The following questions dealing with accounting for income taxes are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.
1. Which one of the following temporary differences will result in a deferred tax asset?
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.
Questions 2 and 3 are based on the following information. Bearings 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. Bearings 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 Bearings has a positive earnings tax position. The MACRS depreciation rates for 3-year equipment are shown below.
2. What is the deferred tax liability at December 31, 2012 (rounded to the nearest whole dollar)?
a. $ 7,000
b. $33,330
c. $11,667
d. $ 4,667
3. For Bearings Manufacturing Company Inc., assume that the following new corporate income tax rates will go into effect:
What is the amount of the deferred tax asset/liability at December 31, 2012 (rounded to the nearest whole dollar)?
a. $0
b. $9,000
c. $2,668
d. $6,332