Multiple choice

Question 1

Which of the following creates a permanent difference between financial income and taxable income?

a. Interest received on municipal bonds
b. Completed contract method of recognizing construction revenue
c. Unearned rent revenue
d. Accelerated cost recovery on plant and equipment

Answer 1

A. Interest received on municipal bonds

Question 2

Which of the following creates a temporary difference between financial and taxable income?

a. Interest on municipal bonds
b. Accelerated cost recovery on plant and equipment
c. Fines from violation of law
d. Premiums paid for officer’s life insurance (company is beneficiary)

Answer 2

B. Accelerated cost recovery on PPE

Question 3

The purpose of an interperiod income tax allocation is to

a. allow reporting entities to fully utilize tax losses carried forward from a previous year.
b. allow reporting entities whose tax liabilities vary significantly from year to year to smooth payments to taxing agencies.
c. recognize an asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
d. amortize the deferred tax liability shown on the balance sheet.

Answer 3

C. To recognize an asset or liability for the tax consequences of temporary differences that exist at the balance sheet date

Question 4

The result of interperiod income tax allocation is that

a. wide fluctuations in a company’s tax liability payments are eliminated.
b. tax expense shown in the income statement is equal to the deferred taxes shown on the balance sheet.
c. tax liability shown in the balance sheet is equal to the deferred taxes shown on the previous year’s balance sheet plus the income tax expense shown on the income statement.
d. tax expense shown on the income statement is equal to income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.

Answer 4

D. Tax expense shown on the income statement is equal to the income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year

Question 5

Which of the following temporary differences ordinarily creates a deferred tax asset?

a. Accrued warranty costs
b. Depreciation
c. Installment sales
d. Prepaid insurance

Answer 5

A. Accrued warranty costs

Question 6

An example of a “deductible temporary difference” occurs when

a. the installment sales method is used for tax purposes, but the accrual method of recognizing sales revenue is used for financial reporting purposes.
b. accelerated depreciation is used for tax purposes but straight-line depreciation is used for accounting purposes.
c. warranty expenses are recognized on the accrual basis for financial reporting purposes but recognized as the warranty conditions are met for tax purposes.
d. the completed-contract method of recognizing construction revenue is used for tax purposes, but the percentage-of-completion method is used for financial reporting purposes.

Answer 6

C. Warranty expenses are recognized on the accrual basis for financial reporting purposes but recognized as the warranty conditions are met for tax purposes.

Question 7

Which of the following situations would require interperiod income tax allocation procedures?

a. A temporary difference exists because the tax basis of capital equipment is less than its reported amount in the financial statements.
b. Proceeds from an insurance policy on capital equipment lost in a fire exceed the book value of the equipment.
c. Last period’s ending inventory was understated causing both net income and income tax expense to be understated.
d. Nontaxable interest payments are received on municipal bonds.

Answer 7

A. A temporary difference exists because the tax basis of capital equipment is less than its reported amount on the financial statements.

Question 8

An item that would create a permanent difference in pretax financial and taxable incomes would be

a. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
b. purchasing equipment previously leased with an operating lease in prior years.
c. using the percentage-of-completion method on long-term construction contracts.
d. paying fines for violation of laws.

Answer 8

d. paying fines for violation of laws

Question 9

Which of the following is the most likely item to result in a deferred tax asset?

a. Using accelerated depreciation for tax purposes but straight-line depreciation for accounting purposes
b. Using the completed-contract method of recognizing construction revenue tax purposes, but using percentage-of-completion method for financial reporting purposes
c. Prepaid expenses
d. Unearned revenues

Answer 9

d. Unearned revenues

Question 10

When enacted tax rates change, the asset and liability method of interperiod tax allocation recognizes the rate change as

a. a cumulative effect adjustment.
b. an adjustment to be netted against the current income tax expense.
c. a separate charge to the current year’s net income.
d. a separate charge or benefit to income tax expense.

Answer 10

d. a separate change or benefit to income tax expense.

Question 11

Recognizing tax benefits in a loss year due to a loss carryforward requires

a. only a footnote disclosure.
b. creating a new carryforward for the next year.
c. creating a deferred tax asset.
d. creating a deferred tax liability.

Answer 11

C. creating a deferred tax asset

Question 12

A company would most likely choose the carryforward option for a net operating loss if the company expected

a. higher tax rates in the future compared to the past.
b. lower tax rates in the future compared to the past.
c. lower earnings in the future compared to the past.
d. higher earnings in the future compared to the past.

Answer 12

A. higher tax rates in the future compared to the past.

Question 13

All of the following can result in a temporary difference between pretax financial income and taxable income except for

a. payment of premiums for life insurance.
b. depreciation expense.
c. contingent liabilities.
d. product warranty costs.

Answer 13

A. A payment of premiums for life insurance.

Question 14

Which of the following items results in a temporary difference deductible amount for a given year?

a. Premiums on officer’s life insurance (company is beneficiary)
b. Premiums on officer’s life insurance (officer is beneficiary)
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes

Answer 14

C. Vacation Pay accrual

Question 15

Which of the following items results in a temporary difference taxable amount for a given year?

a. Premiums on officer’s life insurance (company is beneficiary)
b. Premiums on officer’s life insurance (officer is beneficiary)
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes

Answer 15

D. Accelerated depreciation for tax purposes, straight-line for financial reporting purposes

Question 16

Alpha Company reported net incomes in 2007 and 2008 before sustaining a significant operating loss in 2009. All of the 2009 loss can be carried back against the income of 2007 and 2008 for purposes of determining the company’s 2009 income tax liability. How should the carryback be presented in the company’s 2009 financial statements?

a. As an extraordinary item in the income statement
b. As a revenue from operations in the income statement
c. As the correction of an error in the retained earnings statement
d. As a reduction in the operating loss on the income statement for the year 2009

Answer 16

D. As a reduction in the operating loss on the income statement for the year 2009

Question 17

Which of the following statements is not correct?
All current deferred tax liabilities and assets shall be offset and presented as a single amount on the balance sheet.
Deferred tax assets related to carryforwards shall be classified as current or noncurrent on the balance sheet based on their expected date of reversal.
All current and noncurrent deferred tax assets shall be offset and presented as a single amount on the balance sheet.
Deferred tax liabilities and assets shall be classified as current or noncurrent on the balance sheet based on the classification of the asset or liability giving rise to the deferred tax item.

Answer 17

C. All current and noncurrent deferred tax assets shall be offset and presenting as a single amount on the balance sheet.

Question 18

International accounting standards currently are moving toward the

a. no-deferral approach.
b. partial recognition approach.
c. comprehensive recognition approach.
d. discounted comprehensive recognition approach.

Answer 18

Comprehensive recognition approach

Question 19

The asset-liability method of interperiod tax allocation currently required by U.S. GAAP is an example of the

a. discounted comprehensive recognition approach.
b. no-deferral approach.
c. partial recognition approach.
d. comprehensive recognition approach.

Answer 19

D. Comprehensive recognition approach.

Question 20

On the statement of cash flows using the indirect method, an increase in the deferred tax liability would be shown as

a. an addition to net income.
b. a deduction from net income.
c. an increase in investing activities.
d. an increase in financing activities.

Answer 20

A. addition to net income

Question 21

On December 31, 2007, Alton, Inc., reported a current deferred tax liability of $140,000 and a noncurrent deferred tax asset of $40,000. At the end of 2008, Alton reported a current deferred tax liability of $100,000, and a noncurrent deferred tax liability of $44,000. The deferred tax expense for 2008 is

a. $144,000.
b. $44,000.
c. $36,000.
d. $4,000.

Answer 21

B. 44,000

Question 22

During a year, Great Northern Company reported income tax expense of $200,000. The amount of taxes currently payable remained unchanged from the beginning to the end of the year. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes, increased from $40,000 at the beginning of the year to $44,000 at the end of the year. How much cash was paid for income taxes during for the year?

a. $156,000
b. $160,000
c. $196,000
d. $206,000

Answer 22

C. 196,000

Question 23

Which of the following does not help explain why income tax expense is different from the product of pretax income times the current tax rate?

a. Permanent differences
b. Temporary differences
c. The fact that future and current tax rates are different
d. A change in the valuation allowance account for the deferred tax asset.

Answer 23

B. Temporary Differences

Question 24

Which of the following is an example of a temporary difference that would result in a deferred tax liability?

a. Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes.
b. Rent revenue collected in advance when included in taxable income before it is included in pretax accounting income.
c. Use of a shorter depreciation period for accounting purposes than is used for income tax purposes.
d. Investment losses recognized earlier for accounting purposes than for tax purposes.

Answer 24

A. Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes.

Question 25

Which of the following is an example of a temporary difference that could result in a deferred tax asset?

a. Gain on disposal of an asset when included in taxable income before it is included in pretax accounting income.
b. Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes.
c. Gross margin on installment sales is recognized for accounting purposes before it is included in taxable income in the income tax return.
d. Prepayments of expenses in year of payment; recognition of expense for accounting purposes occurs in a later year.

Answer 25

A. Gain on disposal of an asset when included in taxable income before it is included in pretax accounting income.

Question 26

Which factor would most likely cause a firm to choose the carryforward option for an NOL?

a. Expectations of lower earnings in the future relative to the past
b. Expectations of higher earnings in the future relative to the past
c. Expectations of lower tax rates in the future relative to the past
d. Expectations of higher tax rates in the future relative to the past

Answer 26

D. Expectations of higher tax rates in the future relative to the past.

Question 27

Intraperiod tax allocation

a. involves the allocation of income taxes between current and future periods.
b. associates tax effect with different items in the income statement.
c. arises because certain revenues and expenses appear in the financial statements either before or after they are included in the income tax return.
d. arises because different income statement items are taxed at different rates.

Answer 27

B. associates tax effect with different items in the income statement.

Question 28

In computing the change in deferred tax accounts, which of the following tax rates is used?

a. Current tax rate
b. Estimated future tax rates
c. Enacted future tax rates
d. Past years’ tax rates

Answer 28

C. Enacted future rates

Question 29

Which of the following could never be subject to interperiod tax allocation?

a. Interest revenue on municipal bonds
b. Depreciation expense on operational assets
c. Estimated warranty expense
d. Rent revenue

Answer 29

A. Interest revenue on municipal bonds

Question 30

Which of the following represents a permanent difference?

a. Point-of-sale revenue recognition for financial reporting purposes, installment method for tax purposes
b. Carryback, carryforward option for taxes, no such option for financial reporting purposes
c. Straight-line depreciation for financial reporting purposes, accelerated depreciation for tax purposes
d. Goodwill amortization deducted on the tax return but not amortized for financial reporting purposes

Answer 30

D. Goodwill amortization deducted on the tax return but not amortized for financial reporting purposes.

Question 31

The deferred tax expense is the

a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability

Answer 31

B.

Question 32

14. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in
		Future	Future
		Taxable Amounts	Deductible Amounts
	a.	Yes 	Yes
	b.	Yes	No
	c.	No	Yes
	d.	No	No

Answer 32

A. Yes, Yes

Question 33

15. A company uses the equity method to account for an investment. This would result in what type of difference and in what type of deferred income tax?
		Type of Difference	Deferred Tax
	a.	Permanent	Asset
	b.	Permanent	Liability
	c.	Temporary	Asset
	d.	Temporary	Liability

Answer 33

D. Temp Liability

Question 34

Which of the following will not result in a temporary difference?

	a. Product warranty liabilities
	b. Advance rental receipts
	c. Installment sales
	d. All of these will result in a temporary difference.

Answer 34

D. All of these will result in temp diff

Question 35

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?
		Type of Difference	Deferred Tax
	a.	Temporary	Liability
	b.	Temporary	Asset
	c.	Permanent	Liability
	d.	Permanent	Asset

Answer 35

B. Temporary Asset