FAR Module 14

Question 0

These items are differences between book and taxable income that will not eventually reverse themselves. The item is either in the books or included in taxes but not both.

Answer 0

Permanent differences

Question 1

These items are differences between book and taxable income that will eventually reverse themselves. It’s all about timing.

Answer 1

Temporary differences

Question 2

What are four common examples of permanent differences?

Answer 2

Life insurance premiums
Life insurance proceeds
Interest received on Muni bonds
Dividends received from domestic corps : 80% non taxable

Question 3

What is the JE to record taxes?

Answer 3

Debit Income tax expense - current

Credit Income taxes payable

Question 4

What approach does the FASB require for dealing with tax differences

Answer 4

An asset and liability approach

Question 5

This results when taxable income will be higher in the future

Answer 5

A deferred tax liability

Question 6

This is a future deductible amount (a reversal of a temporary difference that will cause taxable income to be lower than book income in the future)

Answer 6

A deferred tax asset

Question 7

What is the JE to record a deferred tax liability

Answer 7

Debit Income tax expense - deferred

Credit deferred tax liability

Question 8

What is the JE to record a deferred tax asset

Answer 8

Debit deferred tax asset

Credit income tax expense - deferred

Question 9

If the deferred tax item is caused by a current asset or current liability, the deferred item will be classified how?

Answer 9

As current

Question 10

If the deferred tax item is caused by a noncurrent asset or noncurrent liability, the deferred item will be classified how?

Answer 10

Non current

Question 11

If you cannot relate to a particular asset or liability, how do you classify it?

Answer 11

look at when the item reverses itself to determine if it is current or non current

Question 12

T/F

because assets and liabilities are on opposite sides of the balance sheet equation, you cannot net deferred current asset items against deferred current liability items.

Answer 12

FALSE

you can net the two.
You can also net non current items

Question 13

What is the valuation allowance rule for deferred tax assets?

Answer 13

If it is more likely than not (greater than 50%) that the deferred tax asset will not reverse an allowance account must be set up

Question 14

What JE sets up a valuation allowance for a deferred tax asset?

Answer 14

Debit income tax expense

Credit valuation allowance

Question 15

Is there a valuation allowance account for deferred tax liabilities?

Answer 15

No

Question 16

How do you calculate income tax expense current?

Answer 16

Book income 
\+/- any book to tax differences 
= taxable income 
* tax rate 
= income tax expense current

Question 17

How do you calculate the income tax liability?

Answer 17

Calculate income tax expense current & subtract any prepaid tax payments.

Question 18

How do you know if you are looking at a Future Taxable Amount?

Answer 18

If taxable income is less than book income and it will reverse itself you have a deferred tax liability. This is a future taxable amount

Question 19

How do you know if you are looking at a Future Deductible Amount?

Answer 19

When taxable income is greater than book income and it will reverse itself you have a deferred tax asset. This is a future deductible amount

Question 20

T/F

income tax current
+ income tax deferred
= total income tax

Answer 20

TRUE