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Flashcards: Income Taxes

In Year 1, a company has revenues of $600,000 and expenses of $400,000. Of the expenses, $70,000 represents a warranty on a company product. However, the company only paid $30,000 as a result of this warranty. The remainder is expected to be paid in a future year in which company officials believe there is a 60% chance that the company will have taxable income to be reduced by this warranty cost. The relevant tax rate is 30% for Year 1 and 32% for periods after that. What is the total amount of income tax expense to be recognized in Year 1?

$62,000

$59,200

$49,000

$70,000

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Flashcards: Income Taxes

Your answer:

$62,000

Your answer:

$49,000

Your answer:

$70,000

Correct answer:

$59,200

Explanation:

Reported net income of $200K ($600K revenue - $400K expenses) must be adjusted to $240K to exclude the portion of the warranty expenses that weren't paid in Year 1. This means the the current portion of income expense is $72K ($240K x 30%). The remaining $40K deduction is deferred to a future year, so the company recognizes a deferred benefit of $12,800 ($40K x 32%). Total Year 1 tax expense is equal to $72K - $12,800.

Flashcards: Income Taxes

The Faulkner Company had an enacted income tax rate of 25%. The company ended Year 1 with a deferred income tax liability of $30,000, a deferred income tax asset of $40,000, and a valuation allowance of $9,000. The enacted tax rate at the beginning of Year 2 was raised to 28%. The company ended Year 2 with a deferred income tax liability of $60,000, a deferred income tax asset of $30,000, and a valuation allowance of $14,000. On the company's Year 2 income statement, what is the amount of income tax expense (deferred) that is reported?

$20,000

$10,000

$45,000

$40,000

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Flashcards: Income Taxes

Your answer:

$20,000

Your answer:

$10,000

Your answer:

$40,000

Correct answer:

$45,000

Explanation:

The deferred tax liability increases by $30K from Year 1 to Year 2 ($30K to $60K) and the deferred asset decreased by $10K ($40K to $30K). The valuation allowance increased by $5K ($9K to $14K). Therefore, a balancing expense of $45K must be booked ($30K + $10K + $5K).

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All CPA Financial Accounting and Reporting (FAR) Resources

Flashcards: Income Taxes

Flashcards: Income Taxes

Flashcards: Income Taxes

Flashcards: Income Taxes

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HIGH SCHOOL

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math tutoring

science tutoring

foreign languages

elementary tutoring

other

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All CPA Financial Accounting and Reporting (FAR) Resources

Flashcards: Income Taxes

Flashcards: Income Taxes

Flashcards: Income Taxes

Flashcards: Income Taxes

Report an issue with this question

DMCA Complaint

Contact Information

Address

Complaint Details

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