chapter 16 income taxes

Question 1

Which of the following creates a temporary difference between financial and taxable income?

Answer 1

Accelerated cost recovery on PPE

Question 2

Which of the following temporary differences ordinarily results in a deferred tax asset?

Answer 2

Accrued warranty costs

Question 3

Which of the following temporary differences ordinarily results in deferred tax liability?

Answer 3

Depreciation

Question 4

When enacted tax rates change, the asset and liability method of inter-period tax allocation recognizes the rate change as?

Answer 4

a separate change or benefit to income tax expense

Question 5

A deferred tax liability arising from the use of an accelerated method of depreciation for tax purposes and the straight-line method for financial reporting purposes would be classified on the balance sheet as

Answer 5

a non current liability

Question 6

On the statement of cash flows using the indirect method, an increase in the deferred tax liability would be shown as..

Answer 6

an addition to net income

Question 7

The asset-liability method of interperiod tax allocation currently required by U.S. GAAP is an example of the

Answer 7

comprehensive recognition approach

Question 8

Historically, the United Kingdom has recognized only those deferred tax liabilities expected to “crystallize” the term crystallize is most nearly synonymous with the term

Answer 8

realized

Question 9

Which of the following creates a permanent difference between financial income and taxable income?

Answer 9

Interest received on municipal bonds

Question 10

Which of the following is the most likely item to result in a deferred tax asset.

Answer 10

Unearned Revenues

Question 11

Which of the following temporary differences ordinarily results in a deferred tax liability

Answer 11

Depreciation

Question 12

Alpha Company reported net incomes in 2010 and 2011 before sustaining a significant operating loss in 2012. All of the 2012 loss can be carried back against the income of 2010 and 2011 for the purposes of determining the company’s 2012 income tax liability. How should the carryback be presented in the company’s 2012 financial statements?

Answer 12

As a reduction in the operating loss on the income statement for the year 2012

Question 13

A deferred tax liability arising from the use of an accelerated method of depreciation for tax purposes and the straight line method for financial reporting purposes would be classified on the balance sheet as a

Answer 13

non-current liability

Question 14

The purpose of an interperiod income tax allocation is to

Answer 14

Recognize an asset or liability for the tax consequences of temporary differences that exist at the balance sheet date

Question 15

An example of a deductible temporary difference” creating a deferred tax asset occurs when

Answer 15

warranty expenses are recognized on the accrual basis for financial reporting purposes, but recognized as the warranty conditions are met for income tax purposes

Question 16

Monteblanco Corporation paid $20,000 in January 2013 for premiums on a two-year life insurance policy which names the company as the beneficiary, an item that is never deductible for income tax purposes. Additionally, Monteblanco Corporation’s financial statements for the year ended December 31, 2013, revealed the company paid $105,000 in nondeductible taxes during the year and also accrued estimated litigation losses of $200,000 which aren’t deductible until paid for income tax purposes. Assuming the lawsuit was resolved in February 2014 (at which time a $200,000 loss was recognized for income tax purposes) and that Monteblanco’s tax rate is 30 percent for both 2013 and 2014, what amount should Monteblanco report as asset for net deferred income taxes on its 2013 balance sheet?

Answer 16

60,000

Question 17

The Wayne Static Company had taxable income of $12,000 during 2013. Wayne Static used accelerated depreciation for income tax purposes ($3,400) and straight-line depreciation for financial accounting purposes ($2,000). Assuming Wayne Static had no other temporary or permanent differences, what would the company’s pretax financial accounting income be for 2013?

Answer 17

$13400 (15400 is the starting point subtract 2000 to get answer, or take the diff and add or sub to amt given)

Question 18

Recognizing tax benefits in a loss year due to a loss carryforward that will likely be used requires

Answer 18

creating a deferred tax asset

Question 19

In 2013, Boothe Corporation reported $90,000 of income before income taxes. The tax rate for 2013 was 30 percent. Boothe had an unused $60,000 net operating loss carryforward arising in 2012 when the tax rate was 35 percent. The income tax payable Boothe would report for 2013 would be

a. $6,000.
b. $9,000.
c. $10,500.
d. $27,000.

Answer 19

b. 9000

(90000-60000)*.30= 9000
Prior year rate means nothing to the 2013 calculation

Question 20

A deferred tax liability arising from the use of an accelerated method of depreciation for income tax purposes and the stratghttline method for financial reporting purposes would be classified on the balance sheet as an

Answer 20

noncurrent liability

Question 21

On the statement of cash flows using the indirect method, an increase in the deferred tax asset would be shown as an

Answer 21

a deduction from net income

Question 22

Asset and liability method of intereperiod tax allocation

Answer 22

A method of income tax allocation that determines deferred tax assets or tax liabilities based on the expected future benefit or obligation associated with temporary difference reversals. If tax rates change, the asset or liability balances are adjusted to reflect the tax rates legislated to be in effect in the year when reversal is expected to occur

Question 23

Deductible temporary differences

Answer 23

Differences between financial and taxable income that will result in deductible amounts in future years; expected benefits (tax savings) are reported on the balance sheet as deferred tax assets.

Question 24

effective tax rate

Answer 24

Rate computed by dividing reported income tax expense by earnings before income taxes.

Question 25

interperiod tax allocation

Answer 25

An accounting method that recognizes the tax effect of temporary differences between financial and taxable income in the financial statements rather than reporting as tax expense the actual tax liability in each year. The allocation may be made either by (1) the deferred method or (2) the asset and liability method. The latter method is currently required by GAAP.

Question 26

permanent differences

Answer 26

Nondeductible expenses or nontaxable revenues that are recognized for financial reporting purposes but that are never part of taxable income

Question 27

Net Operating Loss (NOL) Carryback

Answer 27

The amount of operating loss that can be carried back and offset against the income of earlier profitable years to obtain a refund of previously paid income taxes. (back 2-forward 20)

Question 28

Net operating loss (NOL) Carryforward

Answer 28

The amount of operating loss that can be carried forward and offset against income of future profitable years to reduce the tax liability for those years.(back2 forward20)

Question 29

Financial statement disclosure: the following items must appear in the income statement or an accompanying note:

Answer 29

Current tax expense or benefit
Deferred tax expense or benefit
investment tax credits
government grants recognized as a tax reduction
benefits of NOL carry forwards
adjustments to a deferred tax liability or asset for enacted changes in tax laws or rates or a change in the tax status of an enterprise
adjustments in the beginning-of-the-year valuation allowance because of change in circumstances.

Question 30

Statement of cashflow; Taxes relate to the operating section of the statement of cashflows

Answer 30

US GAAP requires separate disclosure of cash paid for income taxes.
In direct method, just include cash paid for taxes as a separate amount.
In indirect method, a supplementary note is required

Question 31

Which of the following creates temp diff between financial and taxable income?

Answer 31

Accelerated cost recovery on PPE