Unit 10 questions

Question 1

Under current generally accepted accounting principles, what approach is used to determine income tax expense?

Answer 1

Asset-and-liability approach.

Question 2

The relationship between income tax currently payable and income tax expense is that income tax currently payable

Answer 2

May differ from income tax expense.

Question 3

Income-tax-basis financial statements differ from those prepared under GAAP because they

Answer 3

Recognize certain revenues and expenses in different reporting periods.

Question 4

Temporary differences arise when expenses are deductible for tax purposes after or before they are recognized in financial income?

Answer 4

Both: 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.

Question 5

Intraperiod income tax allocation arises because

Answer 5

Items included in the determination of taxable income may be presented in different sections of the financial statements. To provide a fair presentation, GAAP require that income tax expense for the period be allocated among continuing operations, discontinued operations, other comprehensive income, and items debited or credited directly to equity.

Question 6

Income taxes must be allocated between current and future periods: this is called?

Answer 6

interperiod tax allocation

Question 7

The guidance on accounting for income taxes establishes standards for taxes that are currently payable and for

Answer 7

The tax consequences of revenues and expenses included in taxable income in a different year from the year in which they are recognized for financial reporting purposes.

Question 8

Do permanent differences result as deferred tax liability or tax asset?

Answer 8

No, permanent differences do not, only temporary.

Question 9

A deferred tax asset must be reduced by a valuation allowance if it is

Answer 9

More likely than not that some portion will not be realized. A deferred tax asset shall be reduced by a valuation allowance if the weight of the available evidence, both positive and negative, indicates that it is more likely than not (that is, the probability is greater than 50%) that some portion will not be realized. The allowance should suffice to reduce the deferred tax asset to the amount that is more likely than not to be realized. The effect of a change in the beginning balance resulting from a new judgment about realizability is an item of income from continuing operations.

Question 10

Is valuation allowance recognized on Deferred tax liability?

Answer 10

No, only on deferred tax asset.

Question 11

True or False: Both positive and negative evidence should be considered when determining whether a valuation allowance is needed.

Answer 11

True

Question 12

Under IFRS, a deferred tax asset valuation allowance is

Answer 12

Not required to be recognized. Answer (C) is correct. Under IFRS, a deferred tax asset is recognized for most deductible temporary differences and for the carryforward of unused tax losses and credits, but only to the extent it is probable that taxable profit will be available. Thus, no valuation allowance is recognized. Under U.S. GAAP, a separate valuation allowance must be recognized. This credit equals the amount needed to reduce the asset to the amount more likely than not (the probability exceeds 50%) to be realized.

Question 13

Under IFRS, a deferred tax asset is recognized to the extent that:

Answer 13

Realization is probable. Under IFRS, a deferred tax asset is recognized for most deductible temporary differences and for the carryforward of unused tax losses and credits, but only to the extent it is probable that taxable profit will be available to permit the use of those amounts. Probable means more likely than not. Thus, no valuation allowance is separately recognized under IFRS.

Question 14

A tax rate other than the current tax rate may be used to calculate the deferred income tax amount on the statement of financial position if a

Answer 14

Future tax rate has been enacted into law.

Question 15

On December 2, Huff Corp. received a condemnation award of $450,000 as compensation for the forced sale of land purchased 5 years earlier for $300,000. The gain was not reported as taxable income on its income tax return for the year ended December 31 because Huff elected to replace the land within the allowed replacement period for at least $450,000. Huff has an income tax rate of 25% for the current year, and the enacted rate is 30% for subsequent years. There were no other temporary differences. In its December 31 balance sheet, Huff should report a deferred income tax liability of A. $37,500 B. $0 C. $135,000 D. $45,000

Answer 15

$45,000 Answer (D) is correct. The $150,000 gain was not taxable, but the tax basis of the asset is reduced by the amount of the unrecognized gain. Consequently, when the reported amount of the asset is recovered, a taxable amount of $150,000 will result. The related deferred tax liability is $45,000 ($150,000 × 30% enacted rate for subsequent years).

Question 16

The equity method of accounting resulted in FS income of $35,000, is this included or excluded from TI?

Answer 16

Excluded.

Question 17

How is effective tax rate calculated?

Answer 17

TI x current year tax rate= income tax expense Income tax expense / Pretax net income= effective tax rate

Question 18

Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern’s effective tax rate? A. 31.5% B. 28.5% C. 27.0% D. 30.0%

Answer 18

Answer (B) is correct. The municipal bond revenue (nontaxable) and key-person life insurance premiums (an expense that is nondeductible) are permanent differences. Thus, pretax income is adjusted to eliminate both items. Pretax accounting income $200,000 Municipal bond income (20,000) Life insurance premiums 10,000 Taxable income $190,000 Assuming no temporary differences and deferred taxes, total income tax expense is $57,000 ($190,000 × 30%). Accordingly, the effective tax rate is 28.5% ($57,000 income tax expense ÷ $200,000 pretax net income).

Question 19

When the question asked for “current provision for income taxes” or “income tax expense- current provision” what are they asking for?

Answer 19

Taxes Payable, which is TI x tax rate.

Question 20

Rein, Inc., reported deferred tax assets and deferred tax liabilities at the end of both Year 3 and Year 4. For the year ended in Year 4, Rein should report deferred income tax expense or benefit equal to the A. Increase in the deferred tax liabilities. B. Decrease in the deferred tax assets. C. Amount of the income tax liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities. D. Sum of the net changes in deferred tax assets and deferred tax liabilities.

Answer 20

Answer (D) is correct. Deferred tax expense or benefit is the net change during the year in the entity’s deferred tax liabilities and assets.

Question 21

how are current and noncurrent deferred tax assets and deferred tax liabilities shown on the statement of financial position?

Answer 21

Current deferred tax amounts are netted for financial reporting purposes. Likewise, noncurrent amount are also netter.

Question 22

Which of the following should be disclosed in an entity’s financial statements related to deferred taxes?

1. The types and amounts of existing temporary differences.
2. The types and amounts of existing permanent differences.
3. The nature and amount of each type of operating loss and tax credit carryforward.

Answer 22

1 and 3 only.

Answer (A) is correct. A public entity discloses the tax effects of each type of temporary difference and carryforward resulting in a significant deferred tax amount. A nonpublic entity makes the same disclosures but may omit the tax effects. Other required disclosures include the amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes. No disclosure is required about the types and amounts of existing permanent differences.

Question 23

A current liability is an obligation that will be either liquidated using current assets or replaced by another current liability. Current liabilities also include:

Answer 23

(1) obligations that, by their terms, are or will be due on demand within 1 year (or the operating cycle if longer), and
(2) obligations that are or will be callable by the creditor within 1 year because of a violation of a debt covenant.

Question 24

True or False: Obligations callable at any time by the creditor are current liabilities

Answer 24

Obligations callable by the creditor within 1 year as a result of a violation of a debt covenant are current liabilities, but an obligation callable at any time by the creditor is not a current liability.

Question 25

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?

A.$735,800

B.$750,000

C.$758,300

D.$825,800

Answer 25

Answer (C) is correct.
This interest-bearing 1-year note with four quarterly payments is a current liability because it is expected to be liquidated using current assets. Each payment of $264,200 consists of interest and principal. Only the principal component reduces the liability. The interest component equals $22,500 [$1,000,000 face amount × 9% × (1 ÷ 4 quarters)]. Thus, the principal is reduced by $241,700 ($264,200 payment – $22,500 interest). The note payable is reported as $758,300 ($1,000,000 carrying amount – $241,700 principal reduction) at year end.