Ch 19

Question 0

Tax accounting term: Taxable income

How do companies determine taxable income?

Answer 0

Indicates amount used to compute income taxes payable

Companies determine taxable income according to the
Internal Revenue Code (tax code)

Question 1

Financial reporting term: pretax income,

How is it determined by companiesu.

Answer 1

Income before taxes AKA income for financial/book purposes

Companies Determine pretax income using GAAP

Question 2

Deferred tax liability

Answer 2

Taxes are currently lower but will be higher in future

Deferred tax consequences attributable to taxable temporary
Differences

Question 3

Deferred tax asset

Answer 3

In cases where taxes will be lower in future

Future tax benefit reported in balance sheet, results from
Temporary differences existing at end of current year

Question 4

Temporary basis, what do they result in?

Answer 4

Difference between tax basis of an asset or liability and
It’s reported book amount in the financial statements

Result in taxable or deductible amounts in future years

Question 5

Taxable amounts

Answer 5

Increase taxable income in future years

Question 6

Deductible amounts

Answer 6

Decrease taxable income in future years

Question 7

Current tax expense

Answer 7

Amount of income taxes payable for period

Question 8

Deferred tax expense

Answer 8

Increase in deferred tax liability balance from beginning to

End of accounting period

Question 9

2 key income tax accounting objectives

Answer 9

1 recognize amount of taxes payable or refundable for
current year

2 recognize deferred tax liabilities or assets for future tax
Consequences of events already recognized in financial
Statements or tax returns

Question 10

Deferred tax benefit

Answer 10

Credits to income tax expense

Results from increase in deferred tax asset from beginning
To end of accounting period

Question 11

When is the warranty tax deduction allowed

Answer 11

Once it’s paid

Question 12

3 conditions for deferred tax asset to be recognized as an asset

Answer 12

1 results from past transactions

2 gives rise to probable benefit in future

3 entity controls access to benefits

Question 13

Entity controls access to benefits

Answer 13

Company has exclusive right to deductible tax benefit in

Future

Question 14

Deferred tax asset: Reduction of valuation allowance

Answer 14

More likely than not it will not realize portion or all of

deferred Tax asset

Question 15

More likely than not

Answer 15

Slightly more than 50%

Question 16

Valuation allowance

2) how often is it evaluated

Answer 16

Established to recognize reduction in carrying amount of
Deferred tax asset

2) at end of each accounting period

Question 17

Formula to compute income tax expense or benefit

Answer 17

Total income tax expense or benefit =
(income taxes payable or refundable + or -
(change in deferred income taxes)

Question 18

Taxable temporary differences

Answer 18

Temporary differences that will result in taxable amounts

In future years when related assets are recovered

Question 19

Deductible temporary differences

Answer 19

Temporary differences that will result in deductible amounts

In future years when related book liabilities are settled

Question 20

Revenues or gains are taxable after they are recognized in financial income, 5 examples

Answer 20

1 sales on accrual basis
2 contracts under percentage completion
3 investments accounted for under equity method
4 gain from involuntary conversion of nonmonetary asset
5 unrealized holding gains

Question 21

Expenses or losses are deductible after recognized in financial income, 6 examples

Answer 21

1 product warranty liabilities
2 estimated liabilities of discontinued operations
3 litigation accruals
4 bad debt expense (allowance method), direct write off
5 stock based compensation expense
6 unrealized holding losses

Question 22

Revenues or gains taxable before recognized in financial income, 4 examples

Answer 22

1 subscriptions received in advance
2 advance rental receipts
3 sales + leasebacks (income deferral)
4 prepaid contracts + royalties received in advance

Question 23

Expenses or losses are deductible before they are recognized in financial income, 3 examples

Answer 23

1 Depreciable property, deportable resources, intangibles
2 deduction of pension funding exceeding expenses
3 prepaid expenses deducted on tax return in period paid

Question 24

Originating temporary difference

Answer 24

Initial difference btw/ book basis and tax basis of asset or

Liability

Question 25

Reversing difference

Answer 25

Occurs when eliminating temporary difference that
originated In prior periods

And removing related tax effect from deferred tax account

Question 26

Permanent differences: 2 possible results from items that…

Answer 26

1 enter into pretax financial income but never into taxable
Income

2 enter into taxable income but never into pretax financial
Income

Question 27

4 examples of items recognized for financial reporting purposes but not tax purposes

Answer 27

1 interest received on state and municipal obligations
2 expenses incurred in obtaining tax exempt income
3 proceeds or premiums paid from life insurance carried by company on Key officers or employees
4 fines or expenses resulting from violation of law

Question 28

2 examples of items recognized for tax purposes, but not financial reporting purposes

Answer 28

1 % depletion of natural resources in excess of cost

2 deduction for dividends received from US corporations
Generally 70% or 80%

Question 29

How does a company compute: effective tax rate?

Answer 29

Effective tax rate =

total income tax exp. for period)/(pretax financial income

Question 30

When does the company use the enacted tax rate, expected to apply?

Answer 30

If tax rates are expected to change in the future

Question 31

In determining the appropriate enacted tax rate for a given year companies must use…

Answer 31

The average tax rate, which is a graduated tax rate

Ex. 15% on first 50k, 20% on next 25 k, etc.

Question 32

What happens to company’s financial statements when a change in tax rate is enacted?

Answer 32

Companies record effects on deferred accounts immediately

Company reports the effect as adjustment to income tax
Expense in period of change

Question 33

Net operating loss (NOL)

Answer 33

Occurs for tax purposes in year when tax-deductible
Expenses exceed taxable revenues

Under certain circumstances, federal tax laws permit
Taxpayers to use losses of 1 year to offset profits of other
Years

Question 34

Carry back and carry forward of net operating losses: what happens in year of loss?

Answer 34

Company pays no income taxes for year where net operating

Loss is incurred

Question 35

Loss carry back

Answer 35

Company may carry net operating loss back 2 years and
Receive refunds for income taxes paid in those years

Company must apply loss to earlier year first and then to
2nd year

Question 36

After using loss carryback: Carry forward

Answer 36

Company may carry forward any loss remaining after 2 year

Carry back up to 20 years to offset future income

Question 37

Lose carry forward option

Answer 37

Company may forego loss carry back option and use it

Against future taxable income

Question 38

A loss carry back is classified as?

Answer 38

A tax effect (tax benefit)

Question 39

Taxable income sources 4

Answer 39

1 future reversals of temporary differences
2 future taxable income exclusive of reversing temporary
Differences and carry forwards
3 taxable income in prior carry back years
4 tax planning strategies

Question 40

Taxable income sources: tax planning strategies 3

Answer 40

1 accelerate taxable amounts to utilize expiring carry forwards

2 change character of ordinary income to capital gain/loss

3 switch from tax exempt to taxable investments

Question 41

Negative evidence considered in evaluating need for valuation account, 4 items

Answer 41

1 history of operating loss or tax credit carry forwards
expiring unused
2 losses expected in future years
3 unsettled circumstances may result in adverse effect on
Operations
4 carry back, carry forward period is too brief limiting
realization of tax benefits

Question 42

Positive evidence to consider in evaluating the need for a valuation account

Answer 42

1 existing contracts or firm sales backlog that will produce
More than enough taxable income
2 excess of appreciated asset value over tax basis of entities
Net assets
3 strong earnings history, with very few losses

Question 43

Under IFRS, a company may not recognize a deferred asset unless…

Answer 43

Realization is probable

Question 44

2 things companies should disclose relating to deferred taxes

Answer 44

1 net change during the year in total valuation allowance

2 types of temporary differences, carry forwards, carry backs,
That give rises to significant portions of deferred tax liabilities
And assets

Question 45

Alternative minimum tax (AMT)

Answer 45

IRS provision designed to curb excessive tax avoidance

Question 46

Assessing quality of earnings

Answer 46

Investors are interested in assessing reconciliation of
Pretax financial income to taxable income

To see if no recurring benefits (tax deductions) increased
Earnings temporarily

Question 47

Making better predictions of future cashflows

Answer 47

Examination of deferred portion of income tax expense
Provides information as to whether taxes payable will
Be higher or lower in future

Question 48

Predicting future cashflows for operating loss carry forwards

Answer 48

Companies should disclose amounts and expiration dates

Of any operating loss carry forwards for tax purposes

Question 49

Uncertain tax positions

Answer 49

Tax positions for which tax authorities may deduction in

Whole or in part

Question 50

Asset liability method AKA Liability approach

Answer 50

Most consistent method for accounting for income taxes

Question 51

2 objectives of asset-liability method

Answer 51

1 recognize amount of taxes payable or refundable for
Current year

2 recognize deferred tax assets and liabilities for future tax
Consequences of events recognized in financial statements
Or tax returns