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1. A company has a taxable income of $100,000 and a tax
rate of 25%. It also has a deferred tax asset of $10,000 and
a deferred tax liability of $15,000. What is the company's
income tax expense for the year?
a) $25,000
b) $30,000
c) $20,000
d) $35,000
Answer: b) $30,000
Rationale: Income tax expense = current tax expense +
change in deferred tax liability - change in deferred tax
asset = 25,000 + (15,000 - 10,000) - (10,000 - 15,000) =
30,000
2. A company sells goods to a customer for $1,000 on
credit. The goods cost $600 to produce. The company
expects to collect the receivable in 60 days. The company
uses the accrual method of accounting for both financial
reporting and tax purposes. How does this transaction
affect the company's taxable income in the current year?
a) It increases taxable income by $1,000
b) It increases taxable income by $400
c) It does not affect taxable income
d) It decreases taxable income by $600
Answer: a) It increases taxable income by $1,000
Rationale: Under the accrual method of accounting,
revenue is recognized when earned and expenses are
recognized when incurred. Therefore, the company
recognizes $1,000 of revenue and $600 of cost of goodsÂ
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