in year 2. In its year 1 income statement, what amount should Shear report as deferred income tax expense?






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