CHAPTER 16 CPA/IMA Question Review

Spiaceland CPA1. Scott Corp. received cash of $20,000 that was included in revenues in its 2013
financial statements, of which $12,000 will not be taxable until 2014. Scott's enacted tax rate is 30% for
2013, and 25% for 2014.

What amount should Scott report in its 2013 balance sheet for deferred income tax liability?

a. $2,000
b. $2,400
c. $3,000
d. $3,600

Additional Question: What is the journal entry to record tax expense for 2013 assuming that the
collection of $20,000 was the only transaction that occurred in 2013.

Spiceland CPA2. West Corp. leased a building and received the $36,000 annual rental payment on June
15, 2013. The beginning of the lease was July 1, 2013. Rental income is taxable when received. West's
tax rates are 30% for 2013 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, 2013, balance sheet?

a. $ 5,400
b. $ 7,200
c. $10,800
d. $14,400

Spiceland CPA3. In its December 31, 2013, balance sheet, Shin Co. had income taxes payable of $13,000
and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin
had reported a current deferred tax asset of $15,000 at December 31, 2012. No estimated tax payments
were made during 2013.

At December 31, 2013, Shin determined that it was more likely than not that 10% of the deferred tax
asset would not be realized. In its 2013 income statement, what amount should Shin report as total
income tax expense?
a. $ 8,000
b. $ 8,500
c. $10,000
d. $13,000

RogerCPA 193. When accounting for income taxes, a permanent difference occurs in which of the
following scenarios?
a. The accrual method of accounting is used.
b. An item is included in the calculation of net income in one year and in taxable income in a different
year.
c. An item is included in the calculation of net income, but is neither taxable nor deductible.
d. An item is treated identically for financial and for tax purposes.

Spiceland CPA4. Stone Co. began operations in 2013 and reported $225,000 in income before income
taxes for the year. Stone's 2013 tax depreciation exceeded its book depreciation by $25,000. Stone also
had nondeductible book expenses of $10,000 for officers’ life insurance premiums where the company is
the beneficiary. Stone's tax rate for 2013 was 40%, and the enacted rate for years after 2013 is 35%.

In its December 31, 2013, balance sheet, what amount of deferred income tax liability should Stone
report?

a. $ 8,750
b. $10,000
c. $12,250
d. $14,000

Additional Question: What is the journal entry to record tax expense for 2013?

Spiceland CPA5. Black Co. organized on January 2, 2013, had pretax financial statement income of
$500,000 and
Taxable income of $800,000 for the year ended December 31, 2013. The only temporary differences are
accrued product warranty costs, which Black expects to pay as follows:

2014 $100,000
2015 $ 50,000
2016 $ 50,000
2017 $100,000

The enacted income tax rates are 25% for 2013, 30% for 2014 through 2016, and 35% for 2017. Black
believes that future years' operations will produce profits. In its December 31, 2013, balance
sheet, what amount should Black report as deferred tax asset?

a. $50,000
b. $75,000
c. $90,000
d. $95,000

Spiceland CPA6. Dix, Inc., a calendar-year corporation, reported the following operating income (loss)
beforeincome tax for its first three years of operations:

2011 $100,000
2012 (200,000)
2013 400,000

There are no permanent or temporary differences between operating income (loss) for financial and
income tax reporting purposes. When filing its 2012 tax return, Dix did elected to carryforward its loss
for 2012. Assume a 40% tax rate for all years. What amount should Dix report as its income tax liability
(payable) at December 31, 2013?

a. $ 60,000
b. $ 80,000
c. $120,000
d. $160,000

Spiceland CPA7. An example of intraperiod income tax allocation is

a. Reporting discontinued operations in the income statement.
b. Interest income on municipal obligations.
c. Estimated expenses for major repairs accrued for financial statement purposes in one year, but
deducted for income tax purposes when paid in a subsequent year.
d. Rental income included in income for income tax purposes when collected, but deferred for
financial statement purposes until earned in a subsequent year.

IMA1. Which one of the following temporary differences will result in a deferred tax asset?
a. Use of the straight-line depreciation method for financial statement purposes and the modified
Accelerated Cost Recovery System (MACRS) for income tax purposes.
b. Installment sale profits accounted for on the accrual basis for financial statement purposes
and on a cash basis for income tax purposes.
c. Advance rental receipts accounted for on the accrual basis for financial statement purposes and
on a cash basis for tax purposes.
d. Investment gains accounted for under the equity method for financial statement purposes and
under the cost method for income tax purposes.

IMA2. Bearings Manufacturing Company Inc. purchased a new machine on January 1, 2014 for
$100,000. The company uses the straight-line depreciation method with an estimated equipment life of
5 years and a zero salvage value for financial statement purposes, and uses the 3-year Modified
Accelerated Cost Recovery System (MACRS) with an estimated equipment life of 3 years for income tax
reporting purposes. Bearings is subject to a 35% marginal income tax rate. Assume that the deferred tax
liability at the beginning of the year is zero and that Bearings has a positive earnings tax position.

The MACRS depreciation rates for 3-year equipment are shown below.

Year Rate
1 33.33%
2 44.45
3 14.81
4 7.41

What is the deferred tax liability at December 31, 2014 (rounded to the nearest whole dollar)?
a. $ 7,000
b. $33,330
c. $11,667
d. $ 4,667