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Exam 16: Accounting for Income Taxes

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Question 71

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Which of the following must Franklin Freightways disclose related to the income tax expense reported in the income statement, ($ in millions) ?

A) Only the current portion of tax expense of $66.
B) Only the total tax expense of $82.
C) Both the current portion of the tax expense of $66 and the deferred portion of the tax expense of $16.
D) None of these.Disclosures should reveal both the current portion of the tax expense [($200 + 5 40) 40% = $66] and the deferred portion of the tax expense.($40 40% = $16) .

E) B) and D)
F) All of the above

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Question 72

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When tax rates are changed subsequent to the creation of a deferred tax asset or liability, the FASB requires that:

A) All deferred tax accounts be adjusted to reflect the new tax rates.
B) The beginning deferred tax accounts are left unchanged.
C) Only the current deferred tax accounts are adjusted to reflect the new tax rates.
D) Only the noncurrent deferred tax accounts are adjusted to reflect the new tax rates.

E) All of the above
F) B) and C)

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Question 73

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The effect of a change in tax rates:

Which of the following statements is true regarding SFAS 109 and its use of the asset and liability approach?

The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $150,000 at December 31, 2009. This was a result of differences between straight line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 30% for 2009 and 40% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2009, balance sheet as:

If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is more likely than not that:

The basic issue in deciding whether to record a valuation allowance for a deferred tax asset is if probable taxable income is anticipated to be insufficient to realize the tax benefit.

Before considering a net operating loss carryforward of $80 million, Fama Corporation reported $200 million of pretax accounting and taxable income in the current year. The income tax rate for all previous years was 40%. On January 1 of the current year a new tax law was enacted, reducing the rate to 30% effective immediately. Fama's income tax payable for the current year would be:

Which of the following usually results in an increase in a deferred tax asset?

A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as current to the extent that the NOL will be recovered in the following year.

Typical Corp. reported a deferred tax liability of $6,000,000 for the year ended December 31, 2008, when the tax rate was 40%. The deferred tax liability was related to a temporary difference of $15,000,000 caused by an installment sale in 2008. The temporary difference is expected to reverse in 2010 when the income deferred from taxation will become taxable. There are no other temporary differences. Assume a new tax law passed in 2009 and the tax rate, which will remain at 40% for through December 31, 2009, will become 48% for tax years beginning after December 31, 2009. Taxable income for the year 2009 is $30,000,000. Required: Prepare two footnotes for Typical's year 2009 financial statements to: (a.) Show the composition of Typical's income tax expense for the year. (b.) Explain the classification and description of the deferred tax liability. Give supporting computations to show how you arrived at the dollar amounts disclosed in your footnotes. Students may show the journal entry for the year 2009 tax provision as supporting detail: