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Egbevadoh Tshamala Quiz 3 Answer sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 C A C C C B A D B . . . . . ACCT 311 6381 - Quiz 3 Part 1, 16 questions, 5 points each 1. Which of the following differences would result in future taxable amounts? a. Expenses or losses that are deductible after they are recognized in financial income. b. Revenues or gains that are taxable before they are recognized in financial income. c. Expenses or losses that are deductible before they are recognized in financial income. d. Revenues or gains that are recognized in financial income but are never included in taxable income. 2. Dunn Co.'s year 1 income statement reported $90,000 income before provision for income taxes. To compute the provision for federal income taxes, the following year 1 data are provided: Rent received in advance Income from exempt municipal bonds Depreciation deducted for income tax purposes in excess of depreciation reported for financial statements purposes Enacted corporate income tax rate $16,000 20,000 10,000 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, year 1 balance sheet? a. b. c. d. $18,000 $22,800 $25,800 $28,800 3. For the year ended December 31, year 1, 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 year 1 of $90,000. What amount should Tyre report as current income tax expense for year 1? a. $105,000 b. $135,000 c. $195,000 d. $225,000 4. A temporary difference that would result in a deferred tax liability is a. b. c. d. Interest revenue on municipal bonds. Accrual of warranty expense. Excess of tax depreciation over financial accounting depreciation. Subscriptions received in advance. 5. On its December 31, year 2 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, year 1. No estimated tax payments were made during year 2. At December 31, year 2, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its year 2 income statement, what amount should Shin report as total income tax expense? a. $8,000 b. $8,500 c. $10,000 d. $13,000 6. Leer Corp.'s pretax income in year 1 was $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows: Depreciation in the financial statements was $8,000 more than tax depreciation. The equity method of accounting resulted in financial statement income of $35,000. A $25,000 dividend was received during the year, which is eligible for the 80% dividends received deduction. Leer's effective income tax rate was 30% in year 1. In its year 1 income statement, Leer should report a current provision for income taxes of a. $26,400 b. $23,400 c. $21,900 d. $18,600 7. Town, a calendar-year corporation incorporated in January year 1, experienced a $600,000 net operating loss (NOL) in year 3 due to a prolonged strike. Town never had a strike in the past that significantly affected its income and does not expect such a strike in the future. Additionally, there is no other negative evidence concerning future operating income. For years 1-2, Town reported a taxable income in each year, and a total of $450,000 for the two years. Assume that: (1) there is no difference between pretax accounting income and taxable income for all years, (2) the income tax rate is 40% for all years, (3) the NOL will be carried back to the profit years 1-2 to the extent of $450,000, and $150,000 will be carried forward to future periods. In its year 3 income statement, what amount should Town report as the reduction of loss due to NOL carryback and carryforward? a. $240,000 b. $180,000 c. $270,000 d. $360,000 8. Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes, Jab has 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. c. Current liability. d. Noncurrent liability. 9. On January 1, Year One, a company started a defined benefit pension plan for its employees. Assume that the annual service cost is $200,000. Funding is $150,000 each December 31, beginning on December 31, Year One. The interest rate used for discount purposes to determine the projected benefit obligation is 10 percent. Both actual and expected earnings on plan assets are 8 percent. What pension liability should this company report on its December 31, Year Two, balance sheet? a. $100,000 b. $108,000 c. $132,000 d. $150,000 10. A Company starts a defined benefit pension plan on January 1, Year One. The prior service cost on that date is $400,000. The company employees on that date are expected to work for an additional 8 years on the average. During Year One, service cost was $240,000, funding was $300,000, interest on the projected benefit obligation was $30,000, expected and actual earnings on plan assets was $18,000. On the company's December 31, Year One, balance sheet, what is reported for accumulated other comprehensive income as a result of this pension? a. $332,000 b. $350,000 c. $362,000 d. $400,000 11. A company has a defined benefit pension plan that has been in operation for a number of years. On January 1, Year One, the company amends the plan and the projected benefit obligation increases by $280,000. On the same day, the actuary changes one of the actuarial assumptions and, as a result, the projected benefit obligation increases by another $420,000. On that day, the company has five employees who are each expected to work for an average of another seven years. At the end of Year One, what balance is shown in the company's accumulated other comprehensive income as reported within the stockholders' equity section of the balance sheet? a. $600,000 b. $640,000 c. $660,000 d. $700,000 12. The Keith Corporation has had a defined benefit pension plan for its employees for a number of years. At the beginning of Year One, the projected benefit obligation is $4 million. The company also has plan assets of $3 million. Service cost for Year One is $440,000. The company transfers $360,000 in cash to the pension plan on December 31, Year One as funding for the pensions. The discount rate used for the projected benefit obligation is 12 percent. Company officials expect the plan assets to generate revenue at a 10 percent rate but, in Year One, only 7 percent is actually earned. What amount of pension expense should be recognized for Year One? a. $260,000 b. $350,000 c. $620,000 d. $710,000 13. At the end of Year One, in connection with a defined pension benefit plan, Major Company has a deferred loss of $600,000 which arose from the difference in its expected and actual earnings on plan assets as well as a change in an actuarial assumption. On that date, the expected average remaining service life of the employees is assumed to be ten years. In addition, the projected benefit obligation is $5.6 million and the plan assets amount to $4.9 million. Which of the following statements is true in connection with this $600,000 deferred loss? a. Pension expense for Year One is increased by $4,000. b. Pension expense for Year Two is increased by $4,000. c. Pension expense for Year One is increased by $11,000. d. Pension expense for Year Two is increased by $11,000. 14. The Wilston Corporation has a large defined pension benefit plan for its employees. Currently, the projected benefit obligation is $44 million and plan assets amount to $37 million. The earnings on the plan assets are expected to be 7 percent per year over the next few years. In the current year, the actual earnings were 8 percent. Which of the following statements is not true? a. In computing its pension expense for the current year, the 7 percent expected return should ultimately be used to reduce the expense rather than the 8 percent actual return. b. In arriving at the plan asset balance at the end of the year, the 8 percent actual earnings should be included rather than the 7 percent expected return. c. The difference between the 7 percent expected return and the 8 percent actual return increases a deferred gain and has no direct impact on the pension expense. d. The 1 percent by which actual earnings were in excess of expected earnings serves to reduce pension expense for the current year. 15. On January 1, Year One, a company started a defined benefit pension plan for its employees. The service cost for Year One is $200,000. Funding is $150,000 each January 1, beginning on January 1, Year One. The interest rate used for discount purposes to determine the projected benefit obligation is 10 percent. Both actual and expected earnings on plan assets are 8 percent. What pension liability should this company report on its December 31, Year One, balance sheet? a. $38,000 b. $50,000 c. $200,000 d. $220,000 16. The Cosby Company has a defined benefit pension plan. On January 1, Year One, a contractual provision was changed and the projected benefit obligation increased at that moment by $400,000. Which of the following statements is true? a. Pension expense is not affected on January 1, Year One, but is gradually increased over the next several years. b. Pension expense is increased immediately by $400,000. c. Pension expense is increased on January 1, Year One, by a portion of the $400,000 with the remaining amount added to pension expense over the next few years. d. Pension expense is never affected because the $400,000 is retained within accumulated other comprehensive income on the balance sheet. Part 2, 1 question, 20 points QUESTION 1 XYZ Corporation is in its first year of operations. The company has pretax income of $400,000. The company has the following items recorded in its records. No estimated tax payments were made during year 1. Premiums on life insurance of key officer Depreciation on tax return in excess of book depreciation $10,000 12,000 Interest on municipal bonds Warranty expense Actual warranty repairs Bad debt expense Beginning balance in allowance for uncollectible accounts End balance for allowance for uncollectible accounts Rent received in advance from clients that will be recognized evenly over the next three years Tax rate for year 1 and future years 5,300 4,000 3,250 1,400 0 800 24,000 40% Prepare the following schedule for the deferred tax amounts for the year. Choose items from the following list (not all are used): Items Premium on life insurance Depreciation Interest on municipal bonds Item Difference between taxable amount and income statement amount Classification: Deferred tax asset Deferred tax liability Warranties Bad debts Rent received Current or noncurrent Deferred tax amount Complete the following table to calculate taxable income. If no adjustment is needed for a particular item enter 0 as your calculation. Pretax financial income Premiums on life insurance of key officer Interest on municipal bonds Depreciation for tax in excess of book depreciation Adjustment for warranties Adjustment for bad debts Adjustment for rent received in advance Taxable income ACCT 311 6381 - Quiz 3 Part 1, 16 questions, 5 points each 1. Which of the following differences would result in future taxable amounts? a. Expenses or losses that are deductible after they are recognized in financial income. b. Revenues or gains that are taxable before they are recognized in financial income. c. Expenses or losses that are deductible before they are recognized in financial income. d. Revenues or gains that are recognized in financial income but are never included in taxable income. 2. Dunn Co.'s year 1 income statement reported $90,000 income before provision for income taxes. To compute the provision for federal income taxes, the following year 1 data are provided: Rent received in advance Income from exempt municipal bonds Depreciation deducted for income tax purposes in excess of depreciation reported for financial statements purposes Enacted corporate income tax rate $16,000 20,000 10,000 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, year 1 balance sheet? a. b. c. d. $18,000 $22,800 $25,800 $28,800 3. For the year ended December 31, year 1, 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 year 1 of $90,000. What amount should Tyre report as current income tax expense for year 1? a. $105,000 b. $135,000 c. $195,000 d. $225,000 4. A temporary difference that would result in a deferred tax liability is a. b. c. d. Interest revenue on municipal bonds. Accrual of warranty expense. Excess of tax depreciation over financial accounting depreciation. Subscriptions received in advance. 5. On its December 31, year 2 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, year 1. No estimated tax payments were made during year 2. At December 31, year 2, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its year 2 income statement, what amount should Shin report as total income tax expense? a. $8,000 b. $8,500 c. $10,000 d. $13,000 6. Leer Corp.'s pretax income in year 1 was $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows: Depreciation in the financial statements was $8,000 more than tax depreciation. The equity method of accounting resulted in financial statement income of $35,000. A $25,000 dividend was received during the year, which is eligible for the 80% dividends received deduction. Leer's effective income tax rate was 30% in year 1. In its year 1 income statement, Leer should report a current provision for income taxes of a. $26,400 b. $23,400 c. $21,900 d. $18,600 7. Town, a calendar-year corporation incorporated in January year 1, experienced a $600,000 net operating loss (NOL) in year 3 due to a prolonged strike. Town never had a strike in the past that significantly affected its income and does not expect such a strike in the future. Additionally, there is no other negative evidence concerning future operating income. For years 1-2, Town reported a taxable income in each year, and a total of $450,000 for the two years. Assume that: (1) there is no difference between pretax accounting income and taxable income for all years, (2) the income tax rate is 40% for all years, (3) the NOL will be carried back to the profit years 1-2 to the extent of $450,000, and $150,000 will be carried forward to future periods. In its year 3 income statement, what amount should Town report as the reduction of loss due to NOL carryback and carryforward? a. $240,000 b. $180,000 c. $270,000 d. $360,000 8. Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes, Jab has 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. c. Current liability. d. Noncurrent liability. 9. On January 1, Year One, a company started a defined benefit pension plan for its employees. Assume that the annual service cost is $200,000. Funding is $150,000 each December 31, beginning on December 31, Year One. The interest rate used for discount purposes to determine the projected benefit obligation is 10 percent. Both actual and expected earnings on plan assets are 8 percent. What pension liability should this company report on its December 31, Year Two, balance sheet? a. $100,000 b. $108,000 c. $132,000 d. $150,000 10. A Company starts a defined benefit pension plan on January 1, Year One. The prior service cost on that date is $400,000. The company employees on that date are expected to work for an additional 8 years on the average. During Year One, service cost was $240,000, funding was $300,000, interest on the projected benefit obligation was $30,000, expected and actual earnings on plan assets was $18,000. On the company's December 31, Year One, balance sheet, what is reported for accumulated other comprehensive income as a result of this pension? a. $332,000 b. $350,000 c. $362,000 d. $400,000 11. A company has a defined benefit pension plan that has been in operation for a number of years. On January 1, Year One, the company amends the plan and the projected benefit obligation increases by $280,000. On the same day, the actuary changes one of the actuarial assumptions and, as a result, the projected benefit obligation increases by another $420,000. On that day, the company has five employees who are each expected to work for an average of another seven years. At the end of Year One, what balance is shown in the company's accumulated other comprehensive income as reported within the stockholders' equity section of the balance sheet? a. $600,000 b. $640,000 c. $660,000 d. $700,000 12. The Keith Corporation has had a defined benefit pension plan for its employees for a number of years. At the beginning of Year One, the projected benefit obligation is $4 million. The company also has plan assets of $3 million. Service cost for Year One is $440,000. The company transfers $360,000 in cash to the pension plan on December 31, Year One as funding for the pensions. The discount rate used for the projected benefit obligation is 12 percent. Company officials expect the plan assets to generate revenue at a 10 percent rate but, in Year One, only 7 percent is actually earned. What amount of pension expense should be recognized for Year One? a. $260,000 b. $350,000 c. $620,000 d. $710,000 13. At the end of Year One, in connection with a defined pension benefit plan, Major Company has a deferred loss of $600,000 which arose from the difference in its expected and actual earnings on plan assets as well as a change in an actuarial assumption. On that date, the expected average remaining service life of the employees is assumed to be ten years. In addition, the projected benefit obligation is $5.6 million and the plan assets amount to $4.9 million. Which of the following statements is true in connection with this $600,000 deferred loss? a. Pension expense for Year One is increased by $4,000. b. Pension expense for Year Two is increased by $4,000. c. Pension expense for Year One is increased by $11,000. d. Pension expense for Year Two is increased by $11,000. 14. The Wilston Corporation has a large defined pension benefit plan for its employees. Currently, the projected benefit obligation is $44 million and plan assets amount to $37 million. The earnings on the plan assets are expected to be 7 percent per year over the next few years. In the current year, the actual earnings were 8 percent. Which of the following statements is not true? a. In computing its pension expense for the current year, the 7 percent expected return should ultimately be used to reduce the expense rather than the 8 percent actual return. b. In arriving at the plan asset balance at the end of the year, the 8 percent actual earnings should be included rather than the 7 percent expected return. c. The difference between the 7 percent expected return and the 8 percent actual return increases a deferred gain and has no direct impact on the pension expense. d. The 1 percent by which actual earnings were in excess of expected earnings serves to reduce pension expense for the current year. 15. On January 1, Year One, a company started a defined benefit pension plan for its employees. The service cost for Year One is $200,000. Funding is $150,000 each January 1, beginning on January 1, Year One. The interest rate used for discount purposes to determine the projected benefit obligation is 10 percent. Both actual and expected earnings on plan assets are 8 percent. What pension liability should this company report on its December 31, Year One, balance sheet? a. $38,000 b. $50,000 c. $200,000 d. $220,000 16. The Cosby Company has a defined benefit pension plan. On January 1, Year One, a contractual provision was changed and the projected benefit obligation increased at that moment by $400,000. Which of the following statements is true? a. Pension expense is not affected on January 1, Year One, but is gradually increased over the next several years. b. Pension expense is increased immediately by $400,000. c. Pension expense is increased on January 1, Year One, by a portion of the $400,000 with the remaining amount added to pension expense over the next few years. d. Pension expense is never affected because the $400,000 is retained within accumulated other comprehensive income on the balance sheet. Part 2, 1 question, 20 points QUESTION 1 XYZ Corporation is in its first year of operations. The company has pretax income of $400,000. The company has the following items recorded in its records. No estimated tax payments were made during year 1. Premiums on life insurance of key officer Depreciation on tax return in excess of book depreciation $10,000 12,000 Interest on municipal bonds Warranty expense Actual warranty repairs Bad debt expense Beginning balance in allowance for uncollectible accounts End balance for allowance for uncollectible accounts Rent received in advance from clients that will be recognized evenly over the next three years Tax rate for year 1 and future years 5,300 4,000 3,250 1,400 0 800 24,000 40% Prepare the following schedule for the deferred tax amounts for the year. Choose items from the following list (not all are used): Items Premium on life insurance Depreciation Interest on municipal bonds Item Difference between taxable amount and income statement amount Classification: Deferred tax asset Deferred tax liability Warranties Bad debts Rent received Current or noncurrent Deferred tax amount Complete the following table to calculate taxable income. If no adjustment is needed for a particular item enter 0 as your calculation. Pretax financial income Premiums on life insurance of key officer Interest on municipal bonds Depreciation for tax in excess of book depreciation Adjustment for warranties Adjustment for bad debts Adjustment for rent received in advance Taxable income