1. Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

A. Depreciation early in the life of an asset.

B. Unrealized losses from recording investments at fair value.

C. Rent collected in advance.

D. None of these answer choices are correct.

2. For its first year of operations, Demich Corporation's reconciliation of pretax accounting income to taxable income is as follows:

Pretax accounting income $300,000

Permanent difference (15,000)

285,000

Temporary difference-depreciation (20,000)

Taxable income $265,000

Demich's tax rate is 40%. Assume that no estimated taxes have been paid. What should Demich report as income tax payable for its first year of operations?

A. $120,000.

B. $114,000.

C. $106,000.

D. $8,000.

3. Carlock Inc. began operations in January 2016. For certain of its property sales, Carock recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Carlock recognizes income when it collects cash from the buyer's installment payments.

In 2016, Carlock had $600 million in sales of this type. Scheduled collections for these sales are as follows:

2016 $60 million

2017 120 million

2018 120 million

2019 150 million

2020 150 million

$600 million

Assume that Carlock has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes.

Ignoring operating expenses and additional sales in 2017, what deferred tax liability would Carlock report in its year-end 2017 balance sheet?

A. $54 million.

B. $144 million.

C. $126 million.

D. $180 million.

4. Which of the following statements is true as to GAAP regarding accounting for income taxes, and its use of the asset and liability approach? 

A. Considerable flexibility is permitted in the balance sheet classification of deferred tax amounts.

B. The approach recognizes the time value of money.

C. The approach is consistent with a balance sheet emphasis of U.S. GAAP and the International Financial Reporting Standards (IFRS).

D. The approach is consistent with cash basis accounting.

5. Budget Inc. had $300 million in taxable income for the current year. Budget also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was:

A. $390 million.

B. $210 million.

C. $150 million.

D. $180 million.

6. Hamilton Co. had a decrease in deferred tax liability of $20 million, a decrease in deferred tax assets of $10 million, and an increase in tax payable of $100 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was:

A. $90 million.

B. $100 million.

C. $110 million.

D. $130 million.

7. Information for Kent Corp. for the year 2016:

Reconciliation of pretax accounting income and taxable income:

Pretax accounting income $180,000

Permanent differences (15,000)

165,000

Temporary difference-depreciation (12,000)

Taxable income $153,000

Cumulative future taxable amounts all from depreciation temporary differences:

As of December 31, 2015 $13,000

As of December 31, 2016 $25,000

The enacted tax rate was 30% for 2015 and thereafter.

What would Kent's income tax expense be in the year 2016?

A. $42,300.

B. $45,900.

C. $49,500.

D. None of these answer choices are correct.

8. Of the following temporary differences, which one ordinarily creates a deferred tax asset? 

A. Completed-contract method for long-term construction contracts for tax reporting.

B. Installment sales for tax reporting.

C. Accrued warranty expense.

D. Accelerated depreciation for tax reporting.

9. In reconciling net income to taxable income, interest earned on municipal bonds is: 

A. Ignored.

B. A temporary difference.

C. A reversing difference.

D. A permanent difference.

10. Which of the following would never require reporting deferred tax assets or deferred tax liabilities? 

A. Depreciation on equipment.

B. Accrual of warranty expense.

C. Life insurance premiums for the payer's benefit.

D. Rent revenue received in advance.

11. Pretax accounting income for the year ended December 31, 2016, was $50 million for Truffles Company. Truffles' taxable income was $60 million. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The enacted tax rate is 30% for 2016 and 40% thereafter. What amount should Truffles report as the current portion of income tax expense for 2016?

A. $15 million.

B. $18 million.

C. $20 million.

D. $24 million.

12. The effect of a change in tax rates:

A. Results in a prior period adjustment.

B. Is allocated between discontinued operations and continuing operations.

C. Is reported separately after discontinued operations.

D. Is reflected in income from continuing operations.

13. The employer has an obligation to provide future benefits for: 

A. Defined benefit pension plans.

B. Defined contribution pension plans.

C. Defined benefit and defined contribution plans.

D. None of these answer choices are correct.

14. Consider the following:

I. Present value of vested benefits at present pay levels.
II. Present value of nonvested benefits at present pay levels.
III. Present value of additional benefits related to projected pay increases.

Which of the above constitutes the accumulated benefit obligation?

A. I & II.

B. I, II, III.

C. II & III.

D. II only.

15. The PBO is increased by:

A. An increase in the average life expectancy of employees.

B. Amortization of prior service cost.

C. An increase in the actuary's assumed discount rate.

D. A return on plan assets that is lower than expected.

16. A company's defined benefit pension plan had a PBO of $265,000 on January 1, 2016. During 2016, pension benefits paid were $40,000. The discount rate for the plan for this year was 10%. Service cost for 2016 was $80,000. Plan assets (fair value) increased during the year by $45,000. The amount of the PBO at December 31, 2016, was:

A. $225,000.

B. $305,000.

C. $331,500.

D. None of these answer choices is correct.

17. An underfunded pension plan means that the:

A. PBO is less than plan assets.

B. PBO exceeds plan assets.

C. ABO is less than plan assets.

D. ABO exceeds plan assets.

18. Data for 2016 were as follows: PBO, January 1, $240,000 and December 31, $270,000; pension plan assets (fair value) January 1, $180,000, and December 31, $230,000. The projected benefit obligation was underfunded at the end of 2016 by:

A. $30,000.

B. $60,000.

C. $20,000.

D. $40,000.

19. Pension gains related to plan assets occur when:

A. The return on plan assets is higher than expected.

B. The vested benefit obligation is less than expected.

C. Retiree benefits paid out are less than expected.

D. The accumulated benefit obligation is more than expected.

20. Fox Company received the following reports of its defined benefit pension plan for the current calendar year:

PBO Plan assets

Balance, January 1 $600,000 Balance, January 1 $500,000

Service cost  360,000 Actual return   50,000

Interest cost  64,000 Annual contribution   220,000

Benefits paid (90,000) Benefits paid   (90,000)

Balance, December 31 $934,000 Balance, December 31  $680,000

The long-term expected rate of return on plan assets is 8%. Assuming no other data are relevant, what is the pension expense for the year?

A. $360,000.

B. $424,000.

C. $374,000.

D. $384,000.

21. Gains and losses can occur with pension plans when:

A. Either the PBO or the return on plan assets turns out to be different than expected.

B. Either the ABO or the return on plan assets turns out to be different than expected.

C. Either the PBO, the ABO, or the return on plan assets turns out to be different than expected.

D. Either the PBO or the ABO turns out to be different than expected.

22. Payment of retirement benefits: 

A. Increases the PBO.

B. Increases the ABO.

C. Reduces the GBO.

D. Reduces the PBO.

23. Interest cost is calculated by multiplying the:

A. ABO by the expected return on the plan assets.

B. ABO by the discount rate.

C. PBO by the expected return on plan assets.

D. PBO by the discount rate.

24. The three components of pension expense that are present most often are: 

A. Service cost, prior service cost, and gain on plan assets.

B. Service cost, interest cost, and gain from revisions in pension liability.

C. Service cost, contribution cost, and prior service cost.

D. Service cost, interest cost, and expected return on plan assets.

25. The pension expense includes periodic changes that occur: 

A. In the PBO.

B. In the PBO and the plan assets.

C. In the plan assets.

D. In the PBO and the ABO.