 CHAPTER 16 

Income Taxes
MULTIPLE CHOICE QUESTIONS

Theory/Definitional Questions

1 Example of permanent difference

2 Example of temporary difference
3 Rationale for interperiod tax allocation
4 Determination of income tax expense
5 Example of differences resulting in deferred tax asset
6 Example of a deductible temporary difference
7 Situation requiring interperiod tax allocation
8 Identifying a permanent difference
9 Concepts behind a deferred tax asset
10 Supporting arguments for allocation of income taxes
11 Example of temporary difference resulting in deferred tax liability
12 Recognition of rate change under asset/liability method
13 Recognition of tax benefit of a loss carryforward
14 NOL carryforwards
15 Temporary differences between financial income and taxable income
16 Example of temporary difference deductible amount
17 Example of temporary difference taxable amount
18 GAAP recognition of benefits derived from investment credits
19 Reasons for intraperiod tax allocation
20 Effect of inter- and intraperiod tax allocations on net income
21 Reporting deferred tax assets and liabilities on the balance sheet
22 Reporting deferred tax assets and liabilities on the balance sheet
23 International accounting standards approach to interperiod tax allocation
24 Approaches to interperiod tax allocation
25 Approaches to interperiod tax allocation
26 Meaning of U.K. term “crystallise”
27 Deferred taxes the statement of cash flows using the indirect method

Computational Questions
28 Computation of income tax expense
29 Computation of tax benefit from carryback
30 Computation of pretax accounting income

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606 Chapter 16  Income Taxes

31 Computation of deferred tax liability with changing tax rates

32 Computation of amount deducted for depreciation on the tax return
33 Computation of net income tax expense
34 Computation of deferred tax expense
35 Computation of taxable income
36 Computation of deferred tax asset with temporary and permanent
differences
37 Computation of loss to be reported after NOL carryback
38 Computation of total deferred tax liability
39 Computation of increase in tax expense arising from tax rate increase
40 Computation of income taxes payable
41 Computation of total noncurrent deferred tax liability
42 Determination of income tax refund following an NOL carryback
43 Deferred tax liability arising from depreciation methods
44 Deferred income tax liability from temporary and permanent differences
45 Computation of current federal income tax liability
46 Computation of income tax payable
47 Computation of total income tax expense
48 Intraperiod tax allocation
49 Intraperiod tax allocation
50 Intraperiod tax allocation
51 Intraperiod tax allocation
52 Intraperiod tax allocation
53 Intraperiod tax allocation
54 Intraperiod tax allocation

PROBLEMS

1 Computation of net amount of taxes paid applying carrybacks

2 Computation of taxable income for current year
3 Computation of tax assets/liabilities, journal entries, prepare income
statement
4 Computation of tax assets/liabilities, journal entries, prepare income
statement
5 Computation of tax assets/liabilities, journal entries, prepare income
statement
6 Computation of tax assets/liabilities, journal entries, prepare income
statement
7 Computation of tax assets/liabilities, journal entries, prepare income
statement
8 Computation of balances of deferred tax assets/liabilities
9 Intraperiod tax allocation
10 Discounting deferred taxes
11 Reporting income tax expense

MULTIPLE CHOICE QUESTIONS

a 1. Which of the following creates a permanent difference between financial

LO1 income and taxable income?
a. Interest received on municipal bonds
b. Completed contract method of recognizing construction revenue
c. Unearned rent revenue
d. Accelerated cost recovery on plant and equipment

b 2. Which of the following creates a temporary difference between financial and

LO1 taxable income?
a. Interest on municipal bonds
b. Accelerated cost recovery on plant and equipment
c. Fines from violation of law
d. Premiums paid for officer's life insurance (company is beneficiary)

c 3. The purpose of an interperiod income tax allocation is to

LO1 a. allow reporting entities to fully utilize tax losses carried forward from a
previous year.
b. allow reporting entities whose tax liabilities vary significantly from year to
year to smooth payments to taxing agencies.
c. recognize an asset or liability for the tax consequences of temporary
differences that exist at the balance sheet date.
d. amortize the deferred tax liability shown on the balance sheet.

d 4. The result of interperiod income tax allocation is that

LO1 a. wide fluctuations in a company's tax liability payments are eliminated.
b. tax expense shown in the income statement is equal to the deferred
taxes shown on the balance sheet.
c. tax liability shown in the balance sheet is equal to the deferred taxes
shown on the previous year's balance sheet plus the income tax
expense shown on the income statement.
d. tax expense shown on the income statement is equal to income taxes
payable for the current year plus or minus the change in the deferred tax
asset or liability balances for the year.

607
a 5. Which of the following temporary differences ordinarily creates a deferred
tax
LO1 asset?
a. Accrued warranty costs
b. Depreciation
c. Installment sales
d. Amortization of goodwill

c 6. An example of a "deductible temporary difference" occurs when

LO1 a. the installment sales method is used for tax purposes, but the accrual
method of recognizing sales revenue is used for financial reporting
purposes.
b. accelerated depreciation is used for tax purposes but straight-line
depreciation is used for accounting purposes.
c. warranty expenses are recognized on the accrual basis for financial
reporting purposes but recognized as the warranty conditions are met for
tax purposes.
d. the completed-contract method of recognizing construction revenue is
used for tax purposes, but the percentage-of-completion method is used
for financial reporting purposes.

a 7. Which of the following situations would require interperiod income tax

LO1 allocation procedures?
a. A temporary difference exists because the tax basis of capital
equipment is less than its reported amount in the financial statements.
b. Proceeds from an insurance policy on capital equipment lost in a fire
exceed the book value of the equipment.
c. Last period’s ending inventory was understated causing both net income
and income tax expense to be understated.
d. Nontaxable interest payments are received on municipal bonds.

d 8. An item that would create a permanent difference in pretax financial and

LO1 taxable incomes would be
a. using accelerated depreciation for tax purposes and straight-line
depreciation for book purposes.
b. purchasing equipment previously leased with an operating lease in prior
years.
c. using the percentage-of-completion method on long-term construction
contracts.
d. paying fines for violation of laws.
d 9. Which of the following is the most likely item to result in a deferred tax
asset?
LO1 a. Using accelerated depreciation for tax purposes but straight-line
depreciation for accounting purposes
b. Using the completed-contract method of recognizing construction
revenue tax purposes, but using percentage-of-completion method for
financial reporting purposes
c. Prepaid expenses
d. Unearned revenues

a 10. Which of the following arguments is supportive of allocation of income

taxes?
LO7 a. Future predictions of net income are enhanced when income taxes are
allocated.
b. Income tax expense computed under interperiod tax allocation is a
better predictor of future cash flows than income taxes actually paid.
c. Income tax is not an expense; it is a sharing of profits with government.
d. Income tax expense based on actual payments is more understandable
to users than allocated income taxes.

d 11. Which of the following temporary differences ordinarily results in a deferred

LO2 tax liability?
a. Accrued warranty costs
b. Subscription revenue received in advance
c. Unrealized losses on marketable securities
d. Depreciation

d 12. When enacted tax rates change, the asset and liability method of
interperiod
LO4 tax allocation recognizes the rate change as
a. a cumulative effect adjustment.
b. an adjustment to be netted against the current income tax expense.
c. a separate charge to the current year's net income.
d. a separate charge or benefit to income tax expense.

c 13. Recognizing tax benefits in a loss year due to a loss carryforward requires
LO3 a. only a footnote disclosure.
b. creating a new carryforward for the next year.
c. creating a deferred tax asset.
d. creating a deferred tax liability.
a 14. A company would most likely choose the carryforward option for a net
LO3 operating loss if the company expected
a. higher tax rates in the future compared to the past.
b. lower tax rates in the future compared to the past.
c. lower earnings in the future compared to the past.
d. higher earnings in the future compared to the past.

a 15. All of the following can result in a temporary difference between pretax
LO1 financial income and taxable income except for
a. payment of premiums for life insurance.
b. depreciation expense.
c. contingent liabilities.
d. product warranty costs.

c 16. Which of the following items results in a temporary difference deductible

LO1 amount for a given year?
a. Premiums on officer's life insurance (company is beneficiary)
b. Premiums on officer's life insurance (officer is beneficiary)
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial
reporting purposes

d 17. Which of the following items results in a temporary difference taxable

amount
LO1 for a given year?
a. Premiums on officer's life insurance (company is beneficiary)
b. Premiums on officer's life insurance (officer is beneficiary)
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial
reporting purposes

d 18. Alpha Company reported net incomes in 2001 and 2002 before sustaining a
LO3 significant operating loss in 2003. All of the 2003 loss can be carried back
against the income of 2001 and 2002 for purposes of determining the
company’s 2003 income tax liability. How should the carryback be
presented in the company’s 2003 financial statements?
a. As an extraordinary item in the income statement
b. As a revenue from operations in the income statement
c. As the correction of an error in the retained earnings statement
d. As a reduction in the operating loss on the income statement for the
year 2003
a 19. Intraperiod income tax allocation arises because
LO8 a. items included in the determination of taxable income may be presented
in different sections of the financial statements.
b. income taxes must be allocated between current and future periods.
c. certain revenues and expenses appear in the financial statements either
before or after they are included in taxable income.
d. certain revenues and expenses appear in the financial statements but
are excluded from taxable income.

b 20. Assuming no prior period adjustments, would the following allocations affect
LO8 net income?
Interperiod Tax Intraperiod Income
Tax Allocation Tax Allocation
a. Yes Yes
b. Yes No
c. No Yes
d. No No

c 21. Which of the following statements is not correct?

LO5 a. All current deferred tax liabilities and assets shall be offset and
presented as a single amount on the balance sheet.
b. Deferred tax assets related to carryforwards shall be classified as
current or noncurrent on the balance sheet based on their expected
date of reversal.
c. All current and noncurrent deferred tax assets shall be offset and
presented as a single amount on the balance sheet.
d. Deferred tax liabilities and assets shall be classified as current or
nocurrent on the balance sheet based on the classification of the asset
or liability giving rise to the deferred tax item.

b 22. A deferred tax liability arising from the use of an accelerated method of
LO5 depreciation for tax purposes and the straight-line method for financial
reporting purposes would be classified on the balance sheet as
a. a current liability.
b. a noncurrent liability.
c. a current liability for the portion of the temporary difference reversing
within a year and a noncurrent liability for the remainder.
d. an offset to the accumulated depreciation reported on the balance
sheet.
c 23. International accounting standards currently are moving toward the
LO7 a. no-deferral approach.
b. partial recognition approach.
c. comprehensive recognition approach.
d. discounted comprehensive recognition approach.

b 24. If all temporary differences entering into the determination of pretax

accounting
LO7 income are considered in the computation of deferred taxes and income tax
expense, then
a. the no-deferral approach is being applied.
b. the comprehensive recognition approach is being applied.
c. the partial recognition approach is being applied.
d. the net-of-tax method is being applied.

d 25. The asset-liability method of interperiod tax allocation currently required by

LO7 U.S. GAAP is an example of the
a. discounted comprehensive recognition approach.
b. no-deferral approach.
c. partial recognition approach.
d. comprehensive recognition approach.

b 26. Historically, the United Kingdom has recognized only those deferred tax
LO7 liabilities expected to “crystallize.” The term “crystallize” is most nearly
synonymous with the term
a. amortized.
b. realized.
c. recognized.
d. liquidated.

a 27. On the statement of cash flows using the indirect method, an increase in the
LO6 deferred tax liability would be shown as
a. an addition to net income.
b. a deduction from net income.
c. an increase in investing activities.
d. an increase in financing activities.
b 28. In 2002, Eric Corporation reported $90,000 net income before income
taxes.
LO3 The income tax rate for 2002 was 30 percent. Eric had an unused $60,000
net operating loss carryforward arising in 2001 when the tax rate was 35
percent. The income tax expense Eric would report for 2002 would be
a. $6,000.
b. $9,000.
c. $10,500.
d. $27,000.

a 29. The Gayle Corporation reported a $66,000 operating loss in 2002. In the
LO3 preceding three years, Gayle reported the following income before taxes
and paid the indicated income taxes:
Year Income Taxes Tax Rate
1999 $36,000 $10,800 30%
2000 24,000 8,400 35%
2001 48,000 16,200 35%

The amount of tax benefit to be reported in 2002 arising from the tax
carryback provisions of the current tax code would be
a. $23,100.
b. $22,500.
c. $21,300.
d. $19,200.

c 30. The Indy Company had taxable income of $12,000 during 2002. Indy used
LO2 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 2002?
a. $1,400
b. $6,600
c. $13,400
d. $17,400
b 31. The following information is taken from Blackhawk Corporation's 2002
financial
LO4 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 2002 and
will reverse in equal net taxable amounts in each of the next three years. If
tax rates are 40 percent in 2002, 35 percent in 2003, 35 percent in 2004,
and 30 percent in 2005, then the total deferred tax liability Blackhawk
should report on its December 31, 2002, balance sheet is
a. $13,500.
b. $15,000.
c. $15,750.
d. $18,000.

d 32. The following information was taken from Buccaneer Corporation's 2002
LO2 income statement:
Income before income taxes........................... $ 1,500,000
Income tax expense:
Current....................................................... $564,000
Deferred..................................................... 36,000
600,000
Net income....................................................... $ 900,000

Buccaneers' first year of operations was 2002. The company has a 30

percent tax rate. Management decided to use accelerated depreciation for
tax purpose and the straight-line method of depreciation for financial
reporting purposes. The amount charged to depreciation expense in 2002
was $600,000. Assuming no other differences existed between book
income and taxable income, what amount did Buccaneer deduct for
depreciation on its tax return for 2002?
a. $480,000
b. $570,000
c. $600,000
d. $720,000
a 33. Warren Corporation began operations in 1997 and had operating losses of
LO3 $400,000 in 1998 and $300,000 in 1999. For the year ended December
31, 2000, Warren had a pretax financial income of $600,000. For 1998 and
1999, assume an enacted tax rate of 30 percent, and for 2000 a 35 percent
tax rate. There were no temporary differences in any of the years. In
Warren's 2000 income statement, how much should be reported as income
tax expense?
a. $0
b. $30,000
c. $180,000
d. $210,000

b 34. On December 31, 1999, Alton, Inc., reported a current deferred tax liability
of
LO2 $140,000 and a noncurrent deferred tax asset of $40,000. At the end of
2000, Alton reported a current deferred tax liability of $100,000, and a
noncurrent deferred tax liability of $44,000. The deferred tax expense for
2000 is
a. $144,000.
b. $44,000.
c. $36,000.
d. $4,000.

d 35. Eden Company had pretax accounting income of $24,000 during 2002.
Eden's
LO2 only temporary difference for 2002 relates to a sale made in 2000 and
recognized for accounting purposes at that time. However, Eden uses the
installment sales method of revenue recognition for tax purposes. During
2002 Eden collected a receivable from the 2000 sale which resulted in
$6,000 of income under the installment sales method. Eden's taxable
income for 2002 would be
a. $6,000.
b. $18,000.
c. $24,000.
d. $30,000.
c 36. Begal Corporation paid $20,000 in January of 2002 for premiums on a two-
LO2 year life insurance policy which names the company as the beneficiary.
Additionally, Begal Corporation's financial statements for the year ended
December 31, 2002 revealed the company paid $105,000 in taxes during
the year and also accrued estimated losses on disposal of unused plant
facilities of $200,000. Assuming these facilities were sold in February of
2003 (at which time a $200,000 loss was recognized for tax purposes) and
that Begal's tax rate is 30 percent for both 2002 and 2003, what amount
should Begal report as asset for net deferred income taxes on its 2002
balance sheet?
a. $54,000
b. $57,000
c. $60,000
d. $66,000

c 37. Dodger Corporation reported a loss for both financial reporting purposes
and
LO3 tax reporting purposes of $231,000 in 2002. For financial reporting
purposes, Dodger reported income before taxes for years 1999-2001 as
listed below:
1999............................................................................ $ 66,000
2000............................................................................ 99,000
2001............................................................................ 132,000

Assuming Dodger's tax rate is 30 percent in all periods, and that the
company uses the carryback provisions, what amount should appear in
Dodger's statements for financial reporting purposes as a net loss in 2002?
a. $0
b. $69,300
c. $161,700
d. $234,300
b 38. Analysis of the assets and liabilities of Marie Corp. on December 31, 2002,
LO4 disclosed assets with a tax basis of $1,000,000 and a book basis of
$1,300,000. There was no difference in the liability basis. The difference in
asset basis arose from temporary differences that would reverse in the
following years:
2003............................................................................ $80,000
2004............................................................................ 70,000
2005............................................................................ 72,000
2006............................................................................ 40,000
2007............................................................................ 38,000

The enacted tax rates are 30 percent for the years 2002-2005 and 35
percent for 2006-2009. The total deferred tax liability on December 31,
2002, should be
a. $105,000.
b. $93,900.
c. $90,000.
d. $69,000.

c 39. Schaeffer Products, Inc., reported an excess of warranty expense over

LO4 warranty deductions of $72,000 for the year ended December 31, 2002.
This temporary difference will reverse in equal amounts over the years
2003 to 2005. The enacted tax rates are as follows:
2002..............................................40%
2003..............................................35%
2004..............................................30%
2005..............................................25%

The reporting for this temporary difference at December 31, 2002, would be
a. a deferred tax liability of $28,800.
b. a deferred tax asset of $28,800.
c. a current deferred tax liability of $8,400 and a noncurrent deferred tax
liability of $13,200.
d. a current deferred tax asset of $8,400 and a noncurrent deferred tax
asset of $13,200.
d 40. In 2003, The Worf Company, reported pretax financial income of $500,000.
LO2 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, 2003; 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, 2003, would be
a. $180,000.
b. $200,000.
c. $212,000.
d. $220,000.

b 41. Fieldcrest Company, newly formed on January 1, 2002, prepared a

temporary
LO2 difference reversal schedule at the end of 2003 that disclosed the following
taxable income (loss) amounts before application of the carryback/carry -
forward rules:
2002............................................................................ $ 64,000
2003............................................................................ (128,000)
2004............................................................................ (12,000)
2005............................................................................ 80,000
2006............................................................................ 20,000

The enacted tax rate for all years was 30 percent. Using the provisions of
FASB Statement No. 109, the total noncurrent deferred tax liability on
December 31, 2003, was
a. $0.
b. $7,200.
c. $10,800.
d. $30,000.
b 42. For three consecutive years, 2000-2002, Twins Corporation has reported
LO3 income before taxes of $100,000 for both financial reporting purposes and
tax reporting purposes. During this time, Twins income tax rates were as
follows:
2000............................................................................ 20%
2001............................................................................ 25%
2002............................................................................ 30%

In 2003, Twins’ tax rate changed to 35 percent. Also in 2003, the company
reported a loss for both financial reporting and tax reporting purposes of
$100,000. Assuming the company uses the carryback provisions, the
amount Twins’ should report as an income tax refund receivable in 2003 is
a. $20,000.
b. $25,000.
c. $30,000.
d. $35,000.

c 43. Viking Corporation reported depreciation of $250,000 on its 2002 tax return.
LO2 However, in its 2002 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, 2002, balance sheet?
a. $30,000
b. $37,500
c. $45,000
d. $75,000

b 44. Cowboy Corporation reported depreciation of $450,000 on its 2002 tax

return.
LO2 However, in its 2002 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:
2002............................................................................ 35%
2003............................................................................ 30%
2004............................................................................ 25%
2005............................................................................ 20%
What amount should be included in the deferred income tax liability in
Cowboy's December 31, 2002, balance sheet?
a. $30,000
b. $37,500
c. $45,000
d. $52,500

c 45. The books of the Tracker Company for the year ended December 31, 2002,
LO2 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, 2002, assuming a corporate income tax rate of 30 percent?
a. $99,600
b. $103,200
c. $106,800
d. $108,000

c 46. Frey Corporation's income statement for the year ended December 31,
2002,
LO2 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 2002 is 30 percent. What is the amount of
income tax payable for 2002?
a. $360,000
b. $320,000
c. $294,000
d. $267,000
c 47. Inventive Corporation’s income statement for the year ended December 31,
LO2 2002, 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
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 2002 is 40 percent. What is the current
portion of Inventive's total income tax expense for 2002?
a. $106,200
b. $120,200
c. $130,200
d. $144,200

The following information relates to questions 48-50:

The Hart Company paid $400,000 in income taxes for the year ended December
31, 2002. Of these taxes, $23,000 related to an extraordinary gain that was taxed
at 25%.
The company discontinued one of its business segments during 2002 and realized
a tax savings of $55,000 from the loss on disposition of the segment. The loss was
treated for tax purposes as an ordinary loss and was deducted from ordinary
income that was taxed at 40%. Included in the $400,000 tax payment was $12,000
resulting from a gain on the sale of equipment. The tax rate on the gain was 25%.
All other income items were from normal operations and were taxed at 40%.

c 48. Income from continuing operations for Hart Company for the year 2002 was
LO8 a. $1,000,000.
b. $1,080,000.
c. $1,098,000.
d. $1,050,000.

a 49. Income taxes from continuing operations for Hart Company for the year
2002 LO8 was
a. $432,000.
b. $420,000.
c. $400,000.
d. $455,000.
b 50. Operating income for Hart Company for the year 2002 was
LO8 a. $1,000,000.
b. $1,050,000.
C. $1,098,000.
d. $1,080,000.

c 51. During a year, Great Northern Company reported income tax expense of
LO6 $200,000. The amount of taxes currently payable remained unchanged
from the beginning to the end of the year. 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 $40,000 at the beginning of the year to $44,000 at the end
of the year. How much cash was paid for income taxes during for the year?
a. $156,000
b. $160,000
c. $196,000
d. $206,000

a 52. For the current year, Northern Pacific Company reported income tax
expense
LO6 of $45,000. Income taxes payable at the end of the prior year were
$20,000 and at the end of the current year were $27,000. 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 $18,000 at the beginning of the current year to $23,000 at
the end of the current year. How much cash was paid for income taxes
during the year?
a. $33,000
b. $45,000
c. $38,000
d. $47,000

a 53. For the current year, Santa Fe Company reported income tax expense
LO6 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
a 54. For the current year, Northern Pacific Company reported income tax
expense
LO6 of $11,000. Income taxes payable at the end of the prior year were $9,000
and at the end of the current year were $10,000. 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 $11,000 at the beginning of the current year to $13,000 at
the end of the current year. How much cash was paid for income taxes
during the year?
a. $8,000
b. $10,000
c. $11,000
d. $9,000

PROBLEMS

Problem 1
Garrison Designs, Inc., a corporation organized on January 1, 1993, reported the
following incomes (losses) for the ten-year period, 1993-2002:
Year Income (Loss) Income Tax Rate Income Tax Paid
1993 $ 16,000 50% $ 8,000
1994 (40,000) 50 0
1995 16,000 48 7,680
1996 24,000 48 11,520
1997 (32,000) 45 0
1998 16,000 42 6,720
1999 32,000 42 13,440
2000 64,000 34 21,760
2001 80,000 34 27,200
2002 (16,000) 30 0

Applying the carryback provisions in the tax law, compute the net amount of taxes
paid (amounts paid less refunds) for the ten-year period ending December 31,
2002.

Solution 1
LO3
Income taxes paid through December 31, 1998, net to zero because the $40,000
net operating loss in 1994 and the $32,000 net operating loss in 1997 are applied
against the entire income earned for the years 1993, 1995, 1996, and 1998.
Net taxes paid between January 1, 1999, and December 31, 2002, were:

Year Net Taxes Paid

1999 $13,440
2000 (after applying 2002 loss) 16,320
2001 27,200
2002 --

Total income taxes actually paid (1993 - 2002) $56,960

Problem 2
The following differences between financial and taxable income were reported by
Dider Corporation for the current year.
(a) Excess of tax depreciation over book depreciation................. $60,000
(b) Interest revenue on municipal bonds....................................... 9,000
(c) Excess of estimated warranty expense over actual
expenditures............................................................................. 54,000
(d) Unearned rent received........................................................... 12,000
(e) Fines paid................................................................................. 30,000
(f) Excess of income reported under percentage-of-completion
accounting for financial reporting over completed-contract
accounting used for tax reporting............................................ 45,000
(g) Interest on indebtedness incurred to purchase tax-exempt
securities.................................................................................. 3,000
(h) Unrealized losses on marketable securities recognized for
financial reporting..................................................................... 18,000

Assume that Dider Corporation had pretax accounting income [before considering
items (a) through (h)] of $900,000 for the current year. Compute the taxable
income for the current year.
Solution 2
LO2
Pretax financial income........................................................................... $ 900,000
Add (deduct) permanent differences:
(b) Tax-exempt interest.................................................................
(9,000)
(e) Fines paid ............................................................................... 30,000
(g) Interest expense on funds used to purchase tax-exempt
securities 3,000
Subtotal............................................................................... $ 924,000

Add (deduct) timing differences:

(a) Excess of tax over book depreciation......................................
(60,000)
(c) Excess of warranty expense over actual expenditures........... 54,000
(d) Unearned rent received........................................................... 12,000
(f) Excess of percentage-of-completion income over completed
contract income........................................................................
(45,000)
(h) Unrealized loss on marketable securities................................ 18,000
Taxable income............................................................. $ 903,000

Problem 3
Walsh Services computed pretax financial income of $220,000 for its first year of
operations ended December 31, 2002. In preparing the income tax return for the
year, the tax accountant determined the following differences between 2002
financial income and taxable income.

(1) Nondeductible expenses.................................................................. $40,000

(2) Nontaxable revenues....................................................................... 14,000
(3) Temporary difference--Installment sales reported in financial
income but not in taxable income.................................................... 70,000

The temporary difference is expected to reverse in the following pattern.

2003 ....................................................................................... $14,000
2004 ....................................................................................... 32,000
2005 ....................................................................................... 24,000

$70,000

The enacted tax rates for this year and the next three years are as follows:
2002 ....................................................................................... 40%
2003 ....................................................................................... 35%
2004 ....................................................................................... 32%
2005 ....................................................................................... 30%
Use the provisions of FASB Statement No. 109.

(1) Prepare a schedule showing the reversal of the temporary differences and the
computation of income taxes payable and deferred tax assets or liabilities as of
December 31, 2002.
(2) Prepare journal entries to record income taxes payable and deferred income
taxes.
(3) Prepare the income statement for Walsh Services beginning with “Income from
continuing operations before income taxes” for the year ended December 31,
2002.

Solution 3
LO4
(1) Reversal Years
2002 2003 2004 2005
Pretax financial income $220,000
Nondeductible expense 40,000
Nontaxable revenue (14,000)
Taxable financial income $246,000
Temporary difference:
Gross profit on installment sales (70,000) $14,000 $32,000 $24,000
Taxable income $176,000 $14,000 $32,000 $24,000
Enacted tax rate 40% 35% 32% 30%
Income taxes payable $ 70,400
Deferred tax liability:
Current $ 4,900
Noncurrent $10,240 $ 7,200

(2) 2002 Journal Entries:

Income Tax Expense--Current……………………… 70,400
Income Taxes Payable………………………….. 70,400

Income Tax Expense--Deferred……………………. 22,340

Deferred Tax Liability--Current…………………. 4,900
Deferred Tax Liability--Noncurrent……………… 17,440

(3) 2002 Income Statement Presentation:

Income from continuing operations before
income taxes............................................................ $220,000
Less income taxes:
Current provision................................................ $ 70,400
Deferred provision.............................................. 22,340
92,740
Income from continuing operations......................... $127,260
Problem 4
Millcroft Inc. computed a pretax financial income of $40,000 for the first year of its
operations ended December 31, 2002. Analysis of the tax and book basis of its
liabilities disclosed $360,000 in unearned rent revenue on the books that had been
recognized as taxable income in 2002 when the cash was received.

The unearned rent is expected to be recognized on the books in the following

pattern.
2003………………………………………………..$ 90,000
2004160,000
2005……………………………………………….. 70,000
2006………….…………………………………… 40,000
$360,000

The enacted tax rates for this year and the next four years are as follows:
2002..........................................................................40%
2003..........................................................................36%
2004..........................................................................33%
2005..........................................................................30%
2006..........................................................................32%

Use the provisions of FASB Statement No. 109.

(1) Prepare a schedule showing the reversal of the temporary difference and the
computation of income taxes payable and deferred tax assets or liabilities as of
December 31, 2002.
(2) Prepare journal entries to record income taxes payable and deferred income
taxes.
(3) Prepare the income statement for Millcroft beginning with “Income from
continuing operations before income taxes” for the year ended December 31,
2002.
Solution 4
LO4
(1) Reversal Years
2002 2003 2004 2005 2006
Taxable financial income $ 40,000 $ 0 $ 0 $ 0 $ 0
Temporary differences:
Unearned rent revenue 360,000
Rent revenue earned 0 (90,000) (160,000) (70,000)
(40,000)
Taxable income (loss) $ 400,000 $(90,000) $(160,000) $(70,000)
$(40,000)
Loss carryback:
2003 carryback (90,000) 90,000
2004 carryback (160,000) 160,000
2005 carryback (70,000) 70,000
Net taxable (deductible)
amount $ 80,000 $ 0 $ 0 $ 0 $(40,000)
Enacted tax rate 40% 36% 30% 30% 32%

Income taxes payable (40% x $400,000)........... $160,000

Deferred tax asset:
Current (40% x $90,000)............................ 36,000
Noncurrent (40% x $160,000). ................... 64,000

(2) 2002 Journal Entries:

Income Tax Expense--Current................................ 160,000
Income Taxes Payable....................................... 160,000

Deferred Tax Asset--Current................................... 36,000

Deferred Tax Asset--Noncurrent............................. 92,000
Income Tax Benefit--Deferred............................ 128,000

(3) 2002 Income Statement Presentation:

Income from continuing operations before
income taxes.................................................................... $40,000
Less income taxes:
Current provision.....................................................$160,000
Deferred benefit....................................................... (128,000) 32,000
Income from continuing operations................................. $ 8,000
Problem 5
Radford Appliances computed a pretax financial loss of $60,000 for the first year of
its operations ended December 31, 2002. Analysis of the tax and book basis of its
liabilities disclosed $80,000 in accrued warranty expenses on the books that had
not been deductible from taxable income in 2002, but would be deductible in future
years when the warranty expenses were paid.

The future warranty payments are expected to occur in the following pattern.
2003....................................................................$14,000
2004......................................................................36,000
2005......................................................................18,000
2006.................................................................... 12,000
$80,000

The enacted tax rates for this year and the next four years are as follows:
2002..........................................................................40%
2003..........................................................................35%
2004..........................................................................32%
2005..........................................................................30%
2006..........................................................................30%

Use the provisions of FASB Statement No. 109.

(1) Prepare a schedule showing the reversal of the temporary difference and the
computation of income taxes payable and deferred tax assets or liabilities as of
December 31, 2002.
(2) Prepare journal entries to record income taxes payable and deferred income
taxes.
(3) Prepare the income statement for Radford beginning with "Income from
continuing operations before income taxes" for the year ended December 31,
2002.
Solution 5
LO4
(1) Reversal Years
2002 2003 2004 2005 2006
Taxable financial income $(60,000) $ 0 $ 0 $ 0 $ 0
Temporary differences:
Estimated warranty
payment in future years 80,000
Deductible amount--
warranty payments (14,000) (36,000) (18,000)
(12,000)
Taxable income (loss) $ 20,000 $(14,000) $(36,000) $(18,000)
$(12,000)

Loss carryback:
2003 carryback (14,000) 14,000
2004 carryback (6,000) 6,000
Net taxable (deductible
amount) $ 0 $ 0 $(30,000) $(18,000)
$(12,000)
Enacted tax rate 40% 35% 32% 30%
30%

Income taxes payable (40% x $20,000).......................................................... $8,000

Deferred tax asset:
Current (40% x $14,000).......................................................................... 5,600
Noncurrent (40% x $6,000)...................................................................... 2,400

(2) 2002 Journal Entries

Income Tax Expense--Current........................................ 8,000
Income Taxes Payable............................................ 8,000
Deferred Tax Asset--Current........................................... 5,600
Deferred Tax Asset--Noncurrent..................................... 2,400
Income Tax Benefit--Deferred................................. 8,000

(3) 2002 Income Statement Presentation:

Loss from continuing operations before
income taxes.................................................................... $(60,000)
Less income taxes:
Current provision..................................................... $8,000
Deferred benefit....................................................... (8,000) 0
Loss from continuing operations...................................... $(60,000)
Problem 6
Seta Associates computed a pretax financial income of $280,000 for the first year
of its operations ended December 31, 2002. Included in financial income was
$20,000 of nondeductible expense and $70,000 gross profit on installment sales
that was deferred for tax purposes until the installments were collected.

The temporary differences are expected to reverse in the following pattern.

Gross Profit on Collections

2003 ......................................................................$20,000
2004 ...................................................................... 30,000
2005 ...................................................................... 20,000
$70,000

The enacted tax rates for this year and the next three years are as follows:
2002 ...................................................................... 40%
2003 ...................................................................... 35%
2004 ...................................................................... 32%
2005 ...................................................................... 30%

(1) Prepare a schedule showing the reversal of the temporary differences and the
computation of income taxes payable and deferred tax assets or liabilities as of
December 31, 2002.

(2) Prepare journal entries to record income taxes payable and deferred income
taxes.

(3) Prepare the income statement for Seta beginning with "Income from continuing
operations before income taxes" for the year ended December 31, 2002.
Solution 6
LO4
(1) Reversal Years
2002 2003 2004 2005
Pretax financial income (loss) $280,000
Nondeductible expense 20,000
Taxable financial income (loss) $300,000
Temporary difference:
Gross profit on installment sales (70,000)
Taxable amount--collections $20,000 $30,000 $20,000
Taxable income (loss) $230,000 $20,000 $30,000 $20,000

Enacted tax rate 40% 35% 32% 30%

Income taxes payable (40% x $230,000).......................... $92,000
Deferred tax liability:
Current (35% x $20,000)............................................ 7,000
Noncurrent (32% x $30,000) + (30% x 20,000)............... 15,600

Under the provisions of the proposed modification to FASB Statement No. 109, the
classification of the deferred tax liability into current and noncurrent portions follows
the classification of the underlying installment receivable.

(2) 2002 Journal Entries

Income Tax Expense--Current........................................ 92,000
Income Taxes Payable............................................ 92,000

Income Tax Expense--Deferred...................................... 22,600

Deferred Tax Liability--Current................................ 7,000
Deferred Tax Liability--Noncurrent.......................... 15,600

(3) 2002 Income Statement Presentation:

Income from continuing operations before income taxes
$280,000
Less income taxes:
Current provision..................................................... $92,000
Deferred provision................................................... 22,600 114,600
Income from continuing operations................................. $165,400
Problem 7
Cardinal Industries computed a pretax financial income of $118,500 for the first
year of its operations ended December 31, 2002. Cardinal uses an accelerated
cost recovery method on its tax return, and straight-line depreciation on its books.

The difference between the tax and book deduction for depreciation over the five-
year life of the assets acquired in 1999 are as follows:
2002.............................................................. $(24,000)
2003.............................................................. (39,000)
2004.............................................................. (9,000)
2005…………………………………………… 30,000
2006…………………………………………… 42,000
$ 0

The enacted tax rates for this year and the next four years are as follows:
2002..........................................................................40%
2003..........................................................................38%
2004..........................................................................36%
2005..........................................................................35%
2006..........................................................................32%

Use the provisions of FASB Statement No. 109 and assume that it is more likely
than not that income will be sufficient in all future years to realize any deductible
amounts.

(1) Prepare a schedule showing the pattern of depreciation differences, the

computation of income taxes payable, and deferred tax assets or liabilities as
of December 31, 2002.
(2) Prepare journal entries to record income taxes payable and deferred income
taxes.
(3) Prepare the income statement for Cardinal Industries beginning with "Income
from continuing operations before income taxes" for the year ended December
31, 2002.
Solution 7
LO4
(1) Reversal Years
2002 2003 2004 2005 2006
Taxable financial income $118,500
Temporary difference
between tax and book
depreciation (24,000) $(39,000) $(9,000) $30,000 $42,000
Taxable income (loss) $ 94,500 $(39,000) $(9,000) $30,000 $42,000
Enacted tax rate 40% 38% 36% 35%
32%

Income taxes payable ($94,500 x 40%).................. $37,800

Deferred tax asset:
Noncurrent (38% x $39,000) + (36% x $9,000).............. 18,060
Deferred tax liability:
Noncurrent (35% x $30,000) + (32% x $42,000)............ 23,940

Under the provisions of FASB Statement No. 109, the classification of the deferred
tax asset and liability as noncurrent follows the classification of the underlying
depreciable asset.

The deferred tax asset and liability can be offset and reported as a noncurrent
deferred tax liability totaling $5,880 ($23,940 - $18,060).

(2) 2002 Journal Entries

Income Tax Expense--Current........................................ 37,800
Income Taxes Payable............................................ 37,800

Income Tax Expense--Deferred...................................... 5,880

Deferred Tax Liability--Noncurrent.......................... 5,880

(3) 2002 Income Statement Presentation:

Income from continuing operations before income taxes
$118,500
Less income taxes:
Current provision..................................................... $37,800
Deferred provision................................................... 5,880 43,680
Income from continuing operations ............................... $ 74,820
Problem 8
Halverson Company reported taxable income of $60,000 for 2002, its first year of
operations. This amount reflects temporary differences between financial and
taxable income that are scheduled to reverse in subsequent years as shown below.
As of December 31, 2002, the enacted tax rate for 2002 and future years was 40
percent.

Temporary Difference Reversals

Taxable (Deductible)
Year Amounts
2003 $(24,000)
2004 27,000
2005 (36,000)
2006 (18,000)
2007 101,000

Use the provisions of FASB Statement No. 109 and assume that it is more likely
than not that income will be sufficient in all future years to realize any deductible
amounts. Also assume that all the temporary differences relate to noncurrent
items.

Compute the amount of the deferred tax assets and/or liabilities that would be
reported on Halverson's balance sheet as of December 31, 2002.

Solution 8
LO2
Since future tax rates are unchanging and since FASB Statement No. 109
classifies deferred tax assets and liabilities according to the classification of the
underlying items and not the expected time of reversal, no scheduling is necessary
in this case.

Noncurrent deferred tax liability: ($50,000 x 0.40) = $20,000

Problem 9
Assume Ernst Corporation has the following income components on its income
statement. Amounts are before tax.
Income from continuing operations................................. $40,000
Gain on disposal of business segment............................ 20,000
Extraordinary gain on early extinguishment of debt........ 24,000
Extraordinary loss on property loss................................. (34,000)
Cumulative effect of change in depreciation method...... (12,000)
Total income before considering income taxes............... 38,000
Test Bank, Intermediate Accounting, 14th ed. 637

Assume further that the tax department has applied the current tax regulations and
rates to Ernst’s various income categories and computed the following tax
information using the “with and without” concept required for intraperiod tax
allocation:

Tax on total income ($38,000)................................................ $14,400

Tax on income from continuing operations ($40,000)........... 16,200
Tax on total income before considering all irregular and
extraordinary losses................................................................ 29,000

The tax department also has computed the following incremental tax benefits and
expenses on each individual gain or loss component:

Incremental tax expense--gain components:

Gain on disposal...................................................... $6,500
Extraordinary gain.................................................... 6,700
Incremental tax benefit--loss components:
Extraordinary loss.................................................... 10,500
Cumulative effect..................................................... 4,600

1. Compute the total tax to be allocated to all income components after income
from continuing operations, the total tax benefit allocated to the two loss categories,
and the total tax expense allocated to the two gain categories.

2. Allocate the total tax benefit and tax expense from (1) to the separate gain and
loss components.

Solution 9
LO8
(1) Tax on income from continuing operations............. $16,200
Less: Tax on total income…………………………... 14,400
Total tax benefit to be allocated…………………….. $ 1,800

Tax on total income before considering all

irregular and extraordinary losses…………………. $29,000
Less: Tax on total income………………………….. 14,400
Tax benefit from loss categories............................. $14,600

Total tax benefit from loss categories...................... $14,600

Less: Total tax benefit to be allocated.................... 1,800
Tax expense allocated to gain categories............... $12,800
638 Chapter 16  Income Taxes

(2) Allocation to gain categories:

Total tax expense to allocate to gains..................... $12,800
Incremental tax--Gain on disposal........................... $ 6,500
Incremental tax--Extraordinary gain ....................... 6,700
Total expense on gains............................................ $13,200

Tax expense allocated to gain on disposal

[($6,500  $13,200) x $12,800]............................... $ 6,303
Tax expense allocated to extraordinary gain
[($6,700  $13,200) x $12,800]............................... 6,497
$12,800
Allocation to loss categories:
Total tax benefit allocated to losses........................ $(14,600)
Incremental tax benefit--Extraordinary loss............. $10,500
Incremental tax benefit--Cumulative effect.............. 4,600
Total tax benefit from losses.................................... $15,100

Tax benefit allocated to extraordinary loss

[($10,500  $15,100) x ($14,600)]........................... $(10,152)
Tax benefit allocated to cumulative effect
[($4,600  $15,100) x ($14,600)]............................. (4,448)
Total tax benefit allocated to all losses.................... $(14,600)

Problem 10
A major conceptual issue associated with interperiod tax allocation is the issue of
discounting the deferred tax amount on the balance sheet to reflect its present
value. Current generally accepted accounting principles do not allow the
discounting of deferred taxes. Some in the profession have suggested, however,
that the FASB should reconsider its position on discounting in light of the Board’s
current project on present value-based measurements in accounting.

Provide arguments for and against the discounting of deferred income taxes.

Solution 10
LO5
Proponents of discounting argue that without discounting the deferred tax asset or
liability, the financial statements fail to indicate the appropriate benefit of the
deferral of taxes or the burden of prepayment of taxes. Dollars related to short-
term deferrals appear to have the same value on the financial statements as
dollars related to longer term deferrals. This inconsistency impairs the
comparability of the financial statements. Discounting would result in temporary
differences that do not reverse until many years in the future being reflected at the
Test Bank, Intermediate Accounting, 14th ed. 639

present value of the expected future cash flows. The proponents argue that the
discounting of deferred taxes is consistent with currently generally accepted
accounting principles for long-term notes receivable and payable, pensions, and
leases.

Opponents of discounting argue that discounting results in a mismatching of the full

tax effects of taxable transactions with the transactions themselves. The basic
transaction that results in taxes occurs in one period, and the related tax effects are
recorded in subsequent periods through the recording of interest on the deferred
tax balance. Discounting also tends to conceal the consequences of transactions
because they are hidden in the subsequent interest expense. Opponents further
argue that deferred taxes are an interest free loan from the government thus
eliminating the need for discounting.

Problem 11
A major conceptual issue regarding the accounting for income taxes is the
recognition of income taxes as expenses. Some would argue that income taxes
are not directly related to revenues or revenue-seeking functions and should not be
considered as expenses. Some view income taxes as a distribution of income
similar to dividends. This view would hold that income taxes, like dividends, are
paid only if income is earned. Wages and supplies, on the other hand, are paid for
whether the entity earns a profit or incurs a loss.

Identify arguments that can be made for recognizing income tax as an expense on
the income statement.

Solution 11
LO5
Perhaps the strongest argument for recognizing income taxes as an expense
rather than as a distribution is the fact that the government, like employees or
suppliers, renders a service to the entity. The federal government does not provide
services to an entity in direct proportion to the amount of tax levied, but it does
provide services. Payment of corporate income tax allows an entity to conduct its
business under favorable circumstances such as law, order, and the general
organization of the economy. The federal government contributes to the orderly
functioning of society that allows an enterprise to function and even prosper.
CHAPTER 16 -- QUIZ A
Name _________________________
Section ________________________

T F 1. FASB Statement No. 109 requires business entities to use the asset and
liability method of accounting for income taxes.

T F 2. Rent revenue received in advance is recognized as revenue for financial

reporting purposes prior to its recognition for tax purposes.

T F 3. Estimated warranty liabilities are deductible on the tax return prior to being
reported in the income statement.

T F 4. "Unrealized losses on current marketable equity securities" result in lower

taxable income than financial accounting income.

T F 5. The federal government uses the income tax laws for raising tax revenues
and for implementing fiscal policy.

T F 6. Permanent differences between financial and taxable income do not create

any accounting or reporting problems.

T F 7. Nontaxable revenues are added to, and nondeductible expenses are

deducted from, financial income to determine the income that is subject to
tax.

T F 8. Present federal tax laws require a 3-year carryback of any net operating
losses prior to any carryforward.

T F 9. Present federal tax laws permit a 3-year carryback and a 15-year

carryforward of net operating losses.

T F 10. The benefit that arises from the use of net operating loss carrybacks is used
to reduce the loss in the current period.

640
CHAPTER 16 -- QUIZ B
Name _________________________
Section ________________________

T F 1. Under the provisions of FASB Statement No. 109, an income tax

carryforward may be capitalized and reported as an asset if future income is
definitely assured.

T F 2. The use of a net operating loss carryforward results in a benefit to be

reported as an extraordinary item.

T F 3. Net operating loss carryforwards can be used to reduce deferred tax liabilities
in future years.

T F 4. Under the asset and liability method of interperiod tax allocation, a deferred
tax asset represents probable future economic benefits.

T F 5. The asset and liability method of interperiod tax allocation emphasizes the
balance sheet rather than the income statement.

T F 6. An acceptable alternative to interperiod tax allocation is to report as income

tax expense the amount of tax payable for the current period.

T F 7. A deductible amount may result in a current asset and a taxable amount may
result in a current liability.

T F 8. When a company reports an extraordinary item on its income statement,

intraperiod tax allocation is appropriate.

T F 9. Intraperiod tax allocation refers to the allocation of taxes over time.

T F 10. In a given year, deductible amounts can be used to offset taxable amounts if
the temporary differences relate to the same taxing jurisdiction.

641
CHAPTER 16 -- QUIZ C
Name _________________________
Section ________________________

A. Valuation allowance G. Taxable income

B. Asset and liability method H. Intraperiod tax allocation
C. Deferred tax liability I. Permanent differences
D. Deferred tax asset J. Temporary differences
E. NOL carryforward K. NOL carryback
F. Interperiod tax allocation L. Financial income

Select the term that best fits each of the following definitions and descriptions. Indicate
your answer by placing the appropriate letter in the space provided.

____ 1. Nondeductible expenses or nontaxable revenues that are recognized for

financial reporting purposes but are never part of taxable income.

____ 2. An expected benefit in the form of tax savings on future deductible amounts.

____ 3. The amount of operating loss that can be offset against the income of earlier
profitable years.

____ 4. An accounting method that recognizes the tax effect of temporary financial
and taxable income in the financial statement.

____ 5. Income reported on the financial statements.

____ 6. Income taxes expected to be paid on future taxable amounts.

____ 7. A contra asset account that reduces an asset to its expected realizable value.

____ 8. Income used as the basis for determining the income tax liability for a given
entity.

____ 9. Differences between pretax financial income and taxable income arising from
timing differences.

____ 10. The amount of operating loss that can be offset against income of future
profitable years.

642
CHAPTER 16 -- QUIZ SOLUTIONS

Quiz A Quiz B Quiz C

1. T 1. T 1. I
2. F 2. F 2. D
3. F 3. T 3. K
4. F 4. T 4. F
5. T 5. T 5. L
6. T 6. F 6. C
7. F 7. T 7. A
8. F 8. T 8. G
9. T 9. F 9. J
10. T 10. T 10. E