1. Question : (TCO B)  As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co.'s sole depreciable asset, acquired in Year 1, exceeded its tax basis by $250,000 at December 31, Year 1.  This difference will reverse in future years.  The enacted tax rate is 30% for Year 1, and 40% for future years.  Noor has no other temporary differences.  In its December 31, Year 1, balance sheet, how should Noor report the deferred tax effect of this difference?

  Student Answer:As an asset of $75,000.

 As an asset of $100,000.

 As a liability of $75,000.

 As a liability of $100,000.

  Instructor Explanation:

CPA-00785  Becker ExplanationChoice "d" is correct, as a deferred tax liability of $100,000, since tax depreciation exceeds book depreciation.  The 40% tax rate for the period(s) the difference is expected to reverse should be used. 

  Points Received: 8 of 8

  Comments:

Question 2.Question : (TCO B)  Mobe Co. reported the following operating income (loss) for its first three years of operations:Year 1    $       300,000Year 2             (700,000)Year 3             1,200,000 For each year, there were no deferred income taxes (before Year 1), and Mobe's effective income tax rate was 30%.  In its Year 2 income tax return, Mobe elected the two year carry back of the loss.  In its Year 3 income statement, what amount should Mobe report as total income tax expense?

 Student Answer:

$120,000

 $150,000

 $240,000

 $360,000

 Instructor Explanation:

CPA-00789 Becker ExplanationChoice "d" is correct, $360,000 total income tax expense for Year 3. Year 2DR:           Inc. Tax Refund Rec. ($300,000 30%)            $90,000DR:           Deferred Tax Asset ($400,000 30%)                120,000CR:                     Income Tax Benefit                                                $210,000 Year 3

 DR:           Income Tax Expense                                          $360,000CR:                    Income Tax Payable                                                          $240,000CR:                    Deferred Tax Asset                                                             120,000

  Points Received: 8 of 8

  Comments:

Question 3.Question : (TCO B) Hut Co. has temporary taxable differences that will reverse during the next year and add to taxable income.  These differences relate to noncurrent assets.  Under U.S. GAAP, deferred income taxes based on these temporary differences should be classified in Hut's balance sheet as a:

  Student Answer:

Current asset.

 Noncurrent asset.

 Current liability.

 Noncurrent liability.

  

  Instructor Explanation:

CPA-00779 Becker ExplanationChoice "d" is correct.  Hut's temporary taxable differences add to taxable income, making them deferred tax liabilities.  Under U.S. GAAP, deferred tax liabilities are classified in the balance sheet based on the classification of the related assets.  In this case, the related asset is a noncurrent asset, so the deferred tax liability is classified as a noncurrent liability.Choice "a" is incorrect.  Hut's temporary taxable differences add to taxable income, making them deferred tax liabilities, not deferred tax assets.Choice "b" is incorrect.  Hut's temporary taxable differences add to taxable income, making them deferred tax liabilities, not deferred tax assets.Choice "c" is incorrect.  Under U.S. GAAP, deferred tax liabilities are classified in the balance sheet based on the classification of the related assets.  In this case, the related asset is a noncurrent asset.

  Points Received: 8 of 8

  Comments:

Question 4.Question : (TCO B) Venus Corp.'s worksheet for calculating current and deferred income taxes for Year 1 follows:                                       Year 1             Year 2              Year 3Pretax income              $1,400Temporary differences:Depreciation                    (800)             (1,200)          $  2,000Warranty costs                                                 400                                   (100 )             (300)Taxable income            $ 1,000              (1,300)              1,700Loss carryback              (1,000)              1,000Loss carryforward                                                  300                                       (300 )                                     $             0             $               0             $   1,400

Enacted rate                        30%                 30%                 25% Venus had no prior deferred tax balances.  In its Year 1 income statement, what amount should Venus report as:Current income tax expense?

  Student Answer:

$420

 $350

 $300

 $0

    Instructor

Explanation:CPA-00808 Becker ExplanationChoice "c" is correct, $300 current income tax expense (taxable income of $1,000 x 30%).

  Points Received: 8 of 8

  Comments:

Question 5.Question : (TCO B) Stone Co. began operations in Year 1 and reported $225,000 in income before income taxes for the year.  Stone's Year 1 tax depreciation exceeded its book depreciation by $25,000.  Stone also had nondeductible book expenses of $10,000 related to permanent differences.  Stone's tax rate for Year 1 was 40%, and the enacted rate for years after Year 1 is 35%.  In its December 31, Year 1, balance sheet, what amount of deferred income tax liability should Stone report?

 Student Answer:

$8,750

 $10,000

 $12,250

 $14,000

 Instructor Explanation:

CPA-00806 Becker ExplanationChoice "a" is correct,  $8,750 deferred tax liability at 12/31.                                                                                                                                                                                                                            Temporary                                                                         Book             Tax             differenceTax depreciation in excess of book                    0              25,000            25,000Tax rate for years after Year 1 - When the diff reverses                          x         35 %Deferred tax liability at 12/31                                                                     8,750  

  Points Received: 8 of 8

  Comments: