Page |1

Chapter 9
Income Taxes

NAME: Date:
Professor: Section: Score:

QUIZ:
1. Which of the following creates a permanent difference between financial income and taxable
income?
a. Interest received on government bonds
b. Accrual method of recognizing revenue
c. Unearned rent revenue
d. Accelerated cost recovery on plant and equipment

2. Which of the following creates a temporary difference between financial and taxable income?
a. Interest on treasury debt securities
b. Accelerated depreciation on plant and equipment
c. Fines from violation of law
d. Premiums paid for officer's life insurance (the company is the beneficiary)

3. Which of the following is the most likely item to result in a deferred tax asset?
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

4. The purpose of an interperiod income tax allocation is to

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.

5. For the year ended December 31, 20x1, 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 20x1 of ₱90,000. What amount should Tyre report as current income tax
expense for 20x1?
a. 105,000 c. 195,000
b. 135,000 d. 225,000

6. Pine Corp.'s books showed pretax income of ₱800,000 for the year ended December 31, 20x1. In
the computation of federal income taxes, the, following data were considered:
Gain on an involuntary conversion 350,000
Depreciation deducted for tax purposes in excess of
depreciation deducted for book purposes 50,000
 Page |2

Estimated tax payments during 20x1 70,000

Income tax rate 30%

What amount should Pine report as its current income tax liability on its December 31, 20x1, balance
sheet?
a. 50,000 c. 120,000
b. 65,000 d. 135,000

7. Scott Corp. received cash of ₱20,000 that was included in revenues in its 20x4 financial
statements, of which ₱12,000 will not be taxable until 20x5. Scott's enacted tax rate is 30% for
20x4, and 25% for 20x5. What amount should Scott report in its 20x4 balance sheet for deferred
income tax liability?
a. 2,000 b. 2,400 c. 3,000 d. 3,600

8. West Corp. leased a building and received the ₱36,000 annual rental payment on June 15, 20x9.
The beginning of the lease was July 1, 20x9. Rental income is taxable when received. West’s tax
rates are 30% for 20x9 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, 20x9, balance sheet?
a. 5,4000 b. 7,200 c. 10,800 d. 14,400

9. Huff Corp. began operations on January 1, 20x8. Huff recognizes revenues from all sales under
the accrual method for financial reporting purposes and appropriately uses the installment
method for income tax purposes. Huff's gross margin on installment sales under each method
was as follows:
Year Accrual method Installment method
20x8 800,000 300,000
20x9 1,300,000 700,000
Enacted income tax rates are 30% for 20x9 and 25% thereafter. There are no other temporary
differences. In Huff's December 31, 20x9, balance sheet, the deferred income tax liability should be
a. 150,000 b. 180,000 c. 275,000 d. 330,000

10. Stone Co. began operations in 20x1 and reported ₱225,000 in income before income taxes for the
year. Stone’s 20x1 tax depreciation exceeded its book depreciation by ₱25,000. Stone also had
nondeductible book expenses of ₱10,000 related to permanent differences. Stone’s tax rate for
20x1 was 40%, and the enacted rate for years after 20x1 is 35%. In its December 31, 20x1, balance
sheet, what amount of deferred income tax liability should Stone report?
a. 8,750 b. 10,000 c. 12,250 d. 14,000

“The roots of education are bitter, but the fruit is sweet.” – Aristotle
 Page |3

ANSWERS:
1. A
2. B
3. D
4. C
5. C (650,000 taxable income x 30%) = 195,000 current tax expense
6. A
Multiply by
Description of items Description of items
Tax rate
Pretax income 800,000
Permanent differences:
Less: Non-taxable income
Gain on involuntary conv. (350,000)
Accounting profit subject to tax 450,000 30% Income tax expense 135,000
Temporary differences:
Less: 🡡 Taxable temporary difference Less: 🡡 Deferred tax
(TTD) 'FI>TI': liability (DTL):
Excess depreciation (50,000) 30% (15,000)
Taxable profit 400,000 30% Current tax expense 120,000

Current tax expense 120,000

Estimated tax payments during 20x1 (70,000)
Income tax payable - Dec. 31, 20x1 50,000

7. C (12,000 x 25%) = 3,000

8. B
Rent income - Financial reporting (36,000 x 6/12) 18,000
Rent income - Taxation 36,000
Deductible temporary difference (FI < TI) 18,000
Multiply by: Future tax rate 40%
Deferred tax asset 7,200

9. C
Year Accrual method Installment method Difference
20x8 800,000 300,000
20x9 1,300,000 700,000
Totals 2,100,000 1,000,000 1,100,000
Multiply by: Tax rate 25%
Deferred tax liability - Dec. 31, 20x9 275,000

10. A (25,000 taxable temporary difference x 35%) = 8,750