Chapter 18

Question 1

What method does FASB believe is the most consistent for accounting for income taxes

Answer 1

asset-liability method

Question 2

What are the basic principals for the asset-liability method in terms of accounting for income taxes

Answer 2

A. a current tax liability or asset is recognized for the estimated tax payable for the current year (Income tax payable)

B. A DTA or DTL is recognized for the estimated future tax effects attributable to temporary differences and carry-forwards

C. The measurement of current and deferred assets/liabilities is based on provisions of the enacted tax law

D. The measurement of DTA is reduced if necessary by the amount not expected to be realized

Question 3

How are future changes in tax laws/rates treated

Answer 3

they are ignored, you only use the enacted tax law

Question 4

IRS income tax payable is a result of

Answer 4

amount paid to IRS on tax returns

Question 5

Financial statement income tax expense is a result of

Answer 5

GAAP

Question 6

tax consequences that will become taxable in the future are

Answer 6

DTL

Question 7

tax consequences that will become deductable in the future are

Answer 7

DTA

Question 8

The difference in rules for GAAP and IRS usually result in a…

Answer 8

temporary difference

Question 9

What is a temporary difference

Answer 9

A difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the F.S that will result in a future taxable/deductible amount

Question 10

If accounting income> Taxable income then…

Answer 10

lower IRS tax now and higher later

DTL

Question 11

if accounting income < taxable income then…

Answer 11

tax payable greater now and smaller later

DTA

Question 12

For a DTL is revenue reported on IS or Tax return first

Answer 12

I.S before the tax return

Question 13

For a DTL are expenses reported on IS or Tax return first

Answer 13

tax return

Question 14

For a DTA is revenue reported on IS or Tax return first

Answer 14

Tax return first

Question 15

For a DTA are expenses reported on IS or Tax return first

Answer 15

IS

Question 16

What are originating temporary differences

Answer 16

the initial balance between the book basis and the tax basis of an asset or liability

Question 17

what is the reversing difference

Answer 17

occurs when eliminating a temporary difference that happened in prior periods and then removing the related tax effect from the deferred tax account

Question 18

What are permanent difference

Answer 18

when an income item is included in taxable/accounting income but will never be included in the computation of the other

Question 19

what period do permanent differences affect

Answer 19

only the period in which they occur

Question 20

What are examples of permanent differences that are on F.S but not tax return

Answer 20

• Interest received on municipal bonds
• expenses incurred in obtaining tax-exempt income
  -life insurance proceeds for key officers
• fines and expenses resulting from a violation of law

Question 21

Items recognized for tax purposes but not for financial purposes

Answer 21

• percentage of depletion
• deduction of dividends received from US corps

Question 22

What tax rate must a company consider

Answer 22

resently enacted changes in the tax rate that are currently effective or become effective in the future

Question 23

if new rates are not enacted for future years what rate should be used

Answer 23

current rate

Question 24

when a new tax rate is enacted how should companies account existing deferred income acounts

Answer 24

adjust immediately and prospectivly

Question 25

when does a NOL occur

Answer 25

when tax-deductible expenses are greater than taxable revenue

Question 26

when NOL is used to offset future taxable income it is…

Answer 26

loss carry forward and reduces future tax payable amount

Question 27

what were the old rules of NOL

Answer 27

carryback 2 years and carryforward 20 years

Question 28

what is the new policy for NOL

Answer 28

carry forwards can be indefinitely carried forward for up to 80% starting dec 2017

Question 29

what is the journal entry for a loss carry forward without a valuation allowance

Answer 29

DTA
Income tax expense

Question 30

What is a DTA called on the income statement

Answer 30

Income Tax benefit
Deferred

Question 31

a deferred tax asset can only be realized if…

Answer 31

company has taxable income in the future

Question 32

What is a valuation allowace

Answer 32

contra asset account created when it is more than likely that a portion of DTA will NOT be realized

Question 33

how is a deferred tax asset reported on the balance sheet

Answer 33

it is recorded at net realizable value

Question 34

What is the J.E for valuation allowance

Answer 34

income tax expense
Valuation allowance - DTA

Question 35

whether a company will realize a DTA depends on

Answer 35

whether sufficient taxable income exists or will exist within the carryforward period

Question 36

Uncertain tax position