ch19 Accounting for Income Taxes

Question 1

Taxable income is a tax accounting term and is also referred to as income before taxes.

Answer 1

FALSE

Question 2

Pretax financial income is the amount used to compute income tax payable.

Answer 2

FALSE

Question 3

Taxable amounts increase taxable income in future years.

Answer 3

TRUE

Question 4

A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year

Answer 4

TRUE

Question 5

Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences

Answer 5

FALSE

Question 6

A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year

Answer 6

TRUE

Question 7

A company reduces a deferred tax asset if it is possible that it will not realize some portion of the deferred tax asset

Answer 7

FALSE

Question 8

Companies should consider both positive and negative evidence to determine whether, based on the weight of available evidence, it needs to adjust the deferred tax asset.

Answer 8

TRUE

Question 9

A company should add a decrease in deferred tax liability to income tax payable in computing income tax expense

Answer 9

FALSE

Question 10

Taxable temporary difference will result in taxable amounts in future years when the related assets are recovered

Answer 10

TRUE

Question 11

Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts

Answer 11

FALSE

Question 12

Permanent differences do not give rise to future taxable or deductible amounts

Answer 12

TRUE

Question 13

Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.

Answer 13

TRUE

Question 14

When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.

Answer 14

FALSE

Question 15

Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year

Answer 15

FALSE

Question 16

The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.

Answer 16

TRUE

Question 17

A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is existing taxable temporary differences

Answer 17

TRUE

Question 18

An individual deferred tax asset or liability is classified as current or non-current based on the classification of the related asset/liability for financial reporting purposes

Answer 18

FALSE

Question 19

Companies clasify the balances in the deferred tax accounts on the statement of financial position as non-current assets or non-current liabilities

Answer 19

TRUE

Question 20

The IASB believes that the deferred tax method is most consistent method for accounting for income taxes

Answer 20

FALSE

Asset-liability method is most consistent, according to IASB.

Question 21

Taxable income of a corporation:
a. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination
b. differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination
c. is based on international financial reporting standards
d. is reported on the corporation’s income statement

Answer 21

Differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination

Question 22

Taxable income of a corporation differs from pretax financial income because of:

Answer 22

PERMANENT AND TEMPORARY DIFFERENCES

Question 23

The deferred tax expense is the:
a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

Answer 23

INCREASE IN BALANCE OF DEFERRED TAX LIABILITY MINUS THE INCREASE IN BALANCE OF DEFERRED TAX ASSET

Question 24

Each of the following is determined according to the IFRS except:
a. income before taxes
b. taxable income
c. income for financial reporting purposes
d. income for book purposes

Answer 24

TAXABLE INCOME

Question 25

An assumption inherent in a company’s IFRS statement of financial position is that companies recover and settle the assets and liabilities at:
a. the amount that is probable where “probable” means a level of likelihood of at least more than 50%.
b. the present value of future cash flows.
c. their reported amounts.
d. their net realizable value.

Answer 25

THEIR REPORTED AMOUNTS

Question 26

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in:

a. future taxable amounts
b. future deductible amounts

Answer 26

FUTURE TAXABLE AMOUNTS

Question 27

A temporary difference arises when a revenue item is reported for tax purposes in a period after it is reported in financial income.

Answer 27

TRUE

Question 28

A temporary difference arises when a revenue item is reported for tax purposes in a period before it is reported in financial income.

Answer 28

TRUE

Question 29

Under IFRS:
a. “probable” is defined as a level of likelihoood of at least slightly more than 60%
b. a company should reduce a deferred tax asset when it’s likely that some or all of it will not be recognized
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

Answer 29

Deferred tax assets must be evaluated at the end of each accounting period

Question 30

At the December 31, 2015 statement of financial position date, Unruh Corporation reported an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2016, a future taxable amount will occur and:
a. pretax financial income will exceed taxable income in 2016.
b. Unruh will record a decrease in a deferred tax liability in 2016.
c. total income tax expense for 2016 will exceed current tax expense for 2016.
d. Unruh will record an increase in a deferred tax asset in 2016.

Answer 30

Unruh will record a decrease in deferred tax liability in 2016

Question 31

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?
a. a revenue is deferred for financial reporting purposes but not for tax purposes
b. a revenue is deferred for tax purposes but not for financial reporting purposes
c. an expense is deferred for financial reporting purposes but not for tax purposes
d. an expense is deferred for tax purposes but not for financial reporting purposes

Answer 31

A revenue is deferred for tax purposes but not for financial reporting purposes

Question 32

A major distincition between temporary and permanent difference is:

Answer 32

Temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

Question 33

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?
a. advance rental receipts
b. product warranty liabilities
c. depreciable property
d. fines and expenses resulting from a violation of law

Answer 33

Product warranty liabilities

Question 34

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?
a. subscriptions received in advance
b. prepaid royalty received in advance
c. sales accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes
d. interest received on government obligations

Answer 34

Sales accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes

Question 35

Which of the following differences would result in future taxable amounts?
a. expenses or losses that are tax deductible after they are recognized in financial income
b. revenues or gains that are taxable before they are recognized in financial income
c. revenue or gains that are recognized in financial income but are never included in taxable income
d. expenses or losses that are tax deductible before they are recognized in financial income

Answer 35

Expenses or losses that are tax deductible before they are recognized in financial income

Question 36

Stuart Corporation’s taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be:
a. a balance in the Unearned Rent account at year-end
b. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes
c. a fine resulting from violations of environmental regulations
d. making installment sales during the year

Answer 36

A fine resulting from violations of environmental regulations

Question 37

An example of a permanent difference is:
a. fines resulting from a violation of law
b. interest expense on money borrowed to invest in government bonds
c. percentage depletion of natural resources
d. all of these answers are correct

Answer 37

a. fines resulting from a violation of law
b. interest expense on money borrowed to invest in government bonds
c. percentage depletion of natural resources

Question 38

A company uses the equity method to account for an investment. This would result in what type of tax difference?

Answer 38

Temporary-Deferred tax liability

Question 39

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?

Answer 39

Temporary-Deferred tax asset

Question 40

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?
a. accrual for product warranty liability
b. subscriptions received in advance
c. prepaid insurance expense

Answer 40

a. accrual for product warranty liability
b. subscriptions received in advance

Question 41

Which of the following is not considered a permanent difference?
a. interest received on government obligations
b. fines resulting from violating the law
c. percentage depletion of natural resources
d. stock-based compensation expense

Answer 41

Stock-based compensation expense

Question 42

Permanent differences result from items that enter into pretax financial income but never into taxable income

Answer 42

TRUE

Question 43

Permanent differences result from items that enter into taxable income but never into pretax financial income

Answer 43

TRUE

Question 44

Permanent differences affect only the period in which they occur

Answer 44

TRUE

Question 45

Under IFRS when a change in the tax rates is enacted:
I. Companies should record its effect on existing deferred tax accounts immediately.
II. Companies report the effect of changes in tax rates on deferred tax accounts in the period the new rate becomes effective.
III. Companies report the effect of changes in tax rates on deferred tax accounts that arise in future periods when the new tax rates are in effect.

Answer 45

Companies should report its effect on existing deferred tax accounts immediately

Question 46

When a change in the tax rate is enacted into law, its effect on existing defered income tax accounts should be:
a. handled retroactively in accordance with the guidance related to changes in accounting standards.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

Answer 46

REPORTED AS AN ADJUSTMENT TO TAX EXPENSE IN THE PERIOD OF CHANGE

Question 47

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the statement of financial position if:
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted or substantially enacted.
d. it appears likely that a future tax rate will be less than the current tax rate.

Answer 47

FUTURE TAX RATES HAVE BEEN ENACTED OR SUBSTANTIALLY ENACTED

not just probable or likely to occur

Question 48

Recognition of tax benefits in the loss year due to a loss carryforward requires:
a. The establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements

Answer 48

THE ESTABLISHMENT OF A DEFERRED TAX ASSET

Question 49

In determining whether to adjust a deferred tax asset, a company should:

Answer 49

CONSIDER ALL POSITIVE AND NEGATIVE INFORMATION

not just positive

Question 50

Under IFRS, deferred tax assets are recognized for:
I. Deductible temporary differences.
II. Deductible permanent differences.
III. Operating loss carryforwards.
IV. Operating loss carrybacks.

a. I, II, and III.
b. I and III only.
c. I and IV only.
d. II and III only.

Answer 50

DEDUCTIBLE TEMPORARY DIFFERENCES and OPERATING LOSS CARRYFORWARDS

Question 51

Under IFRS, companies are required to provide a reconciliation between actual tax expense and the applicable tax rate. The purpose(s) of this reconciliation include:
a. making better prediction of future cash flow
b. predicating future cash flows for operating loss carryforwards
c. assessing the composition of the net deferred income tax liability
d. assessing the quality of earnings

Answer 51

a. making better prediction of future cash flow
b. predicating future cash flows for operating loss carryforwards
d. assessing the quality of earnings

Question 52

Major reason(s) for disclosure of deferred income tax information is:
a. better assessment of quality of earnings
b. better predictions of future cash flows
c. that it may be helpful in predicating future cash flows for operating loss carryforwards

Answer 52

a. better assessment of quality of earnings
b. better predictions of future cash flows
c. that it may be helpful in predicating future cash flows for operating loss carryforwards

Question 53

Accounting for income taxes can result in the reporting of deferred tax assets as any of the following except:
a. current or non-current asset
b. current or non-current liability
c. a contra-asset account
d. all of these are acceptable

Answer 53

Contra-asset account

Question 54

Deferred taxes should be presented on the statement of financial position:
a. as one net debit or credit amount.
b. as a net amount in the non-current section.
c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.

Answer 54

AS A NET AMOUNT IN THE NON-CURRENT SECTION

Question 55

Tanner, Inc. incurred a financial and taxable loss for 2016. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2016 financial statements?
a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2016.

Answer 55

THE REFUND CLAIMED SHOULD BE SHOWN AS A REDUCTION OF LOSS IN 2016

Question 56

Companies should allocate income tax expense (or benefit) to all of the following except:
a. discontinued operations
b. prior period adjustments
c. gross profit
d. other comprehensive income

Answer 56

GROSS PROFIT

Question 57

The IASB believes that the ____________ method is the most consistent method for accounting for income taxes

Answer 57

ASSET-LIABILITY

Question 58

All of the following are procedures for the computation of deferred income taxes except to:
a. identify the types and amounts of existing temporary differences and carryforwards
b. measure the deferred tax liability for taxable temporary differences
c. measure the deferred tax asset for deductible temporary differences and loss carrybacks
d. all of the above are acceptable methods

Answer 58

Measure the deferred tax asset for deductible temporary differences and loss carrybacks

Question 59

The IASB believes that the asset-liability method is the most consistent method for accounting for income taxes. Basic principles of this method include:
I. A current tax liability or asset is recognized for the estimated taxes payable or refundable on the tax return for the current year.
II. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
III. The measurement of current and deferred tax liabilities and assets, is based on provisions of the enacted tax law.
IV. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized

Answer 59

I. A current tax liability or asset is recognized for the estimated taxes payable or
refundable on the tax return for the current year.
II. A deferred tax liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards.
III. The measurement of current and deferred tax liabilities and assets, is based on
provisions of the enacted tax law.
IV. The measurement of deferred tax assets is reduced, if necessary, by the amount
of any tax benefits that, based on available evidence, are not expected to be
realized

Question 60

Which of the following statements is incorrect with regards to IFRS and U.S. GAAP?
a. With regard to uncertain tax positions, under IFRS, all potential liabilities must be recognized.
b. The tax effects related to certain items are reported in equity under U.S. GAAP, under IFRS the tax effects are charged or credited to income.
c. U.S. GAAP uses an impairment approach for deferred tax assets. The deferred tax asset is recognized in full and reduced by a valuation account if it is more likely than not all or a portion of the deferred tax asset will not be realized.
d. U.S. GAAP classifies deferred taxes based on the classification of the assets or liability to which it relates.

Answer 60

The tax effects related to certain items are reported in equity under U.S. GAAP, under IFRS the tax effects are charged or credited to income.

Question 61

Which of the following statements is correct with regards to IFRS and U.S. GAAP?
a. Under U.S. GAAP, all potential liabilities related to uncertain tax positions must be recognized.
b. The tax effects related to certain items are reported under U.S. GAAP; under IFRS the tax effects are charged or credited to income.
c. IFRS uses an affirmative judgment approach for deferred tax assets, whereas U.S. GAAP uses an impairment approach for deferred tax assets.
d. IFRS classifies deferred taxes based on classification of the asset or liability to which it relates.

Answer 61

IFRS uses an affirmative judgment approach for deferred tax assets, whereas U.S. GAAP uses an impairment approach for deferred tax assets.