Unit 10 - Payables and Taxes

Question 1

Warranties:

When are warranty costs recognized?

Answer 1

An assurance-type warranty creates a loss contingency. Under the accrual method, a provision for warranty costs is made when the related revenue is recognized.

Question 2

Income Tax Accounting:

Temporary differences arise when expenses are deductible for tax purposes

Answer 2

After they are recognized in financial income - YES

Before they are recognized in financial income - YES

A temporary difference exists when
(1) the reported amount of an asset or liability in the financial statements differs from the tax basis of that asset or liability, and
(2) the difference will result in taxable or deductible amounts in future years when the asset is recovered or the liability is settled at its reported amount.

A temporary difference may also exist although it cannot be identified with a specific asset or liability recognized for financial reporting purposes. Temporary differences most commonly arise when either expenses or revenues are recognized for tax purposes either earlier or later than in the determination of financial income.

Question 3

Income tax Accounting:
Permanent differences

Answer 3

A permanent difference does not result in a change in a deferred tax asset or liability, that is, in a deferred tax expense or benefit. Thus, total income tax expense equals current income tax expense, which is the amount of taxes paid or payable for the year.

Question 4

How are deferred taxes & liabilities classified in the statement of financial position (BS)?

Answer 4

In the statement of financial position, deferred tax liabilities and assets are classified as noncurrent amounts. In addition, deferred tax liabilities and assets and any related valuation allowance are netted and presented as a single noncurrent amount.