Payables And taxes

Question 1

True of False. When a change in tax law or rate occurs, the change on the deferred tax liability or asset is recognized in the period of enactment.

Answer 1

True. It’s recognized in the period of enactment not on the effective date.

Question 2

True of False. The employers share of FICA and federal unemployment tax is expensed.

Answer 2

True

Question 3

True or false. The employees share of FICA is a withholding.

Answer 3

True.

Question 4

True or False. A liability is booked for federal tax withholding + employers FICA + employees FICA.

Answer 4

True

Question 5

What is a deferred tax asset?

Answer 5

A deferred tax asset is an item on a company’s balance sheet that reduces its taxable income in the future. Because the taxes were “prepaid” in a prior period. It results from an overpayment or advance payment of taxes. It’s found when there are differences between tax rules and accounting rules.

Question 6

What is a deferred tax liability?

Answer 6

A deferred tax liability is a listing on a company’s balance sheet that records taxes that are owed but are not due to be paid until a future date. Deferred tax liability is the amount of taxes a company has “underpaid” which will be made up in the future. This doesn’t mean that the company hasn’t fulfilled its tax obligations. Rather it recognizes a payment that is not yet due.

Question 7

Whats a Deferred tax asset?

Answer 7

Revenues or gains that are included in taxable income before they are recognized in GAAP.

Question 8

What’s an example of a DTA?
Deferred tax asset

Answer 8

Unearned revenues such as rent and subscriptions received in advance.

Question 9

What is a deferred tax liability?

Answer 9

Revenues and gains that are recognized in GAAP before they are included in taxable income.

Question 10

What are examples of DTL?
Deferred tax liability

Answer 10

Income recognized under the equity method. Sales revenue accrued for financial reporting and recognized on the installment basis for tax purposes.

Question 11

What’s the formula for DTL?

Answer 11

Future taxable amount
X
enacted tax rate.

Question 12

What’s the formula for a DTA?

Answer 12

Future deductible amount
X
Enacted tax rate

Question 13

What does a valuation allowance do?

Answer 13

Reduces a deferred tax asset that is more likely than not that a portion will not be realized. (probability >50%)

Question 14

Fun fact

Answer 14

Interest on municipal bonds is a permanent difference because it is tax exempt. It Will never be in taxable income.

Question 15

DTL explanation

Answer 15

Income under gap is greater than taxable income. So the tax payment is a deferred liability. (Future taxable amount)

Question 16

DTA explanation

Answer 16

Income under GAAP is less than taxable income. (Future deductible amount)

Question 17

What is the formula for effective tax rate?

Answer 17

Income tax expense divided by pretax income.

Question 18

Fun fact deferred liability

Answer 18

a deferred tax liability is created when a company has earned more revenue in its book than it has recorded on its tax returns. So it has “underpaid taxes” creating a liability.

Question 19

Fun fact deferred tax asset

Answer 19

having lower book income than tax income will result in the creation of a deferred tax asset. Taxable income is higher than book income so the company has “overpaid” taxes.