71. (LO 5)ASC requires a company to disclose those components of its deferred tax assets and liabilities that are considered
a. Relevant
b. Significant
c. Important
d. Major
72. (LO 5) Which of the following temporary differences creates a current deferred tax asset?
a. Allowance for bad debts
b. Goodwill amortization
c. Accumulated depreciation
d. Inventory capitalization under §263A
e. Both a and d create a current deferred tax asset
73. (LO 5) Which formula represents the calculation of a company’s effective tax rate?
a. Income taxes paid / Taxable income
b. Income taxes paid / Pre-tax income from continuing operations
c. Income tax provision / Taxable income
d. Income tax provision / Pre-tax income from continuing operations
74. (LO 5) Which of the following items is not a reconciling item in the income tax footnote?
a. State income taxes
b. Foreign income taxes
c. Accrued pension liabilities
d. Dividends received deduction
e. Tax exempt municipal bond interest
75. (LO 5) Randolph Company reported pre-tax net income from continuing operations of $800,000 and taxable income of $500,000. The book-tax difference of $300,000 was due to a $200,000 favorable temporary difference relating to depreciation, an unfavorable temporary difference of $80,000 due to an increase in the reserve for bad debts, and a $180,000 favorable permanent difference from the receipt of life insurance proceeds. Randolph Company’s applicable tax rate is 34%.
a. Compute Randolph Company’s current income tax expense.
b. Compute Randolph Company’s deferred income tax expense or benefit.
c. Compute Randolph Company’s effective tax rate.
d. Provide a reconciliation of Randolph Company’s effective tax rate with its
76. (LO 5) Which of the following pronouncements should a company consult in computing its quarterly income tax provision?
a. ASC 740
b. ASC 230
c. ASC 718
d. ASC 810
e. SarbOX 404
Comprehensive Problems
77. You have been assigned to compute the income tax provision for Motown Memories, Inc. (MM) as of December 31, 2014. The Company’s federal income tax rate is 34%. The Company’s Income Statement for 2014 is provided below:
| Motown Memories, Inc. |
| Statement of Operations |
|
|
|
|
|
at December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
|
|
|
$50,000,000 |
| Cost of sales |
|
|
|
28,000,000 |
| Gross profit |
|
|
|
22,000,000 |
|
|
|
|
|
|
| Compensation |
|
|
|
2,000,000 |
| Selling expenses |
|
|
|
1,500,000 |
| Depreciation and amortization |
|
|
4,000,000 |
| Other expenses |
|
|
|
500,000 |
| Total operating expenses |
|
|
8,000,000 |
| Income from operations |
|
|
|
$14,000,000 |
| Interest and other income |
|
|
|
1,000,000 |
| Income before income taxes |
|
|
$15,000,000 |
You have identified the following permanent differences:
Interest income from municipal bonds: $50,000
Nondeductible meals and entertainment expenses: $20,000
Domestic production activities deduction (DPAD): $250,000
Nondeductible fines: $5,000
MM prepared the following schedule of temporary differences from the beginning of the year to the end of the year:
| Motown Memories, Inc. |
| Temporary Difference Scheduling Template |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOY |
Beginning |
Current |
EOY |
Ending |
| Taxable (Favorable) |
|
Cumulative |
Deferred |
Year |
Cumulative |
Deferred |
| Temporary Differences |
|
T/D |
Taxes (@ 34%) |
Change |
T/D |
Taxes (@ 34%) |
|
|
|
|
|
|
|
| Non-current |
|
|
|
|
|
|
| Accumulated depreciation |
|
(8,000,000) |
(2,720,000) |
(1,000,000) |
(9,000,000) |
(3,060,000) |
|
|
BOY |
Beginning |
Current |
EOY |
Ending |
| Deductible (Unfavorable) |
|
Cumulative |
Deferred |
Year |
Cumulative |
Deferred |
| Temporary Differences |
|
T/D |
Taxes (@ 34%) |
Change |
T/D |
Taxes (@ 34%) |
|
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
| Allowance for bad debts |
|
200,000 |
68,000 |
50,000 |
250,000 |
85,000 |
| Reserve for warranties |
|
100,000 |
34,000 |
20,000 |
120,000 |
40,800 |
| Inventory §263A adjustment |
|
240,000 |
81,600 |
60,000 |
300,000 |
102,000 |
| Total current |
|
540,000 |
183,600 |
130,000 |
670,000 |
227,800 |
|
|
|
|
|
|
|
| Non-Current |
|
|
|
|
|
|
| Deferred compensation |
|
50,000 |
17,000 |
10,000 |
60,000 |
20,400 |
| Accrued pension liabilities |
|
3,000,000 |
1,020,000 |
250,000 |
3,250,000 |
1,105,000 |
| Total non-current |
|
3,050,000 |
1,037,000 |
260,000 |
3,310,000 |
1,125,400 |
|
|
|
|
|
|
|
| Total |
|
3,590,000 |
1,220,600 |
390,000 |
3,980,000 |
1,353,200 |
a. Compute MM’s current income tax expense or benefit for 2014.
b. Compute MM’s deferred income tax expense or benefit for 2014.
c. Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense in both dollars and rates.
78. You have been assigned to compute the income tax provision for Tulip City Flowers, Inc. (TCF) as of December 31, 2014. The Company’s federal income tax rate is 34%. The Company’s Income Statement for 2014 is provided below:
| Tulip City Flowers, Inc. |
| Statement of Operations |
|
|
|
|
|
at December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
|
|
|
$20,000,000 |
| Cost of sales |
|
|
|
12,000,000 |
| Gross profit |
|
|
|
8,000,000 |
|
|
|
|
|
|
| Compensation |
|
|
|
500,000 |
| Selling expenses |
|
|
|
750,000 |
| Depreciation and amortization |
|
|
1,250,000 |
| Other expenses |
|
|
|
1,000,000 |
| Total operating expenses |
|
|
3,500,000 |
| Income from operations |
|
|
|
$4,500,000 |
| Interest and other income |
|
|
|
25,000 |
| Income before income taxes |
|
|
$4,525,000 |
You have identified the following permanent differences:
Interest income from municipal bonds: $10,000
Nondeductible stock compensation: $5,000
Domestic production activities deduction (DPAD): $8,000
Nondeductible fines: $1,000
TCF prepared the following schedule of temporary differences from the beginning of the year to the end of the year:
| Tulip City Flowers, Inc. |
| Temporary Difference Scheduling Template |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BOY |
Beginning |
Current |
EOY |
Ending |
| Taxable (Favorable) |
|
Cumulative |
Deferred |
Year |
Cumulative |
Deferred |
| Temporary Differences |
|
T/D |
Taxes (@ 34%) |
Change |
T/D |
Taxes (@ 34%) |
|
|
|
|
|
|
|
| Non-current |
|
|
|
|
|
|
| Accumulated depreciation |
|
(5,000,000) |
(1,700,000) |
(500,000) |
(5,500,000) |
(1,870,000) |
|
|
BOY |
Beginning |
Current |
EOY |
Ending |
| Deductible (Unfavorable) |
|
Cumulative |
Deferred |
Year |
Cumulative |
Deferred |
| Temporary Differences |
|
T/D |
Taxes (@ 34%) |
Change |
T/D |
Taxes (@ 34%) |
|
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
| Allowance for bad debts |
|
100,000 |
34,000 |
10,000 |
110,000 |
37,400 |
| Prepaid income |
|
0 |
0 |
20,000 |
20,000 |
6,800 |
| Total current |
|
100,000 |
34,000 |
30,000 |
130,000 |
44,200 |
|
|
|
|
|
|
|
| Non-Current |
|
|
|
|
|
|
| Deferred compensation |
|
50,000 |
17,000 |
10,000 |
60,000 |
20,400 |
| Accrued pension liabilities |
|
500,000 |
170,000 |
100,000 |
600,000 |
204,000 |
| Total non-current |
|
550,000 |
187,000 |
110,000 |
660,000 |
224,400 |
|
|
|
|
|
|
|
| Total |
|
650,000 |
221,000 |
140,000 |
790,000 |
268,600 |
a. Compute TCF’s current income tax expense or benefit for 2014.
b. Compute TCF’s deferred income tax expense or benefit for 2014.
c. Prepare a reconciliation of TCF’s total income tax provision with its hypothetical income tax expense in both dollars and rates.
d. Assume TCF’s tax rate increased to 35% in 2014. Recompute TCF’s deferred income tax expense or benefit for 2014 using the following template:
79. Access the 2012 Annual Report for Google and answer the following questions. You can access the annual report at http://www.google.com.
a. Using information from the company’s Income Statement and Income Taxes footnote, what was the company’s effective tax rate for 2012? Show how the rate is calculated.
b. Using information from the Statement of Cash Flows, calculate the company’s cash tax rate.
c. What does the company’s Income Taxes note tell you about where the company earns its international income? Why does earning income in these countries cause the effective tax rate to decrease?
d. What item creates the company’s largest deferred tax asset? Explain why this item creates a deductible temporary difference.
“
e. What item creates the company’s largest deferred tax liability? Explain why this item creates a taxable temporary difference.
.
f. How does the company classify its unrecognized tax benefits on the balance sheet?
g. How does the company treat interest and penalties related to its unrecognized tax benefits?
80. Spartan Builders Corporation is a builder of high end housing with locations in major metropolitan areas throughout the Midwest. At June 30, 2014, the company has deferred tax assets totaling $10 million and deferred tax liabilities of $5 million, all of which relate to U.S. temporary differences. Reversing taxable temporary differences and taxable income in the carryback period can be used to support approximately $2 million of the $10 million gross deferred tax asset. The remaining $8 million of gross deferred tax assets will have to come from future taxable income.
The company has historically been profitable. However, significant loses were incurred in fiscal years 2012 and 2013. These two years reflect a cumulative loss of 10 million, with losses of $3 million expected in 2014. $7 million of the losses was due to a write-down of inventory. Beginning in fiscal 2015, management decided to get out of the metropolitan Chicago market, which had become over-saturated with new houses.
Evaluate the company’s need to record a valuation allowance for the $10 million of gross deferred tax assets . What positive and negative evidence would you weigh?
