Acctg 322 Ch 16 Financial Deboskey

Front 1

Which of the following statements regarding deferred taxes is incorrect?
A) Income tax expense is comprised of two components: the amount payable currently and the amount deferred until later.
B) An installment receivable has no tax basis.
C) Current GAAP focuses on the income statement and the recognition of expenses and revenues.
D) A temporary difference originates in one period and reverses in one or more subsequent periods.

Back 1

C) Current GAAP focuses on the income statement and the recognition of expenses and revenues.

Front 2

Current GAAP focuses on the balance sheet and the recognition of liabilities and assets.
True/Fals

Back 2

True

Front 3

Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $150,000 in each year. The income reported for 2011 includes $45,000 from installment sales of property will be reported on the tax return when it's collected, in 2012 ($11,000) and 2013 ($34,000). The enacted tax rate is 30% for 2011 – 2013. What is the taxable income for Holmes Builders in 2011?
A) $150,000
B) $195,000
C) $105,000
D) $118,500

Back 3

C) $105,000
Taxable income for 2011 is pretax accounting income less installment sales recorded but not yet collected. Taxable income is computed as follows:
Pretax accounting income
$ 150,000
Less: installment sales not yet collected
(45,000)
-------------------------------------------------------------------------------
Taxable income
$ 105,000

Front 4

Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $200,000 in each year. The income reported for 2011 includes $50,000 from installment sales of property will be reported on the tax return when it's collected, in 2012 ($12,000) and 2013 ($38,000). The enacted tax rate is 35% for 2011 – 2013. What is the total amount of income tax expense reported on the income statement for Holmes Builders for the year ending December 31, 2011?
A) $70,000
B) $52,500
C) $17,500
D) $35,000

Back 4

A) $70,000
Taxable income for 2011 is pretax accounting income less installment sales recorded but not yet collected. Taxable income is computed as follows:
Pretax accounting income
$ 200,000
Less: installment sales not yet collected
(50,000)
------------------------------------------------------------------------------
Taxable income
$ 150,000
× Tax rate
35%
--------------------------------------------------------------------------------
Tax payable currently
$ 52,500
Future taxable amounts
$ 50,000
× Tax rate
35%
-----------------------------------
Deferred tax liability
$ 17,500
Total tax expense
$ 70,000

Front 5

Holmes Builders began operations on January 1, 2011. It reported pretax accounting income in 2011, 2012, and 2013 of $100,000 in each year. The income reported for 2011 includes $40,000 in warranty expense that is deductible when paid. The warranty will be paid out evenly over 2012 and 2013, $20,000 per year. The enacted tax rate is 40% for 2011 – 2013. What is the total amount of taxable income for Holmes Builders for the year ending December 31, 2011?


A) $124,000
B) $140,000
C) $60,000
D) $100,000

Back 5

B) $140,000
Taxable income for 2011 is pretax accounting income plus the warranty expense that was subtracted but which won't be paid until future years. Taxable income is computed as follows:
Pretax accounting income
$ 100,000
Add: Warranty expense not yet paid
40,000
--------------------------------------------------------------------------------
Taxable income
$ 140,000

Front 6

Which of the following statements concerning deferred tax assets and the valuation allowance is incorrect?
A) The valuation allowance for a deferred tax asset is similar to the allowance for doubtful accounts for accounts receivable.
B) A deferred tax asset is recognized when an existing temporary difference will produce future taxable amounts.
C) A valuation allowance is needed if taxable income is anticipated to be insufficient to realize the tax benefit.
D) A valuation allowance is needed if it is more likely than not that some portion or all of deferred tax asset will not be realized.

Back 6

B) A deferred tax asset is recognized when an existing temporary difference will produce future taxable amounts.

Front 7

A deferred tax asset is recognized when an existing temporary difference will produce future deductible amounts.
True/False

Back 7

True

Front 8

Permanent differences:
A) Are disregarded when determining both the tax payable currently and the deferred tax asset or liability.
B) Affect a company's effective tax rate.
C) Include interest received from investments in bonds issued by state and municipal governments.
D) All of the choices are correct regarding permanent differences.

Back 8

D) All of the choices are correct regarding permanent differences.

Front 9

Permanent differences are disregarded when determining both the tax payable currently and the deferred tax asset or liability, affect a company's effective tax rate, and include interest on municipal bonds.
True/False

Back 9

True

Front 10

Which of the following is not a permanent difference?
A) Expenses due to violations of the law.
B) Interest received from investments in bonds issued by state and municipal governments.
C) Life insurance proceeds on the death of an insured executive.
D) Warranty expense.

Back 10

D) Warranty expense.

Front 11

Which of the following statements regarding changes in tax laws or rates is incorrect?
A) If a change in tax law or rate occurs, the effect is reflected in operating income in the year of the enactment of the change in the tax law or rate.
B) A deferred tax asset is based on anticipated future taxable income and anticipated future tax rates and laws.
C) A deferred tax liability is based on enacted tax rates and laws.
D) The tax effects of future taxable amounts depend on the tax rates at which those amounts will be taxed.

Back 11

B) A deferred tax asset is based on anticipated future taxable income and anticipated future tax rates and laws.

Front 12

A deferred tax liability or asset is based on enacted tax rates and laws.
True/False

Back 12

True

Front 13

When a company experiences a net operating loss (NOL)
A) Taxable revenues exceed tax-deductible expenses.
B) A tax payable or a tax receivable may result from carrying back the NOL.
C) Tax laws permit the operating loss to be used to reduce taxable income in other, profitable years.
D) All of the choices are correct regarding NOLs.

Back 13

C) Tax laws permit the operating loss to be used to reduce taxable income in other, profitable years.

Front 14

Net operating losses result when tax-deductible expenses exceed taxable revenues, there is no tax payable for the year an operating loss occurs because there's no taxable income, and a carryback results in a receivable for taxes previously paid.
True/False

Back 14

true

Front 15

When a company experiences a net operating loss (NOL)
A) It may carryback the NOL for up to 20 years.
B) The carryforward election can be made at any time during the carryback/carryforward period.
C) The carryback election results in filing an amended tax return to get a refund of taxes paid in prior years.
D) All of the choices are correct regarding NOLs.

Back 15

C) The carryback election results in filing an amended tax return to get a refund of taxes paid in prior years.

Front 16

A company can elect an operating loss carryback if taxable income was reported in either of the two previous years, or the company can carry the NOL forward for up to 20 years to offset taxable income in those years. The carryforward election is a choice that must be made in the year of the operating loss and the choice is irrevocable.
True/False

Back 16

True

Front 17

During 2011, its first year of operations, Ashley Cosmetics Company reported an operating loss of $295,000 for financial reporting and tax purposes. The enacted tax rate is 40%. What amount of deferred tax asset will Ashley Cosmetics Company report on its December 31, 2011 balance sheet?
A) $295,000
B) $118,000
C) $177,000
D) $413,000

Back 17

B) $118,000
The tax benefit of being able to deduct amounts in the future represents a deferred tax asset. In this case, the benefit of the future deductible amount is $295,000 × 40% = $118,000.

Front 18

In a classified balance sheet, a deferred tax asset that is related to a specific asset or liability is
A) Classified as current if there is a valuation allowance, otherwise deferred tax assets are classified as noncurrent.
B) Classified as current if it relates to a net operating loss carryback and as noncurrent if it relates to an operating loss carryforward.
C) Classified as current or noncurrent according to how the related assets or liabilities are classified for financial reporting.
D) Classified as current or noncurrent depending upon when it is expected to reverse.

Back 18

C) Classified as current or noncurrent according to how the related assets or liabilities are classified for financial reporting.

Front 19

In a classified balance sheet, deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting.
True/False

Back 19

True

Front 20

Which of the following statements is correct regarding classification of deferred tax assets and liabilities?
A) A valuation allowance is allocated between current and noncurrent on a pro rata basis.
B) A deferred tax asset or liability that is not related to a specific asset or liability should be classified according to when the underlying temporary difference is expected to reverse.
C) A net current amount and a net noncurrent amount are reported as either an asset or a liability.
D) All of the choices are correct regarding deferred tax assets and liabilities.

Back 20

D) All of the choices are correct regarding deferred tax assets and liabilities.

Front 21

Valuation allowances are allocated pro rata between current and noncurrent; when there is no specific account that gave rise to the deferred tax asset or liability, it is classifies based on when it's expected to reverse; one net current and one net noncurrent amount are reported for deferred taxes.
True/False

Back 21

True

Front 22

Uncertainties related to income taxes include all of the following except
A) The IRS frequently disagrees with the position a company takes on its tax return.
B) If there's an 80% chance or less of the company's position being sustained on examination, the tax expense can't reflect the tax benefit.
C) There is a two-step process to deal with the uncertainty of certain tax positions.
D) All of the choices are correct regarding the uncertainty related to income taxes.

Back 22

B) If there's an 80% chance or less of the company's position being sustained on examination, the tax expense can't reflect the tax benefit.

Front 23

If there's a 50% chance or less of the company's position being sustained on examination, the tax expense can't reflect the tax benefit.
True/False

Back 23

true

Front 24

Which of the following items should be reported net of its respective income tax effects
A) Income or loss from continuing operations.
B) Discontinued operations.
C) Extraordinary items.
D) All of the choices are reported net of tax.

Back 24

D) All of the choices are reported net of tax.

Front 25

Net-of-tax reporting is required for continuing operations, discontinued operations, and extraordinary items.
True/False

Back 25

True

Front 26

Intraperiod tax allocation


A) Allocates income taxes among financial statement components within a particular reporting period.
B) Results in recognition of deferred tax assets and/or liabilities.
C) Is challenging and controversial.
D) All of the choices are correct regarding intraperiod tax allocation.

Back 26

A) Allocates income taxes among financial statement components within a particular reporting period.

Front 27

Allocating income taxes among financial statement components within a particular reporting period is referred to as intraperiod tax allocation. While interperiod tax allocation is challenging and controversial, intraperiod tax allocation is relatively straightforward and free from controversy.
True/false

Back 27

true

Front 28

Types of temporary differences:
List 2 Revenues (or gains) reported in the income statement now, but on the tax return later (deferred tax liabilities from revenue)

Back 28

1)Installment sales of property (installment method for taxes)
2)Unrealized gain from recording investments at fair value (taxable when asset is sold)

Front 29

Types of temporary differences:
List 3 Revenues (or gains) reported on the tax return now, but in the income statement later
(deferred tax asset from revenue)

Back 29

1)Rent collected in advance
2)subscriptions collected in advance
3)other revenue collected in advance

Front 30

Types of temporary differences:
List 2 Expenses (or losses) reported in the income statement now, but on the tax return later (deferred tax asset from expenses)

Back 30

1)Estimated expenses and losses (tax-deductible when paid)
2)Unrealized loss from recording investments at fair value or inventory at LCM (tax-deductible when asset is sold)

Front 31

Types of temporary differences:
List 2 Expenses (or losses) reported on the tax return now, but in the income statement later
(deferred tax liability from expenses)

Back 31

1)accelerated depreciation on the tax return in excess of straight-line depreciation in the income statement
2)prepaid expenses (tax-deductible when paid)

Front 32

Allocating income taxes within a particular reporting period is intraperiod tax allocation.
True/false

Back 32

true

Front 33

Income tax expense is composed of 3 components:
1)the tax deferred until later, reduced by
2)the deferred tax benefit and
3)the refund receivable of 2011 taxes paid

Back 33

true

Front 34

when the future tax consequence of a temporary difference will be to decrease taxable income relative to pretax accounting income, future deductible amounts are created. These have favorable tax consequences that are recognized as deferred tax assets.
true/false

Back 34

true

Front 35

Deferred tax assets are recognized for all deductible temporary differences. However, a deferred tax asset is then reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized

Back 35

true

Front 36

Permanent differences between the reported amount of an asset or liability in the financial statements and its tax basis are those caused by transactions and events that under existing tax law will never affect taxable income or taxes payable. These are disregarded when determining both the tax payable currently and the deferred tax effect.

Back 36

true

Front 37

The deferred tax liability (or asset) for which payment (or receipt) is deferred is based on enacted tax rates applied to the taxable or deductible amounts

Back 37

true

Front 38

If a change in a tal law or rate occur4s, the deferred tax liability or asset is adjusted to reflect the change in the amount to be paid or recovered. That effect is reflected in operating income in the year of the enactment of the change in the tal law or rate

Back 38

true

Front 39

When multiple temporary differences exist, the total of the future taxable amounts is multiplied by the future tax rate to determine the appropriate balance for the deferred tax liability, and the total of the future deductible amounts is multiplied by the future tax rate to determine the appropriate balance for the deferredtax asset

Back 39

true

Front 40

Tax laws permit an operating loss to be used to reduce taxable income in other, profitable years by either a carryback of the loss to prior years or a carryforward of the loss to later years (up to 20). The tax benefit of an operating loss carryback or an operating loss carryforward is recognized in the year of the loss

Back 40

true

Front 41

Deferred tax assets & deferred tax liablitites are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. Disclosure notes should reveal additional relevant information needed for full disclosure pertaining to deferred tax amounts reproted on the balance sheet, the components of income tax expense, & available operating loss carryforwards

Back 41

true

Front 42

A tax benefit may be reflected in the financial statements only if it is "more likely than not" that the company will be able to sustain the tax return position, based on its technical merits. It should be measured as the largest amount of benefit that is cumulatively greater than 50% likely to be realized

Back 42

true

Front 43

Through intraperiod tax allocation, the total income tax expense for a reporting period is allocated amoung the financial statement items that gave rise to it; specifically, income (or loss) from continuing operations, discontinued operations, extraordinary items, & peior period adjustments (to the beginning retained earnings balance).

Back 43

true

Front 44

Despote the similar approaches for accounting for taxation under IFRS and U.S. GAAP differences in reported amounts for deferred taxes are among the most frequent between the two approaches because a great many of the nontax differences between IFRS & U.S. GAAP affect deferred taxes

Back 44

true

Front 45

temporary differences produce future taxable amounts when the taxable income will be increased relative to pretax accounting income in one or more future yeart. These produce deferred tax liabilities for the taxes to be paid on the future taxable amounts. Income tax expense for the year includes an amount for which payment (or receipt)is deferred in addition to the amoun for which payment is due currently. The deferred amount is the change in the tax liability (or asset).

Back 45

true