FAR40

Question 1

What is realization and what is an example

Answer 1

This is the conversion an item or service into cash to a claim against cash

• Example - depreciated equipment is sold in exchange for a notes receivable

It happens when the entity converts goods or services into A/R - not necessarily when the receivable is collected

Question 2

What is it called when product unit costs are assigned to COGS when units are sold -

Answer 2

This is allocation

Question 3

What are the rules for testing goodwill - public co

Answer 3

Public: Must be tested each year - but can be tested at anytime during the year as long as you test it at the same time each year

Non-public - you can amortize goodwill and not test it each year

However - if there is a triggering event - then you will have to test it.

Question 4

On December 1, 20X0, Tell Co. leased office space for five years at a monthly rental of $60,000. On the same date, Tell paid the lessor the following amounts:

First month’s rent $60,000
Last month’s rent $60,000
Security deposit (refundable at lease expiration) $80,000
Installation of new walls and offices $360,000

Tell’s 20X0 expense relating to utilization of the office space should be

Answer 4

Only 1 months rent would be expensed

360,000 = be capitalized as leasehold improvements and amortized over the 5 years = 72,000 per year or 6,000 per month

Security deposit would be reported as an ASSET PREPAID rent

The deposit would be reported as ASSET DEPOSITS

Total rent expense would be 60,000 per month

Total expense related to utilizing the office space = 60,000 + 6,000 = 66,000

Question 5

When is a treasury bill coming due next year a cash equivalent and when is it not

Answer 5

A Cash equivalent is any security that can easily be converted into cash that mature in 90-days from the DATE of PURCHASE:

U.S. Treasury bill, purchased 11/1/X3, maturing 1/31/X5 100,000

This is a cash equivalent

U.S. Treasury bill, originally issued 2/28/X0, purchased by Yalta 12/1/X4, maturing 2/28/X5 150,000

This is not a cash equivalent because though it is maturing in 3 month s- it was purchased 15 months ago

Question 6

All deferred Tax Liability is considered what on the balance sheet - and how does it work

Answer 6

noncurrent

The net amount of all DTA and DTL are netted together and presented in a single amount in concurrent section

noncurrent DTA 10
noncurrent DTL 30
Tax Asset Valuation Allowance 5

+10 - 30 - 5 = 2r Deferred Tax Liability

Question 7

What is deferred income tax expense equal to

Answer 7

the sum of the net change in the net deferred tax asset or liability

The change is the amount of deferred income tax expense

Question 8

What causes an increase in deferred income tax liabilities

Answer 8

An increase in prepaid insurance and an increase in rent receivable
accelerated depreciation
investments under equity method

These are both deferred tax liabilities because:

Today paid $500 in rent expense for rent for 5 years

So you took 5 years worth of expense today which means you paid less tax today and will therefore owe more tax tomorrow ( can’t take the tax expense tommorrow)

Question 9

Deferred tax assets

Answer 9

These are things where you pay the tax ahead of time - pay it today and will get the benefit tomorrow

• warranty expense
• rent, royalty and interest received in advance is taxed when received but for book - will be earned later

this is a tax asset

Question 10

Examples of permanent tax difference

Answer 10

penalties and fines - Never tax deductible

municipal bonds - never taxable

life insurance proceeds - never taxable

DRD deduction - never taxable

Question 11

What are deferred tax valuation accounts

Answer 11

These are used when you have a deferred tax asset that you think “more likely than not - 50%” will not that some or all of the deferred asset will not be realized

its a contra asset to the deferred tax asset

Deferred tax income expense is equal to:

the net increase/decrease in all deferred tax related accounts

This includes all deferred tax valuation accounts too

Therefore the effect of a change in the opening balance of a valuation allowance IS INCLUDED in income from operations

Question 12

how do you calculate current income tax expense and what would or would not affect it

Answer 12

taxable income * current income tax rate = income tax expense for the year

Therefor the only things that would affect current income tax expense would be things that increase or decrease taxable income or a change in the tax rate

Question 13

GAAP uses the liability method for calculating periodic deferred tax expense - based on what?

Answer 13

Based on the concept of recognition of assets and liabilities

this is the recognition of deferred tax assets and liabilities as of the balance sheet date

Question 14

Are warranty expenses an DTA or DTL

Answer 14

They are DTA because warranty expenses are deductible in the year accrued for finance purposes, but deductible in the year paid for tax purposes

Question 15

Under GAAP - What is the the approach used to determine income tax expense

Answer 15

The asset and liability approach

Question 16

DTL or DTA?
For plant assets, the depreciation expense deducted for tax purposes is in excess of the depreciation expense used for financial reporting purposes.

Answer 16

A temporary difference resulting in a deferred tax liability.

When an entity deducts more depreciation for tax purposes than for financial statement purposes, there will be a reduced depreciation deduction in future periods and the entity will be required to pay additional taxes. This is a taxable temporary difference that will result in a deferred tax liability.

Question 17

DTL or DTA?

A landlord collects some rents in advance. Rents received are taxable in the period in which they are received.

Answer 17

A temporary difference resulting in a deferred tax asset.

Rents are taxed in the earlier of the year in which they accrue or the year in which they are received. When rents are received in advance, they are taxed when received but they are recognized in income subsequently when earned. As a result, they will not be taxed in future periods and represent a deductible temporary difference that will result in a deferred tax asset.

Question 18

DTL or DTA?

Interest is received on an investment in tax-exempt municipal obligations.

Answer 18

A permanent difference. Interest received on tax exempt municipal obligations is not taxable and is a difference with no future tax effect, also referred to as a permanent difference.

Question 19

DTL or DTA?

Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.

Answer 19

A temporary difference resulting in a deferred tax asset.

Estimated guarantees and warranties reduce financial statement income in the period accrued but are not deductible until the costs are actually incurred in a subsequent period. When they are incurred, they will reduce future taxable income and represent a deductible temporary difference that will result in a deferred tax asset.