Concept explainers
Uncertain Tax Positions. Lewis Eagle Corporation concluded that it was able to exclude $2,500,000 in income from its current tax return Income before the exclusion is $6,000,000. There are no book-tax differences. This income is subject to a 30% tax rate. Based on its technical merits, Lewis Eagle determined that it is more likely than not that the exclusion would be sustained upon examination by tax auditors. The possible outcomes and their related probabilities follow.
Filed Amount of the Exclusion That Management Expects to Maintain | Likelihood That the Tax Position Will Be Sustained at This Level (%) |
$2,500,000 | 10% |
2,000,000 | 20 |
1,500,000 | 25 |
1,000,000 | 35 |
880,000 | 10 |
Determine the amount of tax benefit from the exclusion that Lewis Eagle should recognize in its tax provision for the current year and prepare the
Want to see the full answer?
Check out a sample textbook solutionChapter 17 Solutions
Intermediate Accounting - Myaccountinglab - Pearson Etext Access Card Student Value Edition
- Resource Company is evaluating a tax position resulting in a deduction taken for $400,000. Resource Company's tax rate is 21%. When assessing the uncertain tax position using the recognition criteria, Resource Company has determined that it is more-likely-than-not that this position will be sustained on examination by the tax authority. In performing the measurement step, Resource Company determined that $250,000 is the largest tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the taxing authority. What journal entry should Resource Company record related to the tax-effected liability for unrecognized tax benefit? A. Dr: Liability for unrecognized tax benefit $31,500 Cr: Income tax expense $31,500 B. Dr: Income tax expense $31,500 Cr: Liability for unrecognized tax benefit $31,500 C. Dr: Income tax expense $52,500 Cr: Liability for unrecognized tax benefit $52,500 D. Dr: Liability for unrecognized tax benefit $52,500 Cr: Income tax expense…arrow_forwardO’Reilly Inc. considered the probability of its recent tax position taken related to the deductibility of certain expenses of $100,000. O’Reilly Inc. is more than 50% certain that its tax position supporting the deductibility of the $100,000 will hold if the company is audited by the taxing authorities. Based upon the information available, the company believes that it will have to settle with the taxing authorities for less than 100% of the $100,000 of tax deductions taken. As a result, O’Reilly Inc. recorded a liability of $10,000 in addition to income taxes payable of $280,000, which factored in $100,000 of deductions. O’Reilly Inc.’s tax rate is 25%. In the following year, O’Reilly Inc. was audited by the taxing authorities and based upon the settlement, O’Reilly recorded income tax expense of $7,500.What was the dollar amount of allowable deductions based upon the settlement?$40,000 $90,000 $30,000 $70,000 $60,000 None of the abovearrow_forwardUnder IFRS: a. “probable” is defined as a level of likelihood of at least slightly more than 60%. b. a company should reduce a deferred tax asset when it is likely that some or all of it will not be realized by using a valuation allowance. c. a company considers only positive evidence when determining whether to recognize a deferred tax asset. d. deferred tax assets must be evaluated at the end of each accounting period.arrow_forward
- Which of the following statements concerning the classification of deferred tax assets and liabilities is true? Multiple Choice A deferred tax asset is classified as noncurrent only if the company expects the future tax benefit to be received more than 12 months from the balance sheet date. All deferred tax assets and liabilities are treated as noncurrent. A deferred tax asset related to a bad debt reserve is classified as current if the related accounts receivable is classified as a current asset. A deferred tax asset related to inventory capitalization is classified as noncurrent only if the company uses a FIFO accounting method and the inventory to which the deferred tax asset relates will not be treated as sold within 12 months from the balance sheet date.arrow_forwardA company has only one deductible temporary difference due to the use of the current expected credit loss method (CECL) of recognizing credit losses (ie, bad debts) for financial reporting purposes. The company is trying to determine how the resulting deferred tax asset will be reported on the balance sheet. Which section of the authoritative literature describes whether deferred tax assets and liabilities are classified as current or noncurrent? Enter your response in the answer fields below. Unless specifically requested, your response should not cite implementation guidance. Guidance on correctly structuring your response appears above and below the answer fields. Type the topic here. Correctly formatted FASB ASC topics are 3 digits. FASB ASCarrow_forwardWhich of the following statements best describes the ASC 740 process for evaluating a company's uncertain tax positions? Multiple Choice ASC 740 requires a company to complete a two-step analysis every time it evaluates its uncertain tax positions. ASC 740 requires a company to complete Step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more likely than not that its tax position will be sustained on its merits (recognition). ASC 740 allows a company to take into account the probability of audit by a tax authority in Step 1 (measurement) in its evaluation of its uncertain tax positions. ASC 740 allows a company to record a tax benefit from an uncertain tax position only if it is probable the benefit will be sustained on audit by a tax authority.arrow_forward
- Which of the following statements NOT correct? a. If a taxpayer is not in agreement with the decision of the Tax Appeals Authority, there is no further action that the taxpayer can take. b. Where a taxpayer loss an appeal, the taxpayer is required to pay interest on the unpaid tax from the payment date statement on the Decision Notice. c. Tax planning within the confines of the tax laws is not illegal. d. Effective tax management may result in significant cost savings.arrow_forwardWhich of the following is the least likely reason why the 6% capital gains tax is a final tax? A. To mitigate the susceptibility of possible deferral of the actual payment of the tax if the voluntary compliance method is used B. To ensure payment of the applicable tax before property titles are transferred to the buyer C. To mitigate the susceptibility of non-reporting of the sale, leading to tax evasion D. All of the other choices are equally likely to be the reason whyarrow_forwardFor each of the following situations, indicate the amount of the penalty that could be imposed on the tax return preparer: a. A tax return preparer understates the taxpayer's tax liability with a frivolous position and does not disclose the position. The greater of $ percent of the income derived by the tax preparer for an undisclosed unrealistic position. or b. A tax return preparer fails to furnish his identifying number. c. A tax return preparer aids a taxpayer (an individual) in understating a tax liability. d. A tax return preparer endorses and cashes a client's tax refund check.arrow_forward
- Which of the following would result in the recognition of deferred tax liabilities? Select one: А. All are correct B. Purchase of a fixed asset, which allows for 100% tax-deduction in the year of purchase C. Payment of a non-deductible expenditure D. Recognition of an allowance for doubtful debts, which would only become tax-deductible when the debt has been proved to be badarrow_forwardAs an auditor, you are tasked to audit the income tax liability of Taxpayer Corp. which of the following items are consistent with the application of accounting policies for income tax liability computation: *A. Nontaxable Revenues are permanent differences deducted from the unadjusted net income resulting in a deferred tax liability.B. Nontaxable Revenues are permanent differences added to the unadjusted net income resulting in a lower income taxC. Nontaxable Revenues are temporary differences deducted from the unadjusted net income resulting in a deferred tax asset.D. Nontaxable Revenues are permanent differences deducted from the unadjusted net income resulting in a lower income taxarrow_forwardGreen Corporation is required to change its method of accounting for federal income tax purposes. The change will require an adjustment to income to be made over three tax periods. Joe, the sole shareholder of Green, wants to better understand the implications of this adjustment for E&P purposes, because he anticipates a distribution from Green in the current year. Explain to Joe the impact of the adjustment on E&P.arrow_forward