F5 M7

Question 1

recognition to tax benefits steps

Answer 1

1) more likely than not threshold must be met
2) recognize largest amt that has > 50% (expected cumulative outcomes) likelihood of being realized upon settlement with tax authority

Question 2

enacted tax rate

Answer 2

-measurement based on applicable tax rate
-use enacted tax rate to apply to taxable items in period items expected to be paid or realized

Question 3

liability method

Answer 3

requires deferred tax account balance be adjusted for any changes in enacted tax rates

Question 4

changes in tax laws

Answer 4

1) amt of adjustment measured by change tax rates to remaining cumulative temporary differences
2) adjustments goes into income tax expense as component of income from continuing operations
3) entity must reflect impact of enacted change in annual effective tax rate calc in interim period

Question 5

change in valuation allowance

Answer 5

-the ability to realize a deferred tax asset is recognized in income from continuing operations

Question 6

change in tax status of an enterprise

Answer 6

1) when enterprise changes from nontaxable to taxable, DTL or DTA recognized for temporary differences and included in continuing op
2) if taxable entity becomes nontaxable, DTL or DTA eliminated and included in continuing op.

Question 7

the income tax expense/benefit - deferred calc

Answer 7

=ending balance of DTL or DTA - beginning balance

Question 8

change in tax rate calculation steps for deferred tax

Answer 8

1) beginning deferred tax balance +/-(pretax income - taxable income) = total deferred tax
2) total deferred tax * new enacted tax rate
3) subtract step 2 from the beginning balance net of tax

Question 9

how are deferred tax assets and liabilities reported on the B/S?

Answer 9

-non-current
-net of taxes

Question 10

net operating losses arising in 2018, 2019, and 2020

Answer 10

carried back five years (to oldest year first) and carried forward indefinitely
-not subject to taxable income limitation

Question 11

NOLS carried forward to beginning of 2021 or later

Answer 11

limited to 80% of taxable income before NOL deduction
-cannot be carried back but carried forward indefinitely

Question 12

net operating loss carrybacks

Answer 12

1) if losses carried back, tax receivables use the enacted rate in PY
2) any realizable loss carryback recognized in determining loss on prior net income
3) claim for refund of past taxes shown on B/S as separate item from deferred taxes
4) income tax refund receivable considered current asset

Question 13

journal entry to record current net operating loss that can be used to obtain refund (taxes previously paid)

Answer 13

Dr. Tax refund receivable
Cr. Tax benefit

Question 14

operating loss carryforwards

Answer 14

1) tax effect recognized to extent its more likely than not that tax benefit will be realized
2) treated as deferred tax assets in period they occur
3) NOLS valued using enacted future tax rate expected to be used
4) tax credit carryforwards valued at amt payable to be offset in future

Question 15

journal entry to record deferred tax benefit

Answer 15

Dr. Deferred tax asset
Cr. Tax benefit

Note: tax benefit is reduction of book loss
DTA reduces tax payable in future
tax benefit reduces NOL of current period

Question 16

journal entry to record income taxes for CY given NOL carryback

Answer 16

Dr. Income tax refund receivable
Dr. Deferred tax asset
Cr. DTA valuation allowance
Cr. Income tax benefit (plug)

Question 17

calculation for deferred tax asset valuation if NOL carryback used

Answer 17

1) amt of NOL carryforward after applying it to PYs
2) subtract expected income in next year
3) multiply enacted tax rate for next year

Question 18

dividends received deduction based on ownership %

Answer 18

Own 0-19% - 50% exclusion
Own 20% - 80% - 65% exclusion
Own over 80% - 100% exclusion

Question 19

calculation of current and total income tax expense with DRD

Answer 19

=taxable income/pretax income - (DRD * ownership %)

-DRD is permanent difference because deductible
-remainder of DRD if any is a temporary difference

Question 20

B/S disclosures for net deferred tax assets/liabilities

Answer 20

1) all deferred tax liabilities
2) all deferred tax assets
3) valuation allowance for deferred tax assets
4) net change during year in total valuation allowance
5) tax effect of each type of temporary difference and carryforward that is significant to DTA or DTL

Question 21

I/S disclosures for income tax expense/benefit allocated to continuing operations

Answer 21

1) current tax expense/benefit
2) deferred tax expense/benefit
3) investment tax credits
4) government grants (cause reduction of income tax expense)
5) tax expense allocated shareholder’s equity items
6) adjustments of deferred taxes from changes in tax rates
7) adjustments of beg. DTA valuation due to changes in expectations

Question 22

installment sales DTA or DTL?

Answer 22

DTL, because recognize income on GAAP financials, and income on tax return only when received
-as such, GAAP financial income > tax return income
-owe more in taxes later than in current period

Question 23

rents and royalties in advance a DTL or DTA?

Answer 23

DTA, because tax return recognizes revenue when received, whereas GAAP financials recognize it when earned
-as such tax return income > GAAP financial income
-owe less taxes in future than in current year

Question 24

bad debt expense a DTL or DTA?

Answer 24

DTL, because write off of bad debt expense reduce tax return liability and pay more taxes later. On GAAP financials, uses allowance method to account for bad debt expense

Question 25

warranty liability a DTL or DTA?

Answer 25

DTA, because on GAAP financials you accrue warranty expense, but on tax return, it is not deductible until warranty claims have been paid
-owe more now, owe less later

Question 26

is an NOL a DTL or DTA?

Answer 26

a DTA, because a portion of carryover either not absorbed in PYs if carried back or if carried forward instead of carryback, recognize a tax benefit in future

Question 27

is an accrued expense a DTL or DTA?

Answer 27

a DTA, because on tax return, there is no deduction for it until it is paid, but it is fully expensed on GAAP financials

Question 28

is goodwill a DTL or DTA?

Answer 28

DTA, if tax deductible goodwill is greater than book goodwill

Question 29

is depreciation a DTL or DTA?

Answer 29

a DTL, tax return depreciation generally tends to be higher than GAAP financials, so owe more in the future