10 Taxes

Question 1

Is interest on municipal bonds taxable?

Answer 1

No

Question 2

What is the formula for effective tax rate?

Answer 2

Pretax income - temporary and permanent differences = taxable income x tax rate = current year tax expense / pretax income = effective tax rate

Question 3

A deferred tax liability occurs when

Answer 3

Income under GAAP is higher than taxable income

Question 4

A deferred tax asset occurs when

Answer 4

Income under GAAP is less than taxable income

Question 5

When a deferred tax asset is more likely than not that some portion of the DTA will not be realized, what happens?

Answer 5

A valuation allowance is created for the portion that will is not expected to be realized.

DR to income tax expense
CR to DTA - Valuation Allowance

Question 6

What is the applicable/regular tax rate for a DTA or DTL?

Answer 6

The enacted tax rate that is expected to apply when the liability or asset is realized.

Ex - current year rate is 30%, but the DTA/DTL is expected to settle in the next year and the tax rate is 40%, the 40% would be used.

Question 7

Can a valuation allowance be recognized for a deferred tax liability?

Answer 7

No, valuation allowances only apply to deferred tax assets

Question 8

Are proceeds received from life insurance on death taxable?

Answer 8

No, they are subtracted from pre-tax income