Taxable income of a corporation differs from pretax financial income because of Permanent differences or Temporary Differences a.no no b.no yes c.yes yes d.yes no

1 Taxable income of a corporation differs from pretax financial income because of a. b. c. d. 2. Permanent Differences No No Yes Yes Temporary Differences No Yes Yes No Inter-period income tax allocation causes a. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year. b. tax expense shown in the income statement to bear a normal relation to the tax liability. c. tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement. d. tax expense in the income statement to be presented with the specific revenues causing the tax. 3. At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2008, a future taxable amount will occur and a. b. c. d. 4. pretax financial income will exceed taxable income in 2008. Garth will record a decrease in a deferred tax liability in 2008. total income tax expense for 2008 will exceed current tax expense for 2008. Garth will record an increase in a deferred tax asset in 2008. A major distinction between temporary and permanent differences is a. permanent differences are not representative of acceptable accounting practice. b. temporary differences occur frequently, whereas permanent differences occur only once. c. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time. d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. 5. An example of a permanent difference is a. b. c. d. 6. proceeds from life insurance on officers. interest expense on money borrowed to invest in municipal bonds. insurance expense for a life insurance policy on officers. all of these Smiley Corporation purchased a machine on January 2, 2006, for $2,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2006 2007 $400,000 640,000 2009 2010 $230,000 230,000 2008 384,000 2011 116,000 Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Smiley's balance sheet at December 31, 2007, should be a. b. c. d. Deferred Tax Liability Current Noncurrent $0 $72,000 $4,800 $67,200 $67,200 $4,800 $72,000 $0 Use the following information for questions 7 through 8. Frizell Co. at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income Estimated litigation expense Extra depreciation for taxes Taxable income $ 750,000 1,000,000 (1,500,000) $ 250,000 The estimated litigation expense of $1,000,000 will be deductible in 2008 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all years. 7. Income tax payable is a. b. c. d. 8. The deferred tax asset to be recognized is a. b. c. d. 9. $75,000 current. $150,000 current. $225,000 current. $300,000 current. In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary: a. b. c. d. 10. $0. $75,000. $150,000. $225,000. retirement and mortality rate. interest rates. benefit provisions of the plan. all of these factors. In a defined-benefit plan, the process of funding refers to a. determining the projected benefit obligation. b. determining the accumulated benefit obligation. c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. d. determining the amount that might be reported for pension expense. 11. In all pension plans, the accounting problems include all the following except a. b. c. d. 12. measuring the amount of pension obligation. disclosing the status and effects of the plan in the financial statements. allocating the cost of the plan to the proper periods. determining the level of individual premiums. Prior service cost is amortized on a a. straight-line basis over the expected future years of service. b. years-of-service method or on a straight-line basis over the average remaining service life of active employees. c. straight-line basis over 15 years. d. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer. 13. Which of the following is a correct statement of one of the capitalization criteria? a. The lease transfers ownership of the property to the lessor. b. The lease contains a purchase option. c. The lease term is equal to or more than 75% of the estimated economic life of the leased property. d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property. 14. Minimum lease payments may include a a. b. c. d. 15. Executory costs include a. b. c. d. 16. penalty for failure to renew. bargain purchase option. guaranteed residual value. any of these. maintenance. property taxes. insurance. all of these. Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor? Transfers Ownership Contains Bargain Collectibility of Lease Any Important a. b. c. d. 17. By End Of Lease? No Yes Yes No Purchase Option? Yes No No Yes Payments Assured? Yes No No Yes Uncertainties? No No Yes Yes On December 1, 2008, Perez Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the landlord the following amounts: Rent deposit First month's rent Last month's rent Installation of new walls and offices $ 90,000 90,000 90,000 495,000 $765,000 The entire amount of $765,000 was charged to rent expense in 2008. What amount should Perez have charged to expense for the year ended December 31, 2008? a. b. c. d. 18. $90,000 $94,125 $184,125 $495,000 On January 1, 2008, Penn Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Penn to make annual payments of $100,000 at the end of each year for ten years with title to pass to Penn at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Penn uses the straight-line method of depreciation for all of its fixed assets. Penn accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Penn should record for 2008 a. b. c. d. lease expense of $100,000. interest expense of $44,734 and depreciation expense of $38,068. interest expense of $53,681 and depreciation expense of $44,734. interest expense of $45,681 and depreciation expense of $67,101. Use the following information for questions 19 and 20. On January 1, 2008, Dexter, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Garr Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the end of each year. (b) The fair value of the building on January 1, 2008 is $3,000,000; however, the book value to Garr is $2,500,000. (c) The building has an estimated economic life of 10 years, with no residual value. Dexter depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Dexter's incremental borrowing rate is 11% per year. Garr Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dexter, Inc. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property. 19. Dexter, Inc. would record depreciation expense on this storage building in 2008 of (Rounded to the nearest dollar.) a. b. c. d. 20. $0. $250,000. $300,000. $488,237. If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee? a. b. c. d. Sales-type lease Direct-financing lease Operating lease Capital lease 1 Taxable income of a corporation differs from pretax financial income because of a. b. c. d. 2. Permanent Differences No No Yes Yes Temporary Differences No Yes Yes No Inter-period income tax allocation causes a. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year. b. tax expense shown in the income statement to bear a normal relation to the tax liability. c. tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement. d. tax expense in the income statement to be presented with the specific revenues causing the tax. 3. At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2008, a future taxable amount will occur and a. b. c. d. 4. pretax financial income will exceed taxable income in 2008. Garth will record a decrease in a deferred tax liability in 2008. total income tax expense for 2008 will exceed current tax expense for 2008. Garth will record an increase in a deferred tax asset in 2008. A major distinction between temporary and permanent differences is a. permanent differences are not representative of acceptable accounting practice. b. temporary differences occur frequently, whereas permanent differences occur only once. c. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time. d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. 5. An example of a permanent difference is a. b. c. d. 6. proceeds from life insurance on officers. interest expense on money borrowed to invest in municipal bonds. insurance expense for a life insurance policy on officers. all of these Smiley Corporation purchased a machine on January 2, 2006, for $2,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2006 2007 $400,000 640,000 2009 2010 $230,000 230,000 2008 384,000 2011 116,000 Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Smiley's balance sheet at December 31, 2007, should be a. b. c. d. Deferred Tax Liability Current Noncurrent $0 $72,000 $4,800 $67,200 $67,200 $4,800 $72,000 $0 Use the following information for questions 7 through 8. Frizell Co. at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income Estimated litigation expense Extra depreciation for taxes Taxable income $ 750,000 1,000,000 (1,500,000) $ 250,000 The estimated litigation expense of $1,000,000 will be deductible in 2008 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all years. 7. Income tax payable is a. b. c. d. 8. The deferred tax asset to be recognized is a. b. c. d. 9. $75,000 current. $150,000 current. $225,000 current. $300,000 current. In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary: a. b. c. d. 10. $0. $75,000. $150,000. $225,000. retirement and mortality rate. interest rates. benefit provisions of the plan. all of these factors. In a defined-benefit plan, the process of funding refers to a. determining the projected benefit obligation. b. determining the accumulated benefit obligation. c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. d. determining the amount that might be reported for pension expense. 11. In all pension plans, the accounting problems include all the following except a. b. c. d. 12. measuring the amount of pension obligation. disclosing the status and effects of the plan in the financial statements. allocating the cost of the plan to the proper periods. determining the level of individual premiums. Prior service cost is amortized on a a. straight-line basis over the expected future years of service. b. years-of-service method or on a straight-line basis over the average remaining service life of active employees. c. straight-line basis over 15 years. d. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer. 13. Which of the following is a correct statement of one of the capitalization criteria? a. The lease transfers ownership of the property to the lessor. b. The lease contains a purchase option. c. The lease term is equal to or more than 75% of the estimated economic life of the leased property. d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property. 14. Minimum lease payments may include a a. b. c. d. 15. Executory costs include a. b. c. d. 16. penalty for failure to renew. bargain purchase option. guaranteed residual value. any of these. maintenance. property taxes. insurance. all of these. Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor? Transfers Ownership Contains Bargain Collectibility of Lease Any Important a. b. c. d. 17. By End Of Lease? No Yes Yes No Purchase Option? Yes No No Yes Payments Assured? Yes No No Yes Uncertainties? No No Yes Yes On December 1, 2008, Perez Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the landlord the following amounts: Rent deposit First month's rent Last month's rent Installation of new walls and offices $ 90,000 90,000 90,000 495,000 $765,000 The entire amount of $765,000 was charged to rent expense in 2008. What amount should Perez have charged to expense for the year ended December 31, 2008? a. b. c. d. 18. $90,000 $94,125 $184,125 $495,000 On January 1, 2008, Penn Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Penn to make annual payments of $100,000 at the end of each year for ten years with title to pass to Penn at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Penn uses the straight-line method of depreciation for all of its fixed assets. Penn accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Penn should record for 2008 a. b. c. d. lease expense of $100,000. interest expense of $44,734 and depreciation expense of $38,068. interest expense of $53,681 and depreciation expense of $44,734. interest expense of $45,681 and depreciation expense of $67,101. Use the following information for questions 19 and 20. On January 1, 2008, Dexter, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Garr Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the end of each year. (b) The fair value of the building on January 1, 2008 is $3,000,000; however, the book value to Garr is $2,500,000. (c) The building has an estimated economic life of 10 years, with no residual value. Dexter depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Dexter's incremental borrowing rate is 11% per year. Garr Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dexter, Inc. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property. 19. Dexter, Inc. would record depreciation expense on this storage building in 2008 of (Rounded to the nearest dollar.) a. b. c. d. 20. $0. $250,000. $300,000. $488,237. If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee? a. b. c. d. Sales-type lease Direct-financing lease Operating lease Capital lease 1 Taxable income of a corporation differs from pretax financial income because of a. b. c. d. 2. Permanent Differences No No Yes Yes Temporary Differences No Yes Yes No Inter-period income tax allocation causes a. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year. b. tax expense shown in the income statement to bear a normal relation to the tax liability. c. tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement. d. tax expense in the income statement to be presented with the specific revenues causing the tax. 3. At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2008, a future taxable amount will occur and a. b. c. d. 4. pretax financial income will exceed taxable income in 2008. Garth will record a decrease in a deferred tax liability in 2008. total income tax expense for 2008 will exceed current tax expense for 2008. Garth will record an increase in a deferred tax asset in 2008. A major distinction between temporary and permanent differences is a. permanent differences are not representative of acceptable accounting practice. b. temporary differences occur frequently, whereas permanent differences occur only once. c. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time. d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. 5. An example of a permanent difference is a. b. c. d. 6. proceeds from life insurance on officers. interest expense on money borrowed to invest in municipal bonds. insurance expense for a life insurance policy on officers. all of these Smiley Corporation purchased a machine on January 2, 2006, for $2,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2006 2007 $400,000 640,000 2009 2010 $230,000 230,000 2008 384,000 2011 116,000 Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Smiley's balance sheet at December 31, 2007, should be a. b. c. d. Deferred Tax Liability Current Noncurrent $0 $72,000 $4,800 $67,200 $67,200 $4,800 $72,000 $0 Use the following information for questions 7 through 8. Frizell Co. at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income Estimated litigation expense Extra depreciation for taxes Taxable income $ 750,000 1,000,000 (1,500,000) $ 250,000 The estimated litigation expense of $1,000,000 will be deductible in 2008 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all years. 7. Income tax payable is a. b. c. d. 8. The deferred tax asset to be recognized is a. b. c. d. 9. $75,000 current. $150,000 current. $225,000 current. $300,000 current. In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary: a. b. c. d. 10. $0. $75,000. $150,000. $225,000. retirement and mortality rate. interest rates. benefit provisions of the plan. all of these factors. In a defined-benefit plan, the process of funding refers to a. determining the projected benefit obligation. b. determining the accumulated benefit obligation. c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. d. determining the amount that might be reported for pension expense. 11. In all pension plans, the accounting problems include all the following except a. b. c. d. 12. measuring the amount of pension obligation. disclosing the status and effects of the plan in the financial statements. allocating the cost of the plan to the proper periods. determining the level of individual premiums. Prior service cost is amortized on a a. straight-line basis over the expected future years of service. b. years-of-service method or on a straight-line basis over the average remaining service life of active employees. c. straight-line basis over 15 years. d. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer. 13. Which of the following is a correct statement of one of the capitalization criteria? a. The lease transfers ownership of the property to the lessor. b. The lease contains a purchase option. c. The lease term is equal to or more than 75% of the estimated economic life of the leased property. d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property. 14. Minimum lease payments may include a a. b. c. d. 15. Executory costs include a. b. c. d. 16. penalty for failure to renew. bargain purchase option. guaranteed residual value. any of these. maintenance. property taxes. insurance. all of these. Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor? Transfers Ownership Contains Bargain Collectibility of Lease Any Important a. b. c. d. 17. By End Of Lease? No Yes Yes No Purchase Option? Yes No No Yes Payments Assured? Yes No No Yes Uncertainties? No No Yes Yes On December 1, 2008, Perez Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the landlord the following amounts: Rent deposit First month's rent Last month's rent Installation of new walls and offices $ 90,000 90,000 90,000 495,000 $765,000 The entire amount of $765,000 was charged to rent expense in 2008. What amount should Perez have charged to expense for the year ended December 31, 2008? a. b. c. d. 18. $90,000 $94,125 $184,125 $495,000 On January 1, 2008, Penn Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Penn to make annual payments of $100,000 at the end of each year for ten years with title to pass to Penn at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Penn uses the straight-line method of depreciation for all of its fixed assets. Penn accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Penn should record for 2008 a. b. c. d. lease expense of $100,000. interest expense of $44,734 and depreciation expense of $38,068. interest expense of $53,681 and depreciation expense of $44,734. interest expense of $45,681 and depreciation expense of $67,101. Use the following information for questions 19 and 20. On January 1, 2008, Dexter, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Garr Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the end of each year. (b) The fair value of the building on January 1, 2008 is $3,000,000; however, the book value to Garr is $2,500,000. (c) The building has an estimated economic life of 10 years, with no residual value. Dexter depreciates similar buildings on the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Dexter's incremental borrowing rate is 11% per year. Garr Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Dexter, Inc. (f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property. 19. Dexter, Inc. would record depreciation expense on this storage building in 2008 of (Rounded to the nearest dollar.) a. b. c. d. 20. $0. $250,000. $300,000. $488,237. If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee? a. b. c. d. Sales-type lease Direct-financing lease Operating lease Capital lease