Intermediate Accounting In Acc PDF

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PRACTICAL ACCOUNTING 1 – REVIEWACCOUNTING FOR TAXESPROF. U. VALLADOLIDMultiple Choice Identify the letter of the choice that best completes the statement or answers the question. The following differences between financial and taxable income were reported by Dider Corporation for the current year: (...

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1 PRACTICAL ACCOUNTING 1 – REVIEW ACCOUNTING FOR TAXES PROF. U.C. VALLADOLID Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. The following differences between financial and taxable income were reported by Dider Corporation for the current year: (a) (b) (c) (d) (e) (f)

(g) (h)

Excess of tax depreciation over book depreciation .... Interest revenue on municipal bonds .................. Excess of estimated warranty expense over actual expenditures ......................................... Unearned rent received ............................... Fines paid ........................................... Excess of income reported under percentage-of-completion accounting for financial reporting over completed-contract accounting used for tax reporting . Interest on indebtedness incurred to purchase tax-exempt securities .................................... Unrealized losses on marketable securities recognized for financial reporting ..............................

P60,000 9,000 54,000 12,000 30,000 45,000 3,000 18,000

Assume that Dider Corporation had pretax accounting income [before considering items (a) through (h)] of P900,000 for the current year. Compute for the taxable income for the current year. Assuming current tax rate of 30% and future enacted tax rate of 25%. 2. Anne's Co.'s 2020 income statement reported P90,000 income before provision for income taxes. To compute the provision for federal income taxes, the following 2020 data are provided: Rent received in advance Income from exempt municipal bonds Depreciation deducted for income tax purposes in excess of depreciation reported for financial statement purposes Estimated tax payments Enacted corporate income tax rate

P16,000 20,000 10,000 0 30%

What amount of current federal income tax liability should be reported in Anne's December 31, 2020 balance sheet? a. P18,000 b. P22,800 c. P25,800 d. P28,800

2

3. Jostine company at the end of 2020, its first year of operation prepared reconciliation between pre tax financial Income and taxable income as follows: Pre tax financial income P 900,000 Estimation litigation expense 500,000 Installment sales ( 400,000) Taxable income P 1,000,000 The estimate of litigation expense of P500,000 will be deductible in 2021 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of P200,000 in each of the next two years. The estimated liability for litigation is classified as non-current and the installment accounts receivable are classified as P200,000 current and P200,000 non-current. The income tax rate is 32% in 2020 enacted tax law which will be implemented early next year. Tax rate will be 33% for all years.

How much shall be the income tax expense? a) P 287,000 b) P 288,000 c) P 297,000

d) P 353,000

4. The following information was extracted from the records of Dean Company on December 31, 2020: Accounts Receivable Motor Vehicle Provisions for warranty Deposit received in advance

Carrying amount 1,500,000 1,650,000 120,000 150,000

Tax base 1,750,000 1,250,000 0 0

The depreciation rates for accounting and taxation are 15% and 25% respectively. The deposits are taxable when received and warranty cost are deductible only when written off as uncollectible. The tax rate is 30%. Dean Company should report a deferred tax liability on December 31, 2020 at a. 120,000 b. 156,000 c. 81,000 d. 36,000 5. Adik Company prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, 2020, its first year of operation: Pretax financial income Nontaxable interest received Long-term loss accrual in excess of deductible amount Depreciation in excess of financial depreciation Taxable income

1,600,000 ( 50,000) 100,000 (250,000) 1,400,000

1. If income tax is 30%, what amount should Adik report as income tax expense- current portion in its 2020 income statement? a. 465,000 b. 420,000 c. 480,000 d. 390,000 2. What amount should be reported as total income tax expense for 2020? a. 480,000 b. 465,000 c. 420,000 d. 435,000 3. On December 31, 2020, what amount should be reported a deferred tax liability?

3 a. 30,000

b. 45,000

c. 75,0000

d.

0

4. What amount should be reported as deferred tax asset on December 31, 2020? a. 30,000 b. 75,000 c. 45,000 d. 70,000

6. Angel Company reported taxable income of P8,000,000 in its income tax return for the year ended December 31, 2020, its first year of operations. Temporary differences between financial income and taxable income for the year are as follows: Tax depreciation in excess of book depreciation Accrual for product liability claim in excess of actual claim Reported installment sales income in excess of taxable installment sales income Income tax rate

800,000 1,200,000 2,600,000 30%

1. What is the total income tax expense to be reported in the 2020 income statement? a. 3,060,000 b. 2,400,000 c. 2,580,000 d. 2,220,000 2. What is the deferred tax asset on December 31, 2020? a. 240,000 b. 360,000 c. 780,000 d.

0

3. What is the deferred tax expense for the year ended December 31, 2020? a. 1,380,000 b. 1,020,000 c. 660,000 d. 360,000 7. On December 31, 2020, The accounts of Lol Company have the same basis for accounting and tax purposes, except the following: Carrying amount Tax Base Difference Computer software cost 4,000,000 0 4,000,000 Equipment 15,000,000 12,000,000 3,000,000 Accrued liability-heath care 2,000,000 0 2,000,000 In January 2020, Lol Company incurred cost of P6,000,000 in relation to the development of a computer software product, this cost was capitalized and amortized over 3 years for accounting purposes using straight line. However, the total amount was expensed in 2020 for tax purposes. The equipment was acquired on Jan. 1, 2020 for P 20,000,000. The useful life of the equipment is 4 years with no residual value. The equipment is depreciated using the straight line for accounting purposes. In Jan. 2020, Lol Company entered into an agreement with its employees to provide health care benefits. The cost of such plan for 2020 was P2,000,000. This amount was accrued as expense in 2020 for accounting purposes only when actually paid. The pretax accounting income for 2020 is P13,000,000. the tax rate is 30% and there are no deferred taxes on Jan. 1, 2020. 1. The December 31, 2020 statement of financial position shall report deferred tax liability at a. 2,100,000 b. 1,200,000 c. 1,500,000 d. 2,700,000 2. The December 31, 2020 statement of financial position shall report deferred tax asset at a. 1,200,000 b. 2,100,000 c. 900,000 d. 600,000 3. What is the 2020 current tax expense? a. 3,900,000 b. 2,400,000 c. 3,300,000 d. 1,500,000 4. The 2020 income statement shall report total income tax expense at a. 3,900,000 b. 4,500,000 c. 5,100,000 d. 1,500,000

4 5. What is the deferred tax expense for 2020? a. 2,100,000 b. 2,700,000 c. 1,500,000 d. 600,000 8. Jostine company lease office premises to Fox, Inc. for a 4-year term beginning January 2, 2020.Under the terms of the operating lease, rent for the first year is P216,00 and rent for years 2 through 4 is P337,500 per annum. However, as an inducement to enter the lease, Fox was allowed to use the lease asset rent-free for the first three months. Assume tax rate of 32%. In its December 31, 2020 balance sheet of Jostine company, what amount should be reported as deferred tax asset? a) 0 b) 42,120 c) 51, 840 d) 93,969

9. In 2020, Jostine corporation received interest income of 100,000 on government obligations and P600,000 in royalties under a licensing agreement. Royalties are reported as taxable income in the year received, but in the financial statements, royalties are recognized as income in the year earned and amount to P400,000 for the year ended December 31, 2020 the effective income tax rate of Jostine corporation is 32%. By what amount would the deferred income tax asset account balance increase? a)32,000 b)64,000 c)80,000 d)96,000 10. In Year 2, Ajax, Inc. reported taxable income of 400,000 and pretax financial statement income of 300,000. The difference resulted from 60,000 of nondeductible premiums on Ajax's officers' life insurance and 40,000 of rental income received in advance. Rental income is taxable when received. Ajax's effective tax rate is 30%. In its Year 2 income statement, what amount should Ajax report as income tax expense-current portion? a. 90,000 b. 102,000 c. 108,000 d. 120,000 11. Lion Co.'s income statement for its first year of operations shows pretax income of 6,000,000. In addition, the following differences existed between Lion's tax return and records: Tax Accounting return records Uncollectible accounts expense 220,000 250,000 Depreciation expense 860,000 570,000 Tax-exempt interest revenue 50,000 Lion's current year tax rate is 30% and the enacted rate for future years is 40%. What amount should Lion report as deferred tax expense in its income statement for the year? a. 148,000 b. 124,000 c. 104,000 d. 78,000 12. At the beginning of 2020, Pitman Co. purchased an asset for 600,000 with an estimated useful life of 5 years and an estimated residual value of 50,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.’s tax rate is 40% for 2020 and all future years. 1.

At the end of 2020, what is the book basis and the tax basis of the asset? Book basis Tax basis a. 440,000 310,000 b. 490,000 310,000 c. 490,000 360,000 d. 440,000 360,000

2.

At the end of 2020, which of the following deferred tax accounts and balances is reported on Pitman’s statement of financial position?

5

a. b. c. d.

13.

Account _ Deferred tax asset Deferred tax liability Deferred tax asset Deferred tax liability

Balance 52,000 52,000 78,000 78,000

Mathis Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income 500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000) Taxable income 750,000 The estimated litigation expense of 1,250,000 will be deductible in 2022 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of 500,000 in each of the next two years. The estimated liability for litigation is classified as non-current and the installment accounts receivable are classified as 500,000 current and 500,000 noncurrent. The income tax rate is 30% for all years. 1. 2.

The income tax expense is a. 150,000. b. 225,000.

c. 250,000.

d. 500,000.

The net deferred tax asset to be recognized is a. 0. b. 150,000. c. 375,000.

d. 225,000.

14. In 2020, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of 1,500,000. The facilities were sold in March 2021 and a 1,500,000 loss was recognized for tax purposes. Also in 2020, Krause paid 100,000 in fines for violation of environmental regulations. Assuming that the enacted tax rate is 30% in both 2020 and 2021, and that Krause paid 780,000 in income taxes in 2020, the amount reported as net deferred income taxes on Krause's statement of financial position at December 31, 2020, should be a a. 420,000 asset. b. 360,000 asset. c. 360,000 liability. d. 450,000 asset. 15. Munoz Corp.'s books showed pretax financial income of 1,500,000 for the year ended December 31, 2020. In the computation of income taxes, the following data were considered: Gain on an involuntary conversion

650,000

6 (Munoz has elected to replace the property within the statutory period using total proceeds.) Depreciation deducted for tax purposes in excess of depreciation deducted for book purposes 100,000 Estimated tax payments, 2020 125,000 Enacted tax rate, 2020 30% What amount should Munoz report as its current income tax liability on its December 31, 2020 statement of financial position? a. 100,000 b. 130,000 c. 225,000 d. 255,000 16. Haag Corp.'s 2020 income statement showed pretax accounting income of 750,000. To compute the income tax liability, the following 2020 data are provided: Income from government bonds 30,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 60,000 Estimated income tax payments made 150,000 Enacted corporate income tax rate 30% What amount of current income tax liability should be included in Hagg's December 31, 2020 statement of financial position? a. 48,000 b. 66,000 c. 75,000 d. 198,000 17. On January 1, 2020, Piper Corp. purchased 40% of the voting common stock of Betz, Inc. and appropriately accounts for its investment by the equity method. During 2020, Betz reported earnings of 360,000 and paid dividends of 120,000. Piper assumes that all of Betz's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for this temporary difference is a. 72,000. b. 60,000. c. 43,200. d. 28,800. 18. Didde Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, 2020: Book income before income taxes 1,200,000 Add temporary difference Construction contract revenue which will reverse in 2021 160,000 Deduct temporary difference Depreciation expense which will reverse in equal amounts in each of the next four years (640,000) Taxable income 720,000 Didde's effective income tax rate is 34% for 2020. What amount should Didde report in its 2020 income statement as the current provision for income taxes? a. 54,400 b. 244,800 c. 408,000 d. 462,400 19. In its 2020 income statement, Cohen Corp. reported depreciation of 1,110,000 and interest revenue on government obligations of 210,000. Cohen reported depreciation of 1,650,000 on its 2020 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2020, 30% for 2021, and 25% for 2022 and 2023. What amount should be included in the deferred income tax liability in Hertz's December 31, 2020 statement of financial position? a. 144,000 b. 186,000 c. 225,000 d. 262,500

7 20. For calendar year 2020, Kane Corp. reported depreciation of 1,200,000 in its income statement. On its 2020 income tax return, Kane reported depreciation of 1,800,000. Kane's income statement also included 225,000 accrued warranty expense that will be deducted for tax purposes when paid. Kane's enacted tax rates are 30% for 2020 and 2021, and 24% for 2022 and 2023. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense 2021 240,000 45,000 2022 210,000 75,000 2023 150,000 105,000 600,000 225,000 These were Kane's only temporary differences. In Kane's 2020 income statement, the deferred portion of its provision for income taxes should be a. 200,700. b. 112,500. c. 101,700. d. 109,800. 21. On its December 31, year 2 balance sheet, Shin Co. had income taxes payable of 13,000 and a current deferred tax asset of 20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of 15,000 at December 31, year 1. No estimated tax payments were made during year 2. At December 31, year 2, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its year 2 income statement, what amount should Shin report as total income tax expense? a. 8,000 b. 8,500 c. 10,000 d. 13,000 22. Eckert Corporation's partial income statement after its first year of operations is as follows: Income before income taxes Income tax expense Current Deferred Net income

3,750,000 1,035,000 90,000

1,125,000 2,625,000

Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was 1,500,000. No other differences existed between book income and taxable income except for the amount of depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year? a. 1,200,000 b. 1,425,000 c. 1,500,000 d. 1,800,000

23. Kraft Company made the following journal entry in late 2020 for rent on property it leases to Danford Corporation. Cash

60,000 Unearned Rent

60,000

The payment represents rent for the years 2021 and 2020, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of 92,000 at the end of 2020, and its tax rate is 35%. 1.

What amount of income tax expense should Kraft Company report at the end of 2020? a. 53,000 b. 71,000 c. 81,500 d. 113,000

2.

Assuming the taxes payable at the end of 2021 is 102,000, what amount of income tax expense would Kraft Company record for 2021? a. 81,000 b. 91,500 c. 112,500 d. 123,000

8 24. MARGA Company reports pretax financial income of P750,000 for 2020. The following caused taxable income to be different than financial income:  Depreciation on the tax return is greater that depreciation on the income statement by P150,000.  Rent collected on the tax return is greater than rent earned on the income statement by 200,000.  Fines for pollution appears as expense of P100,000 on the income statement. Marga’s tax rate is 32% for all years and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020 What is the amount of income tax liability for 2020? a. 240,000 c. 288,000 b. 272,000 d. 256,000 25. Shear, Inc. began operations in year 1. Included in Shear’s year 1 financial statements were bad debt expenses of 1,400 and profit from an installment sale of 2,600. For tax purposes, the bad debts will be deducted when written off and the profit from the installment sale will be recognized in year 2. The enacted tax rates are 30% in year 1 and 25% in year 2. In its year 1 income statement, what amount should Shear report as deferred income tax expense? a. 300 b. 360 c. 650 d. 780

9 APPLIED AUDITING

CORRECTION OF ERRORS PROF. U.C. VALLADOLID Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. John Paul ‘s December 31 year end financial statements had the following errors: December 31, 2018 December31, 2019 Ending inventory P13,500 understated P19,800 overstated Depreciation expense 3,600 understated Unearned rental 5,000 understated Prepaid insurance 8,000 understated There were no other errors during the years 2018 or 2019 and no connections have been made for any of the errors. (ignore income tax considerations). 1. What is the net effect of the errors on John Paul’s 2019 net income? a. understated by P13,000 b. overstated by P14,800 c. overstated by P20,300 d. overstated by P25,300 2. What is the net effect of the errors in John Paul’s December 31, 2019 accumulated profits balance? a. overstated by P11,800 b. overstated by P15,400 c. understated by P20,300 d. overstated by 25,300 3. What is the net effect of the errors in John Paul’s December 31, 2019 working capital? a. understated by P4,900 b. understated by P8,000 c. overstated by P11,800 d. understated by P20,300 2. The December 31 year end financial statement of Ana co. contained the following errors: Ending inventory Depreciation expense

December 31, 2018 P48,000 underst...