College of Business and Accountancy

Accountancy Department
Intermediate Accounting I
MIDTERM TERMINAL OUTPUT
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ACCOUNTING FOR INCOME TAXES

I. THEORY

1. Taxable income of a corporation

a. differs from accounting income due to differences in intraperiod allocation between the two
methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and permanent
differences between the two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.

2. The deferred tax expense is the

a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.

b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

3. Interperiod tax allocation results in a deferred tax liability from

a. an income item partially recognized for financial purposes but fully recognized for tax purposes in
any one year.
b. the amount of deferred tax consequences attributed to temporary differences that result in net
deductible amounts in future years.
c. an income item fully recognized for tax and financial purposes in any one year.
d. the amount of deferred tax consequences attributed to temporary differences that result in net
taxable amounts in future years.
4. Which of the following situations would require interperiod income tax allocation procedures?
a. An excess of percentage depletion over cost depletion
b. Interest received on municipal bonds
c. A temporary difference exists at the balance sheet date because the tax basis of an asset or
liability and its reported amount in the financial statements differ
d. Proceeds from a life insurance policy on an officer

5. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the
machinery could result in

Future Future
Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No

6. A temporary difference arises when a revenue item is reported for tax purposes in a period

After it is reported Before it is reported

in financial income in financial income

a. Yes Yes
b. Yes No
c. No Yes
d. No No

7. 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. pretax financial income will exceed taxable income in 2008.

b. Garth will record a decrease in a deferred tax liability in 2008.
c. total income tax expense for 2008 will exceed current tax expense for 2008.
d. Garth will record an increase in a deferred tax asset in 2008.
8. Assuming a 40% statutory tax rate applies to all years involved, which of the following
situations will give rise to reporting a deferred tax liability on the balance sheet?

I- A revenue is deferred for financial reporting purposes but not for tax purposes.

II- A revenue is deferred for tax purposes but not for financial reporting purposes.

III- An expense is deferred for financial reporting purposes but not for tax purposes.

IV- An expense is deferred for tax purposes but not for financial reporting purposes.

a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only

9. 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.

10. Which of the following are temporary differences that are normally classified as expenses or
losses that are deductible after they are recognized in financial income?

a. Advance rental receipts.

b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.

11. Which of the following is a temporary difference classified as a revenue or gain that is taxable
after it is recognized in financial income?

a. Subscriptions received in advance.

b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting purposes and on
the installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.
12. Which of the following differences would result in future taxable amounts?

a. Expenses or losses that are tax deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial income.

13. An example of a permanent difference is

a. proceeds from life insurance on officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers.
d. all of these.

14. Which of the following will not result in a temporary difference?

a. Product warranty liabilities

b. Advance rental receipts
c. Installment sales
d. All of these will result in a temporary difference.

15. A company uses the equity method to account for an investment. This would result in what type
of difference and in what type of deferred income tax?

Type of Difference Deferred Tax

a. Permanent Asset
b. Permanent Liability
c. Temporary Asset
d. Temporary Liability

16. A company records an unrealized loss on short-term securities. This would result in what type
of difference and in what type of deferred income tax?

Type of Difference Deferred Tax

a. Temporary Liability
b. Temporary Asset
c. Permanent Liability
d. Permanent Asset
17. When a change in the tax rate is enacted into law, its effect on existing deferred income tax
accounts should be

a. handled retroactively in accordance with the guidance related to changes in accounting principles.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or
increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the
tax rate change, but not subsequent to the date of the change.

18. Tax rates other than the current tax rate may be used to calculate the deferred income tax
amount on the balance sheet if

a. it is probable that a future tax rate change will occur.

b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted into law.
d. it appears likely that a future tax rate will be less than the current tax rate.

19. Recognition of tax benefits in the loss year due to a loss carry forward requires

a. the establishment of a deferred tax liability.

b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.

20. Major reasons for disclosure of deferred income tax information is (are)

a. better assessment of quality of earnings.

b. better predictions of future cash flows.
c. that it may be helpful in setting government policy.
d. all of these.

21. Accounting for income taxes can result in the reporting of deferred taxes as any of the following
except

a. a current or long-term asset.

b. a current or long-term liability.
c. a contra-asset account.
d. All of these are acceptable methods of reporting deferred taxes.
22. Deferred taxes should be presented on the balance sheet

a. as one net debit or credit amount.

b. in two amounts: one for the net current amount and one for the net noncurrent amount.
c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.

23. Deferred tax amounts that are related to specific assets or liabilities should be classified as
current or noncurrent based on

a. their expected reversal dates.

b. their debit or credit balance.
c. the length of time the deferred tax amounts will generate future tax deferral benefits.
d. the classification of the related asset or liability.

24. A deferred tax liability is classified on the balance sheet as either a current or a noncurrent
liability. The current amount of a deferred tax liability should generally be

a. the net deferred tax consequences of temporary differences that will result in net taxable amounts
during the next year.
b. totally eliminated from the financial statements if the amount is related to a noncurrent asset.
c. based on the classification of the related asset or liability for financial reporting purposes.
d. the total of all deferred tax consequences that are not expected to reverse in the operating period or
one year, whichever is greater.

25. All of the following are procedures for the computation of deferred income taxes except to

a. identify the types and amounts of existing temporary differences.

b. measure the total deferred tax liability for taxable temporary differences.
c. measure the total deferred tax asset for deductible temporary differences and operating loss
carrybacks.
d. All of these are procedures in computing deferred income taxes.
II. PROBLEM SOLVING

1. Hilton Company reported pretax financial income of 6,200,000 for the current year. Included
in other income was 200,000 of interest revenue from government bonds held by the entity.
The income statement included depreciation expense of 50,000 for machine with the cost of
3,000,000. The income tax return reported 600,000 as depreciation on the machine. The
enacted tax rate is 30% for the current year and future years.

What is the current tax expense for the current year?

a. 1,860,000
b. 1,800,000
c. 1,770,000
d. 1,830,000

Solution:

Financial Income 6,200,000

Interest revenue on government bonds (200,000)
Tax depreciation in excess of financial depreciation
(600,000-500,000) (100,000)
Taxable Income 5,900,000

Current tax expense (5,900,000x30%) 1,770,000

2. Tantrum Company began operation at the beginning of the current year. At the end of the
first year of operation, the entity reported 6,000,000income before income tax in the income
statement but only 5,100,000 taxable income in the tax return. Analysis of the 900,000
difference revealed that 500,000 was permanent difference and 400,000 was temporary tax
liability difference related to a current asset. The enacted tax rate for the current year and
future year is 30%.

What is the total income tax expense to be reported in the income statement for the current
year?

a. 1,800,000
b. 1,530,000
c. 1,650,000
d. 1,950,000
 Solution:

Accounting or Financial Income 6,000,000

Permanent differences (500,000)
Accounting or Financial income subject to tax 5,500,000

Total income tax expense (5,500,000x30%) 1,650,000

3. In 2018, Tiger Company reported pretax financial income of 5,000,000. Included in the pretax
financial income are 900,000 of non-taxable life insurance proceeds received as a result of the
death of an officer, 1,200,000 of estimate warranty expense accrued on December 31, 2018 and
200,000 of life insurance premiums for a policy for an officer. No income tax was previously
paid during the year and the income tax rate is 30%.

What is the income tax payable on December 31, 2018?

a. 1,500,000
b. 1,230,000
c. 1,290,000
d. 1,650,000

Solution:

Financial income 5,000,000

Non-taxable life insurance proceeds (900,000)
Life insurance premium for an officer 200,000
Financial income subject to tax 4,300,000
Estimate warranty expense 1,200,000
Taxable Income 5,500,000

Income tax payable (5,500,000x30%) 1,650,000

4. Viking Company reported in the income statement for the year ended December 31, 2018
pretax income of 1,000,000.

Tax return Accounting record

Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officer’s life insurance 90,000
Income tax rate 30%

What is the current provision for income tax for 2018?

a. 360,000
b. 300,000
c. 294,000
d. 327,000
 Solution:

Pretax accounting income 1,000,000

Premium on officer’s life insurance-non-deductible 90,000
Accounting Income subject to tax 1,090,000
Rent income - temporary difference ( 50,000)
Depreciation - temporary differences ( 60,000)
Taxable income 980,000

Current Provision for income tax (980,000x30%) 294,000

5. Pine Company reported pretax income of 800,000 for the year ended December 31. 2018. In
the computation of income taxes, the following data were considered:

Non-taxable gain 350,000

Depreciation deduction tax purpose in excess of
depreciation deducted for book purposes 50,000
Estimate tax payment in 2018 70,000
Enacted tax rate 30%

What amount should be reported as current tax liabilities on December 31, 2018?

a. 135,000
b. 120,000
c. 50,000
d. 65,000

Solution:

Pretax financial income 800,000

Non-taxable gain (350,000)
Financial income subject to tax 450,000
Excess tax depreciation ( 50,000)
Taxable Income 400,000

What is the total income tax expense?

a. 120,000
b. 135,000
c. 240,000
d. 85,000
 Solution:

Current tax expense (400,000x30%) 120,000

Estimate tax payment (70,000)
Current tax liability 50,000

Total tax expense (450,000x30%) 135,000

6. Huskie Company reported in the income statement for the current year pretax income of
400,000. The following items are treated differently per tax return and per book:

Tax Return Book

Royalty income 20,000 40,000
Depreciation expense 125,000 100,000
Payment of a penalty NONE 30%

What amount should be reported as current portion of income tax expense?

a. 111,000
b. 106,500
c. 138,000
d. 114,000

Solution:

Pretax income 400,000

Payment of penalty- non-deductible 15,000
Accounting income subject to tax 415,000
Royalty income in excess of taxable amount (20,000)
Excess tax depreciation (25,000)
Taxable income 370,000

Current tax expense (370,000x30%) 111,000

What is the total tax expense?

a. 120,000
b. 124,500
c. 115,500
d. 117,000
 Solution:

Pretax income 400,000

Payment of penalty- non-deductible 15,000
Accounting income subject to tax 415,000

Total tax expense (415,000x30%) 124,500

7. Aris Company computed a pretax accounting income of 5,000,000 for the first year of
operation.

Non-deductible expenses 200,000

Non-taxable revenue 500,000
Gross income on instalment sales reported in
Accounting income but not in taxable income 1,000,000
Provision for doubtful accounts 100,000
Income tax expense 30%

What is the current tax expense?

a. 1,140,000
b. 1,410,000
c. 1,500,000
d. 1,110,000

Solution:

Pretax accounting income 5,000,000

Non-deductible expense – permanent 200,000
Non-taxable revenue – permanent (500,000)
Accounting income subject to tax 4,700,000
Gross income on instalment sales – temporary (1,000,000)
Doubtful Accounts – temporary 100,000
Taxable income 3,800,000

Current tax expense (3,800,000x30%) 1,140,000

 What is the Total income tax expense?

a. 1,770,000
b. 1,410,000
c. 1,475,500
d. 1,650,000

Solution:

Pretax accounting income 5,000,000

Non-deductible expense – permanent 200,000
Non-taxable revenue – permanent (500,000)
Accounting income subject to tax 4,700,000

Total income tax expense (4,700,000x30%) 1,410,000

8. Herbie Company had cumulative taxable temporary differences on December 31, 2018 and
December 31, 2017 of 1,350,000 and 960,000, respectively. The tax rate for 2018 is 40% while
the tax rate for future year is 30%. Taxable income for 2018 is 2,400,000 and there are no
permanent differences.

What is the pretax financial income for 2018?

a. 3,750,000
b. 2,790,000
c. 2,010,000
d. 1,050,000

Solution:

Cumulative taxable temporary difference-12/31/2018 1,350,000

Cumulative taxable temporary difference-12/31/2017 (960,000)
Taxable temporary difference 2018 390,000

Taxable income in 2018 2,400,000

Taxable temporary differences 2015 390,000
Pretax Financial Income 2,790,000
9. On June 30, 2018, Ank Company prepaid a 1,000,000 premium on an annual insurance policy.
The premium payment was a tax deductible expense in the 2018 cash basis tax return. The
accrual basis income statement will report a 500,000 insurance expense in 2018 and 2019. The
income tax rate is 30%

On December 31, 2018, what amount should be reported as deferred tax liability?

a. 300,000
b. 150,000
c. 200,000
d. 0

Solution:

Deferred Tax liability (500,000x30%) 150,000

10. Zambal Company reported depreciation of 2,500,000 in the 2018 tax return. However, in the
2018 income statement, the entity reported depreciation of 1,000,000. The difference in
depreciation is a temporary difference that will reverse over time. The tax rate is 30%.

What amount should be added to the deferred tax liability on December 31, 2018?

a. 300,000
b. 750,000
c. 450,000
d. 0

Solution:

Tax depreciation 2,500,000

Book depreciation 1,000,000
Future taxable amount 1,500,000

Increase in deferred tax liability (1,500,000x30%) 450,000

11. West Company leased building and received 4,000,000 annual rental payment on June 15,
2018. The beginning of the lease was July 01, 2018. Rental income is taxable when received.
The income tax rate is 30%. The entity had no other permanent or temporary differences.

What amount of deferred tax asset should be reported on December 31, 2018?

a. 1,200,000
b. 300,000
c. 600,000
d. 0

Solution:

Deferred tax asset (2,000,000x30%) 600,000

12. Regal Company paid 200,000 in January 2018 for fire insurance premiums on two-year policy.
Additionally, the financial statements for the year ended December 31, 2018 revealed that the
entity paid 1,050,000 in income tax during the year and also accrued estimated litigation loss of
2,000,000. The lawsuit was resolved in February 2019 at which time a 2,000,000 loss was
recognized for tax purposes. The entity used the cash basis for tax purpose. The tax rate is
30% for both 2018 and 2019.

What amount should be reported as deferred tax asset on December 31,2018?

a. 630,000
b. 540,000
c. 600,000
d. 570,000

Solution:

Deferred Tax asset (2,000,000x30%) 600,000

13. In arriving at the profit before tax for the year ended December 31, 2018, Jerry Company has
accrued royalties receivable of 200,000 and interest payable of 250,000. Both royalties and
interest are dealt with on cash basis in tax computations.

What is the net temporary difference on December 31, 2018?

a. 450,000-taxable temporary difference

b. 450,000-deductible temporary difference
c. 50,000-deductible temporary difference
d. 50,000-taxable temporary difference

Solution:

Taxable temporary difference 200,000

Deductible temporary differences 250,000
Net deductible temporary differences 50,000

14. Jillian Company has a non-current asset which had a carrying amount of 1,800,000 on
December 31, 2018. The tax written down value or tax base of the asset at that date was
900,000. The tax rate is 30%.

What is the deferred tax balance in respect of the asset on December 31, 2018?

a. 900,000 asset
b. 270,000 liability
c. 270,000 asset
d. 900,000 liability

Solution:

Future taxable amount (1,800,000-900,000) 900,000

Deferred Tax liability (900,000x30%) 270,000

15. At year-end, South Company has revalued a property and has recognized the increase in the
revaluation in the financial statements. The carrying amount of the property was 8,000,000
and the revalued amount was 10,000,000. However, the tax base of the property was only
6,000,000. The income tax rate is 30%.

What is the deferred tax asset or liability at the year-end?

a. 1,200,000 asset
b. 1,200,000 liability
c. 600,000 asset
d. 600,000 liability

Solution:

Future taxable amount (10,000,000-6,000,000) 4,000,000

Deferred tax liability (4,000,000x30%) 1,200,000

16. Chamber Company reported the following differences between the book basis and tax basis of
asset and liabilities on December 31, 2018 which is the end of the first year operation:

Carrying amount Tax base

Installment accounts receivable 1,000,000 0
Litigation liability 200,000 0

It is expected that the litigation liability will be settled in 2019. The difference in account
receivable will result in taxable amount of 600,000 in 2019 and 400,000 in 2020. The entity has
a taxable income of 7,000,000 in 2018 and expected to have taxable income in each of the
following two years. The income tax rate is 30%.

What is the current tax expense?

a. 2,400,000
b. 2,040,000
c. 2,100,000
d. 2,460,000

Solution:

Current tax expense (7,000,000x30%) 2,100,000

 What is deferred tax expense?

a. 300,000
b. 360,000
c. 240,000
d. 60,000

Solution:

Increase in deferred tax liability (1,000,000x30%) 300,000

Increase in deferred tax asset (200,000x30%) (60,000)
Deferred tax expense 240,000

What is the total tax expense?

a. 2,460,000
b. 2,400,000
c. 2,340,000
d. 1,860,000

Solution:

Current tax expense (7,000,000x30%) 2,100,000

Deferred tax expense 240,000
Total tax expense 2,340,000

17. Zeff Company prepared the following reconciliation of pretax financial statement income to
taxable income for the first year of operations:

Pretax financial income 1,600,000

Non-taxable interest received (50,000)
Long-term loss accrual in excess of deductible amount 100,000
Depreciation in excess of financial depreciation (250,000)
Taxable income 1,400,000

If the income tax is 30%, what amount should be reported as income tax expense-current
portion in the income statement?

a. 465,000
b. 420,000
c. 480,000
d. 390,000

Solution:

Current tax expense (1,400,000x30%) 420,000

 What amount should be reported as deferred tax liability at year-end?

a. 30,000
b. 45,000
c. 75,000
d. 0

Solution:

Deferred tax liability (250,000x30%) 75,000

Note: excess in tax depreciation will result to deferred tax liability because it is future taxable
amount.

What amount should be reported as deferred tax asset at the year-end?

a. 30,000
b. 75,000
c. 45,000
d. 70,000

Solution:

Deferred tax asset (100,000x30%) 30,000

Note: long-term loss accrual will result to deferred tax asset because it is future deductible amount.

What amount should be reported as total tax expense for the first year?

a. 480,000
b. 465,000
c. 420,000
d. 435,000

Solution:

Pretax financial income 1,600,000

Non-taxable interest received (50,000)
Financial income subject to tax 1,550,000

Total tax expense (1,550,000x30%) 465,000