Chapter 19

Question 1

What SFAS applies to Deferred Taxes?

Answer 1

SFAS 109

Question 2

When do deferred taxes arise?

Answer 2

when income tax expense differs from income tax liability and these differences unwind

Question 3

What is tax expense determined under?

Answer 3

GAAP

Question 4

What is income tax liability determined under?

Answer 4

Internal Revenue Code

Question 5

What types of differences exist between GAAP and the Internal Revenue Code?

Answer 5

temporary and permanent

Question 6

What are permanent differences?

Answer 6

items recognized for financial accounting purposes but not for income tax purposes

Question 7

Why are deferred taxes created?

Answer 7

because of a fundamental difference between GAAP and IRS

Question 8

What kind of income do companies want when dealing with taxes?

Answer 8

Want low income because higher income is seen as a liability

Question 9

What are examples of permanent differences?

Answer 9

1) Interest income received on tax exempt securities, 2) Fines and expenses resulting from violations of law, 3) Premiums paid for life insurance on key officers, employees

Question 10

How does interest income effect taxes?

Answer 10

included in GAAP, but permanently lowers taxes and income

Question 11

How do fines and expenses effect taxes?

Answer 11

Expense that lowers net income but no tax break for this kind of activity therefore increases net income and taxes

Question 12

How do life insurance premiums on executives and employees effect a company?

Answer 12

Helps absorb costs if something bad happens to executives

Question 13

How do life insurance premiums effect taxes?

Answer 13

deducted under GAAP but not deducted under IRS, similar to fines and expenses, increases taxable income and therefore increases taxes

Question 14

Do permanent differences create assets and liabilities?

Answer 14

No, these are created by the reversal of temporary differences

Question 15

What are the two types of deferred taxes?

Answer 15

Assets and Liabilities

Question 16

When does a deferred tax liability arise?

Answer 16

due to net taxable amounts in the future

Question 17

When does a deferred tax asset arise?

Answer 17

due to a net deductible amount in the future

Question 18

How does a deferred tax liability effect taxes in the future?

Answer 18

increase in taxes in the future

Question 19

How does a deferred tax asset effect taxes in the future?

Answer 19

deduction in taxes in the future

Question 20

What are examples of temporary differences?

Answer 20

1) warranty expense, 2) unearned revenue, 3) depreciation, 4) installment sales

Question 21

How does warranty expense create a deferred tax?

Answer 21

lower GAAP net income so right now there are no tax issues, but in the future the company will have to pay claims which will lower net income and result in lower taxes making it a deferred tax asset

Question 22

How does unearned revenue create a deferred tax?

Answer 22

taxes are owed right now since record all of income now, but in future taxes will not be owed making it a deferred tax asset

Question 23

How does depreciation create a deferred tax?

Answer 23

depreciation occurs much quicker under taxes to encourage companies to spend and help the economy so the company gets a big deduction today, but in the future they will no longer have that deduction and taxes will be larger making it a deferred tax liability

Question 24

What is the most common deferred tax issue?

Answer 24

depreciation

Question 25

What depreciation method is used for taxes?

Answer 25

MACRS (most accelerated)

Question 26

Sum of the years digits method of depreciation formula

Answer 26

Base(cost-salvage value) x (Years Remaining/Sum of years (ex. 4 years, 1+2+3+4)) x (number of months in depreciation period)

Question 27

Double-declining balance method of depreciation formula

Answer 27

2/useful life x base (cost-accumulated depreciation)

Question 28

How do installment sales create a deferred tax?

Answer 28

no cash is given upfront right now there is no tax, but in the future as cash is collected net income will increase which ultimately increases taxes creating a deferred tax liability

Question 29

What steps are used to determine how to deal with a difference?

Answer 29

1) Is the difference temporary or permanent? 2) What does the difference do to GAAP? 3)Does the difference create higher or lower taxes in the future?

Question 30

What is the basic rule of applying tax rates when determining a deferred tax?

Answer 30

apply the yearly tax rate to calculate deferred tax effects

Question 31

What tax rate is used if the future tax rate changes?

Answer 31

use the enacted tax rate expected to apply in the future year

Question 32

What tax rate should be used if new rates are not yet enacted into law for future years?

Answer 32

use the current rate

Question 33

How is income tax expense presented on the income statement?

Answer 33

1) continuing operations, 2) discontinued operations, 3) extraordinary items, 4) prior period adjustments (errors)

Question 34

What is intraperiod tax allocation?

Answer 34

Showing separate tax impact of specific items

Question 35

When are NOLs computed?

Answer 35

for each tax year

Question 36

How is a NOL used?

Answer 36

can be applied to offset taxable income of other years, possibly resulting in tax refunds

Question 37

What is the carryback option?

Answer 37

when NOLs are carried back 2 years and carried forward 20 years

Question 38

What is the carryforward only option?

Answer 38

when NOLs are carried forward 20 years

Question 39

How are NOLs beneficial to a company?

Answer 39

can help companies survive a few bumps in the road, but only a bandaid for companies in severe trouble

Question 40

What is the maximum refund a company can receive when using a NOL?

Answer 40

what previously paid in taxes for 2 years

Question 41

When might a carryforward be beneficial?

Answer 41

if Congress is raising tax rates

Question 42

How are NOLs applied when they are carried back 2 years and carried forward 20 years?

Answer 42

1) NOL is applied to earlier of the 2-year period, then to the immediately preceding year, 2) remaining NOLs are applied to the following 20-year period using future rates, 3) any tax refunds are reported in the year of the original net operating loss

Question 43

Why is a carryback beneficial?

Answer 43

get refund immediately while have to wait several years for a deferred tax asset from carryforwards

Question 44

Effective tax rate calculation

Answer 44

income tax expense/income before taxes

Question 45

What is an NOL designed for?

Answer 45

to give a company relief from having a bad year

Question 46

What tax rate is used when using a carryback?

Answer 46

apply the past rate

Question 47

What tax rate is used when using a carryforward?

Answer 47

apply the future rate

Question 48

When is a valuation account used?

Answer 48

1) huge deferred tax asset balances, 2) large carryforwards

Question 49

What kind of account is the benefit on carryback?

Answer 49

income statement account

Question 50

What type of account is income tax refund receivable?

Answer 50

current asset

Question 51

What journal entry is made if in the next year there is not enough deferred tax asset to cover income taxes?

Answer 51

debit income tax expense for the year and credit deferred tax asset for the carryforward amount left and income tax payable for the remainder

Question 52

What happens if there is a loss in the next year and you still have a carryfoward left?

Answer 52

carryforward the entire amount to the next year