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A company has taxable income of $70,000 and pre-tax income of $80,000

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A company has Taxable Income of $70,000 and Pre-tax Income of $80,000 during fiscal year 2012. The statutory tax rate is 35.0% and the effective tax rate is 30%

What is Income Tax Expense for 2012?
$10,000
$28,000
$24,500
$21,000
$24,000

Question 2
Which of the following are permanent differences? (check all that apply)
Tax-free interest income
Cash advances from customers
State taxes
Warranty expense
Depreciation expense

Question 3
Which of the following are true about Deferred Tax Liabilities? (check all that apply)
Initially, tax rules require smaller expenses than GAAP
Initially, tax rules require bigger expenses than GAAP
In the future, tax rules require smaller expenses than GAAP
They represent an obligation to make higher tax payments in the future
In the future, tax rules require bigger expenses than GAAP

Question 4
A company has a temporary difference due to depreciation. For fiscal year 2012, its Income Tax Expense is $15,000 and its Taxable Income is $100,000. The statutory tax rate is 35%

What is the correct journal entry for recording 2012 Income Tax Expense and Income Tax Payable?
Dr. Income Tax Expense 15,000
Dr. Deferred Tax Liabilities 20,000
Cr. Income Tax Payable 35,000

Question 5
A company has a temporary difference due to doubtful accounts (i.e., bad debt expense). For fiscal year 2012, its Income Tax Payable was $10,000 greater than its Income Tax Expense.

What happened to deferred taxes in 2012?
Deferred Tax Liabilities increased by $10,000
There was no effect on Deferred Tax Assets or Deferred Tax Liabilities
Deferred Tax Liabilities decreased by $10,000
Deferred Tax Assets decreased by $10,000
Deferred Tax Assets increased by $10,000

Question 6
A company has a Deferred Tax Asset of $35,000. Now, the government has just changed the statutory tax rate from 35% to 30% effective immediately.

What is the correct journal entry to record the impact of this tax rate change?
Dr. Income Tax Payable 5000
Cr. Deferred Tax Assets 5000

Dr. Income Tax Expense 5000
Cr. Income Tax Payable 5000

Dr. Deferred Tax Assets 5000
Cr. Income Tax Expense 5000

Dr. Deferred Tax Assets 5000
Cr. Income Tax Payable 5000

Dr. Income Tax Expense 5000
Cr. Deferred Tax Assets 5000

Question 7
A company had Taxable Income of $20,000 in 2011 and a Net Operating Loss (NOL) of $40,000 in 2012. This is the company’s first-ever NOL. The company thinks that it is more likely than not that it will have taxable income in the future before the tax loss carryforward would expire. The statutory tax rate is 35.0%.

What is the amount of the Deferred Tax Asset for NOLs at the end of 2012?
$20,000
$40,000
$0
$14,000 – (if the company makes an election not to carryback; the answer would be 7000 if the company did carryback. The general rule under section 172(b)(2) is that an NOL is used in the following order until exhausted:

Carried back to the second preceding tax year;
Carried back to the first preceding tax year; and
Carried forward to the following 20 tax years.)

$7,000

Question 8
A company had total Deferred Tax Assets related to NOLs of $35,000. It also had a Valuation Allowance of $10,000 due to the NOLs in the Faroe Islands. Now, the company thinks that it is more likely than not that it will be able to use the NOLs in the Faroe Islands. The statutory tax rate is 42.0% in the Faroe Islands.

How will the change to the “more likely than not” determination for the Faroe Islands affect Net Income?
Increase Net Income by $10,000
There is no effect on Net Income
Increase Net Income by $4,200
Decrease Net Income by $4,200
Decrease Net Income by $10,000

Question 9
After preparing a preliminary version of its financial statements, a company found that it made a mistake in computing bad debt expense on the books. The company needed to reduce Bad Debt Expense on its books by $100,000.

Which of the following would be increased by this change? (check all that apply)
Cash flow from Operations
Income Tax Expense
Deferred Tax Liabilities
Deferred Tax Assets
Income Tax Payable

Question 10
A company purchased a marketable security for $10,000 on 3/3/2013. On 3/30/2013, the company prepared its financial statements and marked the security to its market value, which was $17,500. The security was sold on 4/30/2013 for $15,000. The company used the Available-for-Sale method to account for the security. The statutory tax rate is 35%.

What was the effect of the sale of the security on Income Tax Payable on 4/30/2013?
$875 decrease in Income Tax Payable
$1,750 increase in Income Tax Payable
There was no effect on Income Tax Payable
$875 increase in Income Tax Payable
$1,750 decrease in Income Tax Payable

 

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