Unit 4

Question 1

Which Financial Accounting Standards Board (FASB) asset-liability method should be used to present deferred taxes on the financial statement?

Answer 1

As either net noncurrent deferred tax assets or noncurrent deferred tax liabilities

FASB states that deferred taxes should be presented as a noncurrent asset or liability.

Question 2

Which type of tax rate is used to measure a deferred tax asset or liability when an entity’s income is subjected to a graduated rate schedule?

Answer 2

Average rates

A progressively graduated tax rate schedule requires the company to use an average tax rate.

Question 3

Which temporary difference increases net income in the current financial statements but is potentially taxable in a future period?

• Proceeds from life insurance carried by the company on key officers
• Advance rental receipts
• Gain from involuntary conversion of a nonmonetary asset
• Interest earned from tax-exempt bonds

Answer 3

Gain from involuntary conversion of a nonmonetary asset

In this circumstance, an entity would defer the gain for tax purposes.

Question 4

Which account may companies use to reduce income taxes payable?

Answer 4

Prepaid income taxes

Companies may generally use such prepayments when determining a net income tax liability.

Question 5

Which account may be used to reduce a deferred tax asset?

Answer 5

Valuation account

Question 6

What is the difference between a company’s calculated tax expense and taxes payable based on tax laws?

Answer 6

Deferred tax expense

Question 7

Which situation causes a company to have a permanent difference between accounting and taxable incomes?

Answer 7

A fine resulting from violations of regulations

Question 8

Which item is considered a permanent difference between financial statements and taxable income?

Answer 8

Interest earned from state and local bonds

This source of income is never taxable, but it would be included in a company’s financial income.

Question 9

Which presentation of deferred taxes should be used on the balance sheet?

Answer 9

As a noncurrent amount

Question 10

Which Financial Accounting Standards Board (FASB) method will recognize the amount of taxes payable or refundable for the current year?

Answer 10

Asset-liability