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CPA Excel FAR Flashcards > INCOME TAXES > Flashcards

INCOME TAXES Flashcards

1
Q

How are deferred tax accounts offset for reporting?

A

Current accounts are offset; noncurrent accounts are offset; two net accounts remain for reporting.

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2
Q

Why is the procedure for offsetting deferred tax accounts reasonable given the nature of the underlying differences?

A

It is reasonable because future deductible and taxable differences will naturally cancel in the relevant future periods.

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3
Q

How are deferred tax accounts reported on the balance sheet?

A

Current assets and liabilities are netted.; Noncurrent assets and liabilities are netted.

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4
Q

Noncurrent assets and liabilities are netted.

A

Based on expected year of reversal.

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5
Q

How is the classification of a deferred tax account determined?

A

Same as asset/liability that caused the temporary difference.

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6
Q

Short-term prepaid rent gives rise to what type of deferred tax account and how is it classified?

A

Current deferred tax liability.

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7
Q

List the four internal deferred tax accounts possible.

A

Classified separately, therefore: 1. Current deferred tax asset; 2. Noncurrent deferred tax asset; 3. Current deferred tax liability; 4. Noncurrent deferred tax liability.

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8
Q

Organization costs give rise to what type of deferred tax account and how is it classified?

A

Deferred tax asset; classification depends on expected period of reversal.

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9
Q

How is the required ending deferred tax liability balance expressed?

A

Product of sum of future taxable differences and the future enacted tax rate.

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10
Q

What effect does an originating deductible difference have on the tax accrual entry?

A

Increases the required ending deferred tax asset balance.

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11
Q

How is the change in the deferred tax liability account for a period expressed?

A

Required ending deferred tax liability balance less beginning deferred tax liability balance.

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12
Q

What effect does a reversing taxable difference have on the tax accrual entry?

A

Decreases the required ending deferred tax liability balance.

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13
Q

What is the general formula for computing income tax expense?

A

Income tax liability plus or minus the change in the deferred tax accounts.

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14
Q

What tax rate is used for computing the tax liability?

A

Current tax rate.

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15
Q

If future enacted tax rates are not the same as the current rate and future temporary differences originated in the current period, which rate(s) do(es) income tax expense reflect?

A

Both current and future enacted tax rates are reflected.

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16
Q

If more than one tax bracket and tax rate applies, what rate is used to determine the change in deferred tax accounts?

A

Average future enacted tax rate is used to determine the change in deferred tax accounts.

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17
Q

What effect does income tax benefit have on income for financial reporting?

A

Increase net income.

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18
Q

What is the effective length of the taxing period for the carryback-carryforward option?

A

Effective length of the taxing period is 23 years.

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19
Q

What tax rate is used in computing a refund from carryback of net operating losses?

A

Tax rate paid on taxable income for the previous two years.

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20
Q

What is the journal entry for recording a net operating loss carryforward?

A

DR: Deferred Tax Asset; CR: Income Tax Benefit

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21
Q

What is the required ending balance of a deferred tax asset when there are future deductible differences and an unused net operating loss (NOL) carryforward?

A

Product of future enacted tax rate and sum of future deductible differences plus unused NOL carryforward.

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22
Q

What is the journal entry for recording a net operating loss carryback?

A

DR: Refund Receivable; CR: Income Tax Benefit

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23
Q

Refund of taxes paid in the past is a feature of which option for net operating losses?

A

Carryback-carryforward only.

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24
Q

What effect does a change in tax status from taxable to nontaxable have on deferred tax accounts?

A

Close the accounts against income tax expense (for example, closing a deferred tax asset increases income tax expense).

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25
Q

What is the ending balance of deferred tax asset for a net operating loss (NOL) carryforward?

A

Product of enacted future tax rate and NOL remaining to carryforward.

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26
Q

What effect do future taxable differences have on the ending deferred tax asset for a firm with an unused net operating loss carryforward?

A

No effect; taxable differences yield deferred tax liabilities.

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27
Q

What should deferred tax accounts under international accounting standards be classified as?

A

The classification is all noncurrent.

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28
Q

How is a carryforward valued?

A

Product of enacted future tax rate and NOL remaining to carryforward.

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29
Q

What is the main reason for choosing the carryforward only option?

A

An expectation of higher future tax rates.

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30
Q

What effect does a change in tax status from nontaxable to taxable have on deferred tax accounts?

A

Apply interperiod tax allocation as usual; there are no beginning deferred tax balances to use.

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31
Q

Increase in deferred tax asset is a feature of which option for NOLs?

A

Both the Carryback Carryforward Option and the Carryforward Only Option.

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32
Q

Describe the general effect of net operating loss (NOL) on ending deferred tax asset balance for carryback-carryforward option.

A

Include in ending DTA for the portion of NOL remaining after being used in the carryback, multiplied by the future enacted tax rate.

33
Q

List the net operating loss options a taxpayer has.

A
  1. Carryback Carryforward Option; 2. Carryforward Only Option.
34
Q

Describe the general effect of net operating loss (NOL) on ending deferred tax asset balance for carryforward only option.

A

Include in ending DTA the full NOL multiplied by the future enacted tax rate.

35
Q

True or False: The total of all deferred tax assets and deferred tax liabilities are not required to be disclosed.

A

False. Total of all deferred tax assets and deferred tax liabilities are required to be disclosed.

36
Q

Which years of taxable income are absorbed by a net operating loss (NOL) carryback?

A

The taxable income two years before the year of the NOL is used first, then one year before the NOL.

37
Q

What is the general expression for the change in deferred tax asset for a period for a net operating loss (NOL) carryforward that is not fully used up in the period?

A

End of period sum of future deductible differences plus unused NOL carryforward, multiplied by future enacted tax rate, less beginning deferred tax asset.

38
Q

Define “net operating loss”.

A

Negative taxable income (strictly a tax term).

39
Q

What period of years can a net operating loss (NOL) be carried back and forward?

A

Two years back, twenty years forward.

40
Q

What is the effect of a nontaxable revenue on income tax liability?

A

Income tax liability is not increased.

41
Q

List some common permanent differences.

A
  1. Tax-Free Interest Income; 2. Life Insurance Expense Premiums on key employee; 3. Proceeds from life insurance on key employee; 4. Dividends Received Deduction; 5. Fines and penalties.
42
Q

If book depletion is $4,000 and tax depletion is $12,000, what is the amount of the permanent difference?

A

The amount is $8,000.

43
Q

What general effect does income tax expense have on permanent differences?

A

The effect of a permanent difference on income tax expense is the same as its effect on the income tax liability for the period.

44
Q

What is the effect of a nondeductible expense on income tax expense?

A

Income tax expense is not reduced.

45
Q

Define “permanent difference”.

A

An amount that appears in the tax return or income statement but never both.

46
Q

Are current year or future permanent differences used in the current year tax accrual entry?

A

Current year differences are used.

47
Q

What is the effect of a nontaxable revenue on income tax expense?

A

Income tax expense is not increased.

48
Q

List the formula for computing the effect of a permanent difference on the effective tax rate.

A

Product of permanent difference and stated rate, divided by pretax accounting income.

49
Q

What book vs. tax differences does the computation of income tax liability consider?

A

It considers current period temporary and permanent differences.

50
Q

How is income tax expense for a period computed?

A

It is a derived amount or “plug” figure, the net change caused by the changes in deferred tax accounts and the income tax liability.

51
Q

What tax rate should be used when computing the change in the deferred tax accounts?

A

Enacted future tax rates (which could be the same as the current tax rate if rates have not been changed).

52
Q

How do permanent differences affect the tax accrual entry?

A

Taxable income excludes them; this exclusion is reflected in income tax expense - a plug figure.

53
Q

List the two categories of temporary differences.

A
  1. Taxable Temporary Differences; 2. Deductible Temporary Differences.
54
Q

What type of temporary differences are caused by depreciation?

A

Taxable difference.

55
Q

Are originating or future reversing temporary differences used in determining the change in deferred tax accounts?

A

Future reversing temporary differences are used.

56
Q

Define “deductible temporary differences.”

A

Differences that initially cause a prepayment of taxes.

57
Q

Define “deductible difference.”

A

A temporary difference that causes future taxable income to be less than future book income.

58
Q

What type of deferred tax accounts do deductible temporary differences cause?

A

They cause Deferred tax assets.

59
Q

Define “deferred tax asset.”

A

The future tax effect of a future deductible difference.

60
Q

What temporary difference causes future taxable income to exceed future book income?

A

Taxable temporary difference.

61
Q

Define “taxable temporary differences.”

A

Differences that initially cause a postponement in the payment of taxes.

62
Q

Define “temporary difference.”

A

An item of revenue or expense that, over the total life of the item, will affect pretax accounting income and taxable income in the same total amount but will be recognized in different amounts in any given year for financial reporting and tax purposes.

63
Q

What type of difference is caused by the liability for a warranty?

A

Deductible differences.

64
Q

True or False. Future taxable temporary differences are differences which cause deferred tax liabilities.

A

True.

65
Q

What is the minimum probability of sustaining an uncertain tax position to reduce income tax expense for an uncertain tax position?

A

Greater than 50%.

66
Q

Describe the accounting effect when the probability of sustaining an uncertain tax position is equal to or greater than the minimum for reducing income tax expense.

A

Recognize a reduction in income tax expense for the largest amount for which the cumulative probability of realization exceeds 50%, and an additional liability for the unrecognized portion.

67
Q

Define “uncertain tax position”.

A

A position taken on the Firm’s tax return that reduces income tax but which may be challenged by the Taxing Authorities.

68
Q

Describe the account effect when the probability of sustaining an uncertain tax position is less than the minimum for reducing income tax expense.

A

Report a liability for the uncertain tax position in addition to the income tax liability.

69
Q

Describe the accounting effect when actual tax benefit is less than expected in a later year.

A

Recognize income tax expense for the difference between benefit recognized in previous year and the actual benefit.

70
Q

Describe the accounting effect when actual tax benefit is greater than expected in a later year.

A

Reduce income tax expense for the difference between benefit recognized in previous year and the actual benefit.

71
Q

How is the amount of a valuation allowance determined?

A

Enough to reduce deferred tax asset to amount that has a better than 50% chance of being realized.

72
Q

Compute the ending valuation allowance if the total future deductible difference is $4,000, tax rate is 30%, and only $1,000 of future taxable income is assured.

A

$900 (deferred tax asset balance is $1,200, but only $300 is expected to be realized).

73
Q

When is a valuation allowance created for a deferred tax asset?

A

When there is a 50% or less chance of the deferred tax asset being fully realized.

74
Q

What percentage is used for determining realization of a deferred tax asset?

A

Fifty percent.

75
Q

What is the classification of the valuation allowance for deferred tax assets?

A

The classification is contra deferred tax asset.

76
Q

List the sources for realizing a deferred tax asset.

A
  1. Expectation of future taxable income; 2. Taxable income in prior years w/i carryback period; 3. Future taxable differences; 4. Tax planning strategies.
77
Q

List the evidence suggesting the need of a valuation allowance.

A
  1. History of unused net operating losses; 2. History of operating losses; 3. Losses expected in future years; 4. Very unfavorable contingencies; 5. Very brief carryback or carryforward period.
78
Q

What does a history of unused net operating losses suggest?

A

Evidence suggesting that the deferred tax asset will not be realized.

CPA Excel FAR Flashcards (18 decks)

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