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Exam 14: Taxes on the Financial Statements

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Question 1

True/False

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Only domestic entities are included in a combined financial statement prepared under GAAP.

A) True
B) False

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False

Question 2

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Beach,Inc. ,a domestic corporation,owns 100% of Mountain,Ltd. ,a manufacturing facility in Ireland.Mountain has no operations or activities in the United States.The U.S.tax rate is 35% and the Irish tax rate is 10%.For the current year,Beach earns $500,000 in taxable income.Mountain earns $300,000 in taxable income from its operations,pays $30,000 in taxes to Ireland,and makes no distributions to Beach.What is Beach's effective tax rate for book purposes assuming Beach makes the permanent reinvestment assumption of ASC 740-30 (APB 23) ?

A) 38.75%.
B) 31.25%.
C) 35%.
D) 25.63%.
E) None of the above.

F) A) and E)
G) A) and D)

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Question 3

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Current tax expense is always the amount a taxpayer actually paid all Federal,state,and foreign tax authorities in a particular year.

ASC 740 (FIN 48)allows companies to choose their own level of certainty in reporting uncertain tax positions in their financial statements.

Nocera,Inc. ,earns book net income before tax of $600,000 in 2010.Nocera acquires a depreciable asset in 2010 and first year tax depreciation exceeds book depreciation by $120,000.Nocera has no other temporary or permanent differences.Assuming the U.S.tax rate is 35%,what is Nocera's total income tax expense reported on its financial statements for 2010?

Amelia,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Amelia Inc.'s gross deferred tax assets and liabilities at the beginning of Amelia's year are listed below. Amelia Inc.'s book income before tax is $25,200.Amelia has two permanent differences between book and taxable income.It earned $1,000 in tax exempt municipal bond interest and had $1,840 in nondeductible meals and entertainment expense.Determine the change in Amelia's deferred tax assets for the current year.

Gator,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Gator Inc.'s gross deferred tax assets and liabilities at the beginning of Gator's year are listed below. Gator Inc.'s book income before tax is $6,300.Gator has two permanent differences between book and taxable income.It earned $250 in tax exempt municipal bond interest and had $460 in nondeductible meals and entertainment expense.Determine the net deferred tax asset or net deferred tax liability at year end.

Discuss how temporary and permanent differences affect the gap between book and taxable income.

West,Inc. ,is a domestic corporation.It owns 100% of Texas,Inc. ,a domestic corporation,100% of Paris,a foreign corporation,and 35% of Iowa,Inc. ,a domestic corporation.Which entities income will be included in West's combined financial statement? How would your answer change if West instead owned 15% of Iowa?

The ownership percentage share of net earnings from a lower-tier corporation owned between 20% and 50% is included in the upper-tier corporation's book income without regard to whether any dividends are paid.

Permanent differences include items that appear in the Federal tax return as income or expense and the financial statements as income or expense,but in different periods.

Describe the factors considered in evaluating the need for a valuation allowance.

PaintCo Inc. ,a domestic corporation,owns 100% of BrushCo Ltd. ,an Irish corporation.Assume that the U.S.corporate tax rate is 35% and the Irish rate is 10%.PaintCo is permanently reinvesting BrushCo's earnings outside the United States under ASC 740-30 (APB 23).The corporations' book income,permanent and temporary differences,and current tax expense are as follows.Determine PaintCo's total tax expense reported on its financial statements,its current tax expense (benefit),and its deferred tax expense (benefit).

The income tax note to the financial statements includes a reconciliation of a corporation's hypothetical tax on book income as if taxed at the U.S.Federal tax rate and its book tax expense.

Gator,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Gator Inc.'s gross deferred tax assets and liabilities at the beginning of Gator's year are listed below. Gator Inc.'s book income before tax is $6,300.Gator has two permanent differences between book and taxable income.It earned $250 in tax exempt municipal bond interest and had $460 in nondeductible meals and entertainment expense.Determine the change in Gator's deferred tax liabilities for the current year.

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23)benefits were previously adopted will cause an increase in a corporation's current year effective tax rate.

Any 80% or more owned domestic subsidiaries must be included in the parent corporation's consolidated tax return.

Gator,Inc. ,is a domestic corporation with the following balance sheet for book and tax purposes at the end of the year.Assume a 34% corporate tax rate and no valuation allowance. Gator Inc.'s gross deferred tax assets and liabilities at the beginning of Gator's year are listed below. Gator Inc.'s book income before tax is $6,300.Gator has two permanent differences between book and taxable income.It earned $250 in tax exempt municipal bond interest and had $460 in nondeductible meals and entertainment expense.Calculate Gator's current tax expense.

Compare and contrast the objectives of the Federal tax return and the GAAP financial statements.

Nocera,Inc. ,earns book net income before tax of $600,000 in 2010.Nocera acquires a depreciable asset in 2010 and first year tax depreciation exceeds book depreciation by $120,000.Nocera has no other temporary or permanent differences.Assuming the U.S.tax rate is 35%,what is Nocera's deferred income tax liability reported on its financial statements for 2010?