CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS

1599. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #1
Kooler, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a domestic corporation, 100% of Paris, a foreign corporation, and 45% of Iowa, Inc., a domestic corporation.

a.

Which entities’ incomes are included in Kooler’s combined GAAP financial statements?

b.

How would your answer change if Kooler instead owned 15% of Iowa?

1600. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #2
Bunker, 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.

a.

Which entities’ incomes are included in Bunker’s Federal consolidated income tax return?

b.

How would your answer change if Bunker instead owned 15% of Iowa?

1601. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #3
Rochelle, Inc., reported the following results for the current year.

Book income (before tax)

$500,000

Tax depreciation in excess of book

25,000

Non-tax-deductible warranty expense

17,500

Municipal bond interest income

20,000

Determine Rochelle’s taxable income for the current year. Identify any temporary or permanent book-tax differences.

1602. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #4
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 book-tax 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).

PaintCo

BrushCo

Book income before tax

$600,000

$400,000

Permanent differences

Meals & entertainment expense

40,000

–0–

Municipal bond interest income

(100,000)

–0–

Temporary differences

Tax > book depreciation

(100,000)

–0–

Book > tax bad debt expense

20,000

–0–

1603. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #5
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 book-tax differences, and current tax expense are as follows. Provide the income tax footnote rate reconciliation for PaintCo using both dollar amounts and percentages.

PaintCo

BrushCo

Book income before tax

$600,000

$400,000

Permanent differences

Meals & entertainment expense

40,000

–0–

Municipal bond interest income

(100,000)

–0–

Temporary differences

Tax > book depreciation

(100,000)

–0–

Book > tax bad debt expense

20,000

–0–

1604. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #6
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.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts Receivable

5,000

5,000

Buildings

300,000

300,000

Acc. Depreciation

(150,000)

(80,000)

Furniture & Fixtures

40,000

40,000

Acc. Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued Litigation Expense

$ –0–

($ 27,000)

Note Payable

(116,000)

(116,000)

Total Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in Capital

($ 1,000)

($ 1,000)

Retained Earnings

(57,300)

(106,300)

Total Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.’s gross deferred tax assets and liabilities at the beginning of Gator’s year are listed below.

Beginning of Year

Accrued Litigation Expense

$21,000

Subtotal

$21,000

Applicable Tax Rate

´ 34%

Gross Deferred Tax Asset

$ 7,140

Building – Acc. Depreciation

($61,000)

Furniture & fixtures – Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable tax rate

´ 34%

Gross deferred tax liability

($21,828)

Gator Inc.’s book income before tax is $6,300. Gator records two permanent book-tax differences. It earned $250 in tax exempt municipal bond interest and $460 in nondeductible meals and entertainment expense. Determine the change in Gator’s deferred tax assets for the current year.

1605. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #7
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.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts Receivable

5,000

5,000

Buildings

300,000

300,000

Acc. Depreciation

(150,000)

(80,000)

Furniture & Fixtures

40,000

40,000

Acc. Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued Litigation Expense

$ –0–

($ 27,000)

Note Payable

(116,000)

(116,000)

Total Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in Capital

($ 1,000)

($ 1,000)

Retained Earnings

(57,300)

(106,300)

Total Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.’s gross deferred tax assets and liabilities at the beginning of Gator’s year are listed below.

Beginning of Year

Accrued Litigation Expense

$21,000

Subtotal

$21,000

Applicable Tax Rate

´ 34%

Gross Deferred Tax Asset

$ 7,140

Building – Acc. Depreciation

($61,000)

Furniture & fixtures – Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable tax rate

´ 34%

Gross deferred tax liability

($21,828)

Gator Inc.’s book income before tax is $6,300. Gator records two permanent book-tax differences. It earned $250 in tax exempt municipal bond interest and $460 in nondeductible meals and entertainment expense. Determine the net deferred tax asset or net deferred tax liability at year end.

1606. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #8
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.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts Receivable

5,000

5,000

Buildings

300,000

300,000

Acc. Depreciation

(150,000)

(80,000)

Furniture & Fixtures

40,000

40,000

Acc. Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued Litigation Expense

$ –0–

($ 27,000)

Note Payable

(116,000)

(116,000)

Total Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in Capital

($ 1,000)

($ 1,000)

Retained Earnings

(57,300)

(106,300)

Total Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.’s gross deferred tax assets and liabilities at the beginning of Gator’s year are listed below.

Beginning of Year

Accrued Litigation Expense

$21,000

Subtotal

$21,000

Applicable Tax Rate

´ 34%

Gross Deferred Tax Asset

$ 7,140

Building – Acc. Depreciation

($61,000)

Furniture & fixtures – Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable tax rate

´ 34%

Gross deferred tax liability

($21,828)

Gator Inc.’s book income before tax is $6,300. Gator records two permanent book-tax differences. It earned $250 in tax exempt municipal bond interest and $460 in nondeductible meals and entertainment expense. Determine the change in Gator’s deferred tax liabilities for the current year.

1607. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #9
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.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts Receivable

5,000

5,000

Buildings

300,000

300,000

Acc. Depreciation

(150,000)

(80,000)

Furniture & Fixtures

40,000

40,000

Acc. Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued Litigation Expense

$ –0–

($ 27,000)

Note Payable

(116,000)

(116,000)

Total Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in Capital

($ 1,000)

($ 1,000)

Retained Earnings

(57,300)

(106,300)

Total Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.’s gross deferred tax assets and liabilities at the beginning of Gator’s year are listed below.

Beginning of Year

Accrued Litigation Expense

$21,000

Subtotal

$21,000

Applicable Tax Rate

´ 34%

Gross Deferred Tax Asset

$ 7,140

Building – Acc. Depreciation

($61,000)

Furniture & fixtures – Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable tax rate

´ 34%

Gross deferred tax liability

($21,828)

Gator Inc.’s book income before tax is $6,300. Gator records two permanent book-tax differences. It earned $250 in tax exempt municipal bond interest and $460 in nondeductible meals and entertainment expense. Determine Gator’s change in net deferred tax asset or net deferred tax liability for the current year and provide the journal entry to record this amount.

1608. CHAPTER 14—TAXES ON THE FINANCIAL STATEMENTS Question PR #10
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.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts Receivable

5,000

5,000

Buildings

300,000

300,000

Acc. Depreciation

(150,000)

(80,000)

Furniture & Fixtures

40,000

40,000

Acc. Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued Litigation Expense

$ –0–

($ 27,000)

Note Payable

(116,000)

(116,000)

Total Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in Capital

($ 1,000)

($ 1,000)

Retained Earnings

(57,300)

(106,300)

Total Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.’s gross deferred tax assets and liabilities at the beginning of Gator’s year are listed below.

Beginning of Year

Accrued Litigation Expense

$21,000

Subtotal

$21,000

Applicable Tax Rate

´ 34%

Gross Deferred Tax Asset

$ 7,140

Building – Acc. Depreciation

($61,000)

Furniture & fixtures – Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable tax rate

´ 34%

Gross deferred tax liability

($21,828)

Gator Inc.’s book income before tax is $6,300. Gator records two permanent book-tax differences. It earned $250 in tax exempt municipal bond interest and $460 in nondeductible meals and entertainment expense. Calculate Gator’s current tax expense.