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Exam 3: Taxes on the Financial Statements

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Question 21

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If a corporation has no operations outside the United States, its GAAP book and taxable income are identical.

A) True
B) False

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Question 22

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Qute, Inc., earns book net income before tax of $500,000.In computing its book income, Qute deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes.Qute records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 21% and no valuation allowance is required, what is Qute's total income tax expense reported on its GAAP financial statements?

A) $115,500
B) $105,000
C) $94,500
D) $10,500

E) A) and C)
F) A) and B)

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Question 23

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Ursula, Inc.is a domestic corporation.It owns 100% of Texas, Inc., a domestic corporation; 100% of Paris, a foreign corporation and 45% of Iowa, Inc., a domestic corporation. a.Which entities' incomes are included in Ursula's combined GAAP financial statements? b.How would your answer change if Ursula instead owned 15% of Iowa?

At the beginning of the year, Schrader, Inc., holds a net operating loss carryforward, and its balance sheet shows a related deferred tax asset of $500,000.At the end of the year, the balance in the deferred tax asset account has not changed, but Schrader's auditors want to record a $90,000 valuation allowance against this amount, because of a persistent downturn in Schrader's profitability.Provide the journal entry to record the valuation allowance.

Which of the following statements best describes considerations regarding a company's tax expense that users of GAAP financial statements may make?

Kling Corporation reports a $150,000 cash tax savings from a temporary book-tax difference.This item has the same effect on Kling's current-year effective tax rate as a $150,000 cash tax savings that is a permanent book-tax difference.

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

If a valuation allowance is decreased (released) in the current year, the corporation's effective tax rate is lower than had the valuation allowance not decreased.

Bryden Corporation is considering two tax planning strategies.Both would produce a $1 million tax savings.One of the strategies would structure the plan so that the $1 million would represent a temporary book-tax difference, and the other would generate a permanent difference.In general, which plan would the Bryden CFO prefer? Which would a stock analyst reviewing the Bryden valuation prefer?

Bunker, Inc., is a domestic corporation.It owns 100% of Texas, Inc., a domestic corporation; 100% of Paris, a foreign corporation and 35% of Iowa, Inc., a domestic corporation. a.Which entities' incomes are included in Bunker's Federal consolidated income tax return? b.How would your answer change if Bunker instead owned 15% of Iowa?

You are the tax adviser to a publicly traded U.S.corporation.How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?

In the typical case, the taxpayer would prefer to see a(n) :

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

Which of the following taxes are included in the total income tax expense of a corporation as reported on its GAAP financial statements?

Create, Inc., a domestic corporation, owns 90% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation.Create also owns 60% of Record, Inc., a domestic corporation.Create receives no distributions from any of these corporations.Which of these entities' net income is included in Create's Federal income tax return for the current year, assuming that Create elects to include all eligible entities in its consolidated Federal income tax return?

A deferred tax liability represents a potential future tax benefit associated with income reported in the current-year GAAP financial statements.

Black, Inc., is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 21% corporate tax rate and no valuation allowance. Black, Inc.'s, gross deferred tax assets and liabilities at the beginning of Black's year are listed below. Black, Inc.'s, book income before tax is $6,000.Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest and incurred $500 in nondeductible business meals expense.Determine the change in Black's deferred tax liabilities for the current year.

Which of the following items is not included in the GAAP financial statement income tax footnote's effective tax rate reconciliation?

Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation.Create also owns 12% of Record, Inc., a domestic corporation.Create receives no distributions from any of these corporations.Which of these entities' net income is included in Create's income statement for current-year financial reporting purposes?

Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.