HW assignment 7
** Please show calculations for each question to get credit; failure to do so will
result in receiving a grade of 0 for the assignment.
Use the following information for questions 1 through 3.
Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation
between pretax financial income and taxable income as follows:
Pretax financial income
$ 800,000
Estimated litigation expense
Installment sales
Taxable income
2,000,000
(1,600,000)
$ 1,200,000
The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is
expected to be paid. The gross profit from the installment sales will be realized in the
amount of $800,000 in each of the next two years. The estimated liability for litigation
is classified as noncurrent and the installment accounts receivable are classified as
$800,000 current and $800,000 noncurrent. The income tax rate is 40% for all years.
1.
The income tax expense is
a. $240,000.
b. $320,000.
c. $360,000.
d. $400,000.
2.
The deferred tax asset to be recognized is
a. $240,000 current
b. $240,000 noncurrent.
c. $800,000 current.
d. $800,000 noncurrent.
3.
The deferred tax liabilityõrrent to be recognized is
a. $240,000.
b. $480,000.
c. $320,000.
d. $640,000.
4.
Horner Corporation has a deferred tax asset at December 31, 2015 of $80,000
due to the recognition of potential tax benefits of an operating loss
carryforward. The enacted tax rates are as follows: 40% for 2012°14; 35%
for 2015; and 30% for 2016 and thereafter. Assuming that management
expects that only 60% of the related benefits will actually be realized, a
valuation account should be established in the amount of:
a. $80,000
b. $32,000
c. $28,000
d. $24,000
Use the following information for questions 5 and 6.
Rowen, Inc. had pre-tax accounting income of $1,672,000 and a tax rate of 40% in
2015, its first year of operations. During 2015 the company had the following
transactions:
Received rent from Jane, Co. for 2016
Municipal bond income
Depreciation for tax purposes in excess of book
$64,000
$80,000
$40,000
depreciation
Installment sales revenue to be collected in
2016
$108,000
5.
For 2015, what is the amount of income taxes payable for Rowen, Inc?
a. $603,200
b. $654,400
c. $686,400
d. $772,800
6.
At the end of 2015, which of the following deferred tax accounts and balances
is reported on Rowen, Inc.àbalance sheet?
Account
_
Balance
a. Deferred tax asset
$32,000
b. Deferred tax liability
$32,000
c. Deferred tax asset
$59,200
d. Deferred tax liability
$59,200

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