Deferred Taxes

Class Questions

1.For the year ended December 31, 20X3, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income
was $650,000. The difference is due to accelerated depreciation for income tax purposes. Tyre’s effective income tax rate is 30%
and Tyre made estimated tax payments during 20X3 of $90,000. What amount should Tyre report as current income tax
expense for 20X3?
a. $105,000
b. $135,000
c. $195,000
d. $225,000

2. Dunn Co.’s 20X3 income statement reported $90,000 income before provision for income taxes. To compute the provision for
federal income taxes, the following 20X3 data are provided: Rent received in advance $16,000 Income from exempt municipal
bonds 20,000 Depreciation deducted for income tax purposes in excess of depreciation reported for financial statements
purposes 10,000 Enacted corporate income tax rate 30% If the alternative minimum tax provisions are ignored, what amount of
current federal income tax liability should be reported in Dunn’s December 31, 20X3 balance sheet?
a. $18,000

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b. $22,800

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c. $24,600

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d. $21,000

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3. Black Co., organized on January 2, 20X3, had pretax accounting income of $500,000 and taxable income of $800,000 for the

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year ended December 31, 20X3. The only temporary difference is accrued product warranty costs that are expected to be paid
as follows:
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20X4 $100,000
20X5 50,000
20X6 50,000
20X7 100,000
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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 20X3, 30% for 20X4 through 20X6, and 25% for 20X7. In
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Black’s December 31, 20X3 balance sheet, the deferred income tax asset should be
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a. $ 60,000
b. $ 70,000
c. $ 85,000
d. $105,000
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4. Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes, Jab has
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temporary differences that will reverse during the next year and add to taxable income. Deferred income taxes that are based
on these temporary differences should be classified in Jab’s balance sheet as a
a. Contra account to current assets
b. Contra account to noncurrent assets
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c. Current liability
d. Noncurrent liability
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5. When dealing with deferred taxes, which of the following should be disclosed in a company’s financial statements?
I. The types and amounts of existing temporary differences
II. The types and amounts of existing permanent differences
III. The nature and amount of each type of operating loss and tax credit carryforward
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a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

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 6. Which of the following is true regarding reporting deferred taxes in financial statements prepared in accordance with IFRS?
a. Deferred tax assets and liabilities are classified as current and noncurrent based on their expiration dates.
b. Deferred tax assets and liabilities may only be classified as noncurrent.
c. Deferred tax assets are always netted with deferred tax liabilities to arrive at one amount presented on the balance sheet.
d. Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process.

Deferred taxes got me to thinking about my own taxes. Being an individual that has residency in another country I thought
about how I have taxes that are paid in Germany but I get a tax credit in the states. To me that seemed like a deferment every
year. I know it is not the same seeing it is individual income tax and one is a credit and the other is either an asset of a
deferment for future payments. I just saw a similarity and thought it was interesting. One of the examples I personally have is a
VA disability check that is tax free. So even though it is considered income it is a permanent difference as I do not pay taxes on
it.

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