Chapter 13 Income Tax Reporting Flashcards by Honorio Martir

Assume that Maddox Corporation buys new equipment for $15,000 on January 1, 2018. Depreciation for book purposes using the SL method is $3,000 and $5,000 for tax purposes using the SYD method. Assume that depreciation is the only Book-vs-tax difference. Income from depreciation and taxes is $30,000 each year over the next five years and the statutory tax rate is 40%. How much will the company report as deferred tax liability for 2018?

800 : ((30,000-3,000) - (30,000-5,000)) = 27,000-25,000 = 2000 x .4)

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Temporary differences that result in deferred tax assets are called _______ _______ amounts.

future deductible

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The cumulative temporary differences between book and tax amounts for depreciation over the period depreciated

will be equal to zero.

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Assume that Maddox Corporation buys new equipment for $15,000 on January 1, 2018. Depreciation for book purposes using the SL method is $3,000 and $5,000 for tax purposes using the SYD method. Assume that depreciation is the only Book-vs-tax difference. Income from depreciation and taxes is $30,000 each year over the next five years and the statutory tax rate is 40%. Which of the following will be included in the journal entry for 2021?

a credit to income tax payable of $11,200.

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Dusack Corporation had a net operating loss of $525,000 in 2018. In the previous years , they had taxable income of $50,000 in 2015, $200,000 in 2016 and $250,000 in 2017. Their statutory tax rate was 40% for each year. For 2018, this will result in

A deferred tax asset of $30,000 ($525,000 - ($200,000 + $250,000) = $75,000 x 40% = $30,000)

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$180,000: ($200,000 + $250,000) x 40%)

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The valuation allowance account that is used with deferred tax assets is a(n):

contrast asset

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Effective in 2017, if a US firm had a net deferred tax liability and its consolidated subsidiary had a net deferred tax asset

the two amounts would not be netted against each other

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Assume that Maddox Corporation buys new equipment for $15,000 on January 1, 2018. Depreciation for book purposes using the SL method is $3,000 and $5,000 for tax purposes using the SYD method. Assume that depreciation is the only Book-vs-tax difference. Income from depreciation and taxes is $30,000 each year over the next five years and the statutory tax rate is 40% in 2019. The entry to record income tax for 2019 would include

a credited deferred tax liability for $500. ($2000 + $1000) x 40% - $2000 x 35%)

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Deferred tax liabilities arise when

taxable income is less than book income

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Maddox has a deferred tax asset of $2000
Maddox has a deferred tax liability of $2000
Maddox has a deferred tax asset of $800
Maddox has a deferred tax liability of $800

Maddox has a deferred tax liability of $800

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The way of thinking about deferred taxes as the existence of deferred tax assets and liabilities is called the

balance sheet approach

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Deferred tax liabilities arise when

taxable income is less than book income

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An item that will enter into accounting income but will never affect taxable income is a ______ difference.

Permanent

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An item that will enter into accounting income but will never affect taxable income is a ______ difference.

Permanent

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An item that causes book income to be more or less than taxable income initially is called a(n) _____ temporary difference

originating

An item that enters into determination of taxable income but that will never affect accounting income is called a ______ difference.

Permanent

37%

Book income ($30,000 - $3000) = $27,000

Taxable income ($30,000 - $5000) = $25,000

Tax expense $25,000 x 40% = $10,000

Effective tax rate $10,000/$27,000

$10,800 (($30,000 - $3000) = $27,000 x 40%)

An example of a temporary difference is

rent revenue received in advance since these amounts are taxed when received for tax purposes but are recorded as liabilities for book purposes.

Effective in 2017,
• all deferred tax assets and liabilities are classified as noncurrent
• all deferred tax assets and liabilities are classified as current
• a separate noncurrent asset or liability is shown if all business is conducted in the United States
• US GAAP requires firms to classify deferred tax assets or deferred tax liabilities according to the originating asset or liability

all deferred tax assets and liabilities are classified as noncurrent

When the tax rate increases,
• the full change in the amount of future liability for income taxes is recognized as a prior period of adjustment
• the full change in the amount of future liability for income taxes is recognized as income tax expenses in the year the tax rate change is enacted
• the change in the amount of future liability for income taxes is recognized as income tax expenses in the years following the rate change

the full change in the amount of future liability for income taxes is recognized as income tax expenses in the year the tax rate change is enacted

Earning interest on municipal bonds

has no effect on deferred tax liabilities

21. An item that affects accounting income in one. But that affects taxable income in a different period is a (choose all that apply)  normal difference  timing difference ```  temporary difference  permanent difference  transitory difference  ```

timing difference temporary difference

The differences between pre-tax income and taxable income are called

temporary and permanent differences

stance expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities is a ______ ______.

Tax position

Which of the following statements is true regarding an uncertain tax position?  GAAP allows the use of a valuation account in place of a contingency reserve  A two-step process is used to determine how much benefit is recognized  Disclosures are not mandatory under US GAAP  The benefits are measured as the smallest amount of benefit that is cumulatively greater than 50% likely of being realized.

A two-step process is used to determine how much benefit is recognized

26. Kensington Valley Corporation claimed a tax deduction of $10,000 which was uncertain when it was deducted in the current year. However, there are relatively certain of receiving the deduction over a five-year period. The book income for current year is $120,000 and they have a tax rate of 35%. Which of the following is true?  Kensington has deferred tax asset of $2800  Kensington’s pretax income is equal to $120,000  The current portion of Kensington’s income tax expense is $38,500  Under GAAP, Kensington subtracts the entire $10,000 in the current year

Kensington has deferred tax asset of $2800 ($10,000 - $2000) x 35%

Income tax expense is equal to (select all that apply)  taxes due plus a decrease in a deferred tax asset  taxes due plus a decrease in a deferred tax liability  taxes due plus an increase in a deferred tax liability  taxes due minus an increase in a deferred tax liability

Taxes due plus a decrease in a deferred tax asset Taxes due plus an increase in a deferred tax liability

Book tax expense divided by book pretax income results in the ______ tax rate.

Effective tax rate

Nondeductible fine and penalties cause book income to be ______ and the effective tax rate to be _______ then the statutory rate.

Lower, higher

Which of the following transactions would create a deferred tax liability on foreign income?  A company is a foreign country sells its products to a US company  a US company earns income in a foreign country that it does not expect to repatriate back to the US.  A US company sells its products in a foreign country.  A US company earns income in a different country and pays the foreign government and income tax less than the US corporate tax rate.

A US company earns income in a different country and pays the foreign government and income tax less than the US corporate tax rate.

32. Interest on municipal bonds cause book income to be ______ and the effective tax rate to be ______ than the statutory rate. 

Higher, lower

Interest on municipal bonds cause book income to be ______ and the effective tax rate to be ______ than the statutory rate. 

Higher, lower

Each of the following items should be shown as net of deferred tax effects except:  translation adjustment  unrealized gain on derivatives  unrealized gain on investments  retirement benefits adjustment

translation adjustment

Which of the Following Statements Is to regarding IFRS and the US GAAP?  US GAAP requires reconciliation between the statutory and effective tax rates but IFRS rules do not  A violation allowance account is used for both IFRS and US GAAP  IFRS requires firms to disclose the aggregate amount of current and deferred income taxes charged directly to equity through OCI  IFRS requires recognition of deferred tax assets if it is deemed it is more likely than not that they will be realized

IFRS requires firms to disclose the aggregate amount of current and deferred income taxes charged directly to equity through OCI

Which of the following statements is true regarding IFRS and US GAAP?  IFRS requires firms to use the enacted or substantively enacted tax rate  US GAAP requires reconciliation between the statutory and effective tax rates but IFRS rules do not  A violation allowance account is used for both IFR as and US GAAP  The substantively enacted tax rate must be based on legislation already officially enacted into law

IFRS requires firms to use the enacted or substantively enacted tax rate