Multiple Choice Questions for Income Statements

1. Yellow Co.'s 2002 income statement reported $90,000 income before provisions for income taxes. To compute the provision for Federal income tax, the following 2002 data are provided:

Rent received in advance 16,000
Income from municipal bonds 20,000
Depreciation deducted for tax in excess of book depreciation 10,000
Enacted tax rate 30%

What is the amount of current income tax liability that should be reported on the 2002 balance sheet?

a. 25,800
b. 18,000
c. 28,800
d. 22,800

2. Which of the following differences would result in future taxable amounts?

a. Expenses or losses that are deductible for tax before they are deductible for book.
b. Expenses or losses that are deductible for tax after they are deductible for book.
c. Revenues or gains recognized for book, but never included in taxable income.
d. Revenues or gains that are taxable before they are recognized for book.

3. For the year ended 12/31/02, Brown Corp. reported pretax financial income of $750,000. Its taxable income was $650,000. The difference is due to depreciation for tax purposes. Brown's tax rate is 30% and the company made estimated tax payments of $90,000 for 2002. What should Brown report as the current income tax expense for 2002?

a. 135,000
b. 105,000
c. 225,000
d. 195,000

4. On June 30, 2001, Red Inc. prepaid a $19,000 premium on an annual insurance
policy. The premium payment was tax deductible on Red's 2001 tax return. The accrual basis of accounting was used for book and the insurance expense will be reported as $9,500 in 2001 and 2002. Red's tax rate is 30% for 2001 and 25% thereafter. In Red's balance sheet for 2001, what amount related to insurance expense should be reported as a deferred tax liability?

a. 2,850
b. 2,375
c. 5,700
d. 4,750

5. Among the items reported on Blue's income statement for the year ended 12/31/02, were the following:

Payment of a penalty 5,000
Key-man life insurance premium 10,000
With Blue as beneficiary

Temporary differences amount to

a. 5,000
b. 0
c. 15,000
d. 10,000

6. A temporary difference that would result in a deferred tax liability is

a. Excess of tax depreciation over book depreciation
b. Interest revenue from municipal bonds
c. Subscription received in advance
d. Accrual of warranty expense

7. Green Co. began operations in 1/1/01. For financial reporting purposes, Green recognizes revenues under the accrual method. Green's gross profit on these installment sales under each method is as follows:

Accrual Installment

2001 1,600,000 600,000
2002 2,600,000 1,400,000

The income tax rate is 30% for all years. In the 2002 balance sheet, what amount should Green report as a liability for deferred taxes?

a. 660,000
b. 840,000
c. 360,000
d. 600,000

8. Pink Corp. organized on 1/1/98. It had PTFI of $500,000 and TI of $800,000 at year end. The only difference is product warranty costs which are expected to be paid as follows:

1999 100,000
2000 50,000
2001 50,000
2002 100,000

Enacted tax rates are 35% for 1998, 30% for 1999 through 2001, and 25% for 2002. In Pink's balance sheet, the deferred tax would be

a. 70,000
b. 60,000
c. 105,000
d. 85,000

9. Teal Co. is a cash basis taxpayer and prepares its financial statement using accrual accounting. On its 2002 balance sheet, Teal's deferred income tax liabilities increased compared to 2001. Which of the following changes would cause this increase?

I. An increase in prepaid insurance
II. An increase in warranty obligations
III. An increase in rent receivable

a. I only
b. I and II only
c. I and III only
b. II only

10. Silver reported a deferred tax asset of $9,000 on its 12/31/01 balance sheet. For 2002, it reported PTFI of $300,000. Temporary differences of $100,000 resulted in TI of $200,000. At 12/31/02 Silver had cumulative differences of $70,000. Silver's tax rate was 30%. On its 12/31/02 income statement, what should Silver report as deferred income tax expense?

a. 21,000
b. 12,000
c. 60,000
d. 30,000