ACCT 3200: Chapter 16 Flashcards
Temporary differences arise when expenses are reported in the income statement:
After they are deductible for tax purposes/Before they are deductible for tax purposes
a. Yes/Yes
b. Yes/No
c. No/No
d. No/Yes
Option a
Option b
Option c
Option d
Option a
Explanation
Temporary differences occur when there is difference in timing between when expenses are deductible on the income statement and recognized on the income statement.
A reconciliation of pretax financial statement income to taxable income is shown below for Shaw-Anderson Industries for the year ended December 31, 2021, its first year of operations. The company offers quality-assurance warranties that extend six months after goods are purchased. The income tax rate is 40%.
Pretax accounting income (income statement) $640,000
Interest revenue on municipal securities (20,000)
Warranty expense in excess of deductible amount 45,000
Depreciation in excess of financial statement amount (120,000)
Taxable income (tax return) $545,000
What amount should Shaw-Anderson report as the deferred portion of income tax expense on its 2021 income statement?
$56,000
$18,000
$30,000
$38,000
$30,000
Explanation
($45,000 − $120,000) × 40% = $30,000.
The pretax financial statement income for Yeager Industries was $32 million the year ended December 31, 2021. Yeager’s taxable income was $25 million. The difference was due to differences between depreciation for financial reporting purposes and tax purposes. The enacted tax rate is 40% for 2021 and 35% thereafter. If no 2021 taxes have been paid, what is Yeager‘s current liability for income taxes for 2021?
$10.0 million
$8.7 million
$12.8 million
$11.2 million
$10.0 million
Explanation
Tax payable = $25 million × 40% = $10 million.
In its first three years of operations Carlos Productions, a musical production company, reported the following operating income (loss) amounts:
2022 $ 450,000
2023 (1,000,000)
2024 1,800,000
There were no other deferred income tax amounts in any year. The enacted income tax rate was 25% in 2023 and 30% thereafter. In its 2023 balance sheet, what amount of deferred tax asset should Carlos report relevant to the NOL? (It concludes that no valuation allowance is necessary.)
$250,000.
$300,000.
$137,500.
$0
$300,000
Explanation
Carlos’ industry does not qualify for NOL carryback. $1,000,000 × 30% = $300,000.
In its first four years of operations Bellow Corporation, a software company, reported the following operating income (loss) amounts:
2024 $ 300,000
2025 (850,000)
2026 500,000
2027 900,000
There were no other deferred income tax amounts in any year. The enacted income tax rate was 25% in all years. What will be Bellow’s 2026 tax payable?
(87,500)
$0
$100,000
$25,000
$25,000
Explanation
Bellow’s industry does not qualify for NOL carryback. ($500,000 − (80% × $500,000)) × 25% = $25,000.
Using straight-line depreciation for financial reporting purposes and MACRS for tax purposes creates:
A permanent difference not requiring interperiod tax allocation.
A deferred tax liability.
A deferred tax asset.
A temporary difference requiring intraperiod tax allocation.
A deferred tax liability.
Explanation
Higher expenses in early years for tax purposes than for financial-reporting purposes gives rise to a deferred tax liability.
The income tax benefit of an operating loss carryforward reduces the tax expense reported in the income statement:
Always.
Unless there is no taxable income in the two previous years.
When the loss year is the company’s first year of operations.
Unless it’s more likely than not that the future tax savings will not be realized.
Unless it’s more likely than not that the future tax savings will not be realized.
Explanation
Normally the establishment of a deferred tax asset to recognize an NOL carryforward has the effect of reducing tax expense in the year the NOL occurs. However, if it is more likely than not that future tax savings will not be realized, a valuation allowance against the deferred tax asset is recognized which offsets its reduction of tax expense.
Typically, the tax effects of an operating loss carryforward on net income are:
Deferred and amortized over 15 years.
Not reported on the income statement.
Recognized in the year the loss occurs.
Recognized in the period(s) the benefits are realized.
Recognized in the year the loss occurs.
Explanation
The NOL carryforward reduces tax expense in the year the NOL occurs.
The most common cause for variation in reported amounts for deferred taxes between U.S. GAAP and IFRS are:
the nontax differences between IFRS and U.S. GAAP.
differences between the two methods in accounting for net operating losses.
differences between the two methods in accounting for temporary differences.
differences between the two methods in accounting for permanent differences.
the nontax differences between IFRS and U.S. GAAP.
Explanation
Nontax differences in financial reporting affect determination of financial-reporting income, which affects the temporary differences that occur between financial-reporting income and taxable income.
