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 goods