Multiple choice questions
1. Which of the following is not a cause of a difference between pretax financial income and taxable income in a given period?
a. Operating loss carrybacks and carryforwards
b. Permanent differences
c. Applicable tax rates
d. Temporary differences
2. Which of the following is an argument in favor of the asset/ liability method of interperiod income tax allocation?
a. Deferred taxes are the result of historical transactions and should be reported in a similar manner.
b. Taxes are an expense of doing business and should be accrued and deferred like other expenses, which results in the recognition of deferred assets and liabilities.
c. The predictive value of future cash flows is increased when deferred taxes are reported based on enacted tax rates in effect when the temporary difference originates.
d. Historical tax rates are more verifiable, and, therefore, the deferred tax amount is more reliable.
3. The FASB came to which of the following conclusions regarding interperiod income tax allocation?
a. The partial allocation approach should be applied.
b. The net of tax method of income tax allocation should be used.
c. Non-allocation of income tax expense is appropriate.
d. The asset/ liability method of income tax allocation should be used.
4. Prior to and during 2016, Shadrach Company reported tax depreciation at an amount higher than the amount of financial depreciation, resulting in a book value of the depreciable assets of $ 24,500 for financial reporting purposes and of $ 20,000 for tax purposes at the end of 2016. In addition, Shadrach recognized a $ 3,500 estimated liability for legal expenses in the financial statements during 2016; it expects to pay this liability
(and deduct it for tax purposes) in 2020. The current tax rate is 30%, no change in the tax rate has been enacted, and the company expects to be profitable in future years. What is the amount of the net noncurrent deferred tax liability at the end of 2016?
a. $ 300
b. $ 450
c. $ 1,050
d. $ 1,350
5. At the beginning of 2016, Conley Company purchased an asset at a cost of $ 10,000. For financial reporting purposes, the asset has a 4 year life with no residual value and is depreciated by the straight line method beginning in 2016. For tax purposes, the asset is depreciated under MACRS using a 5 year recovery period. Prior to 2016, Conley had no deferred tax liability or asset. The difference between depreciation for financial reporting purposes and income tax purposes is the only temporary difference between pretax financial income and taxable income. The current income tax rate is 30%, and no change in the tax rate has been enacted for future years. In 2016 and 2017, taxable income will be higher or lower than financial income by what amount?

6. Oliver Company earned taxable income of $ 7,500 during 2016, its first year of operations. A reconciliation of pretax financial income and taxable income indicated that an additional $ 2,500 of accelerated depreciation was deducted for tax purposes and that an estimated expense of $ 5,800 was deducted for financial reporting purposes. The estimated expense is not expected to be deductible for tax purposes until 2019, when the liability is paid. The current tax rate is 30%, and no change in the tax rate has been enacted for future years. The resulting journal entry for 2016 would be:
a. Income Tax Expense 1,260 Deferred Tax Asset 1,740 Deferred Tax Liability 750 Income Taxes Payable 2,250
b. Income Tax Expense 1,260 Deferred Tax Asset 990 Income Taxes Payable 2,250
c. Income Tax Expense 3,240 Deferred Tax Liability 990 Income Taxes Payable 2,250
d. Income Tax Expense 3,000 Deferred Tax Liability 750 Income Taxes Payable 2,250
7. A permanent difference is a difference between pretax financial income and taxable income in an accounting period that will never reverse in a later period. Which of the following is not an example of a permanent difference?
a. Fine for air pollution
b. Percentage depletion in excess of cost depletion on a wasting asset
c. Interest on municipal bonds
d. Rent received in advance
8. In 2016, Swope Company reports a pretax operating loss of $ 70,000 for both financial reporting and income tax purposes. Pretax financial income and taxable income for the previous 3 years had been: 2013€”$ 15,000 (tax rate 20%), 2014€” $ 24,000 (tax rate 25%), and 2015€”$ 49,000 (tax rate 30%). The current tax rate is 30%, and no change in the tax rate has been enacted for future years. At the end of 2016, the journal entry recorded would contain an income tax benefit from an operating loss carryback of:
a. $ 0
b. $ 18,300
c. $ 19,800
d. $ 19,950
9. Brooks Company reported a prior period adjustment of $ 12,000 in pretax financial €œ income€ and taxable income for 2017. The prior period adjustment was the result of an error in calculating bad debt expense for 2016. The current tax rate is 30%, and no change in the tax rate has been enacted for future years. When the company applies intraperiod income tax allocation, the prior period adjustment will be shown on the:
a. Income statement at $ 12,000
b. Income statement at $ 8,400 (net of $ 3,600 income taxes)
c. Retained earnings statement at $ 12,000
d. Retained earnings statement at $ 8,400(net of $ 3,600 income taxes)
10. Which component of current income is not disclosed on the income statement net of tax effects?
a. Gain on sale of discontinued component
b. Gain on disposal of milling machine
c. Gain from sale of discontinued segment
d. Loss from operations of discontinued component

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2016 2017 a. higher by $150 by $210 b. higher by $500 lower by $700 c. ower by $500 d. lower by $1,500 by $100 higher by $700