Question 1:
Smith Corp. received cash of $20,000 that was included in revenues in its 2011 financial statements, of which $12,000 will not be taxable until 2012. Smith's enacted tax rate is 30% for 2011, and 25% for 2012. What amount should Scott report in its 2011 balance sheet for deferred income tax liability? Show calculation
a. $2,000
b. $2,400
c. $3,000
d. $3,600
Question 2:
East Corp. leased a building and received the $36,000 annual rental payment on June 15, 2011. The beginning of the lease was July 1, 2011. Rental income is taxable when received. East's tax rates are 30% for 2011 and 40% thereafter. East had no other permanent or temporary differences. East determined that no valuation allowance was needed. What amount of deferred tax asset should East report in its December 31, 2011, balance sheet? Show calculation
a. $ 5,400
b. $ 7,200
c. $10,800
d. $14,400
Question 3:
Which one of the following temporary differences will result in a deferred tax asset? And why?
a. Use of the straight-line depreciation method for financial statement purposes and the modified Accelerated Cost Recovery System (MACRS) for income tax purposes.
b. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
c. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.
d. Investment gains accounted for under the equity method for financial statement purposes and under the cost method for income tax purposes
Question 4:
Manufacturing Company Inc. purchased a new machine on January 1, 2012 for $100,000. The company uses the straight-line depreciation method with an estimated equipment life of 5 years and a zero salvage value for financial statement purposes, and uses the 3-year Modified Accelerated Cost Recovery System (MACRS) with an estimated equipment life of 3 years for income tax reporting purposes. Johnson is subject to a 35% marginal income tax rate. Assume that the deferred tax liability at the beginning of the year is zero and that Johnson has a positive earnings tax position. The MACRS depreciation rates for 3-year equipment are shown below
What is the deferred tax liability at December 31, 2012 (rounded to the nearest whole dollar)? Show calculation.
a. $ 7,000
b. $33,330
c. $11,667
d. $ 4,667
Question 5:
You are the new accounting manager at the Terry Transport Company. Your CFO has asked you to provide input on the company's income tax position based on the following:
a. Pretax accounting income was $41 million and taxable income was $8 million for the year ended December 31, 2011.
b. The difference was due to three items:
i. Tax depreciation exceeds book depreciation by $30 million in 2011 for the business complex acquired that year. This amount is scheduled to be $60 million in 2012 and to reverse as ($50 million) and ($40 million) in 2013, and 2014, respectively.
ii. Insurance of $9 million was paid in 2011 for 2012 coverage.
iii. A $6 million loss contingency was accrued in 2011, to be paid in 2013.
Question 6:
On December 31, 2010, Merrick, Inc., had 600 million shares of common stock outstanding. Twenty million shares of 8%, $100 par value cumulative, nonconvertible preferred stock were sold on January 2, 2011. On April 30, 2011, Merrick purchased 30 million shares of its common stock as treasury stock. Twelve million treasury shares were sold on August 31. Merrick issued a 5% common stock dividend on June 12, 2011. No cash dividends were declared in 2011. For the year ended December 31, 2011, Merrick reported a net loss of $140 million, including an after-tax extraordinary loss of $400 million from a litigation settlement.
a. Determine Merrick's net loss per share for the year ended December 31, 2011.
b. Determine the per share amount of income or loss from continuing operations for the year ended December 31, 2011.
c. Prepare an EPS presentation that would be appropriate to appear on Merrick's 2011 and 2010 comparative income statements. Assume EPS was reported in 2010 as $.75, based on net income (no extraordinary items) of $450 million and a weighted-average number of common shares of 600 million