Chapter 16 Learnsmart

Front 1

Smith Company suffers an operating loss of $100K in 2015. Smith incurred taxable income of $150K in 2013 and taxable income of $75K in 2014. Smith elects to use the NOL carryback. Which years will the NOL carryback affect?

Back 1

2013 only

Front 2

A deferred tax liability or asset is based on _________________ tax rates and laws.

Back 2

enacted

Front 3

All temporary differences are categorized in which of the following ways?

Back 3

Future taxable amounts; future taxable amounts

Front 4

________________________ provide useful information to investors and creditors.

Back 4

Financial accounting standards

Front 5

____________ raise public revenues and influence behaviors.

Back 5

Tax Laws

Front 6

The enacted tax rate is

Back 6

used to measure deferred tax assets and liabilities in the years the temporary difference reverses.

Front 7

Uncertainty in income tax expenses results from

Back 7

management taking a tax position that might differ from the IRS position.

Front 8

We reduce a deferred tax __________ by a valuation allowance if it is more likely then not that some portion or all of the deferred tax asset will not be realized.

Back 8

asset

Front 9

A future taxable amount means taxable income will be ________ relative to pretax accounting income, whereas a future deductible amount means taxable income will be _____ relative to accounting income.

Back 9

increased; decreased

Front 10

A difference of when an item is included in financial income and when an item is included in taxable income is referred to as a _______ difference.

Back 10

temporary

Front 11

Items that result in deferred tax assets or liabilities that would be classified as current.

Back 11

bad debt expense; warranties; subscription revenue earned in the next 12 months

Front 12

A deferred tax asset is created when taxable gross income is ________ than financial statement revenues.

Back 12

greater

Front 13

A NOL ____________ reduces future taxable income.

Back 13

carryforward

Front 14

Regina Corporation is in its third year of operations and has net loss of $100K/ Regina had taxable income of $10K and $30K in its 1st and 2nd year of operations, respectively. They expect to be profitable within the next year. The enacted tax rate if 40%. What disclosures are required on Regina's income statement in the year of the loss?

Back 14

Income tax benefit from NOL carryback $16K; Income tax benefit from NOL carryforward $24K.

Front 15

Depreciation on tax return in excess of financial reporting depreciation expense is a ____________ difference that creates a deferred tax liability

Back 15

temporary

Front 16

Life insurance proceeds on death of executive create __________ difference that results in taxable income lower than financial reporting income

Back 16

permanent

Front 17

Receipt of rent revenue in advance is a temporary difference that creates a

Back 17

deferred tax asset

Front 18

Fines or penalties for violating a law are permanent difference that results in taxable income

Back 18

greater than financial reporting income

Front 19

______ tax allocation is allocating income taxes among financial statement components within a particular reporting period.

Back 19

Intraperiod

Front 20

Accounting for income taxes is consistent with the ___________ concept of accounting.

Back 20

accrual

Front 21

A __________ results in future taxable amounts when the temporary difference reverses.

Back 21

deferred tax liability

Front 22

Negative taxable income is another name for

Back 22

net operating loss

Front 23

In a classified balance sheet, deferred tax assets and liabilities should be classified as ______________ and _____________.

Back 23

current; noncurrent

Front 24

A _____________ difference is never deductible or never taxable.

Back 24

permanent

Front 25

Revenue being reported on the tax return after the income statement, or an expense being reported on the tax return before the income statement can cause what?

Back 25

a deferred tax liability to occur

Front 26

A permanent difference is a difference that is

Back 26

never on the tax return.

Front 27

The ______________ ______________ of an asset or liability is its original value for tax purposes reduced by any amounts included to date on tax returns.

Back 27

tax basis

Front 28

Required disclosures for taxes in the notes to the financial statements:

Back 28

total of all deferred tax assets; total valuation allowance for deferred tax assets; effect of each type of temporary difference

Front 29

Tax depreciation in excess of book depreciation is classified as

Back 29

deferred tax liability-noncurrent

Front 30

Bad debt deductions in excess of bad debt expense are classified as

Back 30

deferred tax liability-current

Front 31

Rent received in advance that will be reported in financial income two years later is a

Back 31

deferred tax asset-noncurrent

Front 32

Warranty expense for financial reporting greater than warranties paid is a

Back 32

deferred tax asset-current

Front 33

_________ tax allocation is allocating income taxes between two or more reporting periods

Back 33

interperiod

Front 34

1. Calculate the income tax on the tax return; 2. Calculate what the ending balance in the deferred tax liability or asset should be; 3. Calculate the change in the deferred tax assets and liabilities necessary.

Back 34

The steps for determining tax expense in the proper order.

Front 35

What numbers are combined to determine income tax expense?

Back 35

Changes in deferred tax assets and liabilities; change in liability for uncertain tax positions; income tax payable; change in valuation allowance for deferred tax assets

Front 36

Regina Corporation is in its third year of operations and has net loss of $100K. Regina had taxable income of $10K and $30K in its 1st and 2nd year of operations, respectively. They expect to be profitable within the next year. The enacted tax rate if 40%. Regina will carryback and carryforward the NOL. What is the net loss on the IS for financial reporting purposes in year 3?

Back 36

Net loss $60K

Front 37

Income (or loss) from continuing operations and discontinued operations should be reported separately, _____________ of tax on the income statement.

Back 37

net

Front 38

A NOL _________ must be applied to the earlier year first and then brought forward to the next year.

Back 38

carryback

Front 39

A deferred tax ________ occurs when there is a future deductible amount.

Back 39

asset

Front 40

A _________ difference is created when there is a timing difference of when an item is included in pretax accounting income and taxable income, whereas a _______ difference is one in which the amount is never included or deductible on the tax return

Back 40

temporary; permanent

Front 41

Newberry Corp has pretax accounting income of $100K. They have tax depreciation in excess of financial accounting depreciation of $20K. Bad debt expense on the income statement was $5K and bad debts for tax reporting was $2K. The enacted tax rate is 40%. What entires will be included in the JE to record tax at year end?

Back 41

Debit deferred tax asset $1200; credit income taxes payable $33,200; credit deferred tax liability $8000

Front 42

Required disclosure related to deferred tax assets and deferred tax liabilities:

Back 42

the approximate tax effect of each type of temporary difference

Front 43

Companies are required to disclose their effective tax rate reconciliation indicating the _________ and ________ of each significant reconciling item.

Back 43

amount; nature

Front 44

Deferred tax assets or liabilities that are classified as current:

Back 44

warranties and bad debts

Front 45

What must be disclosed in a company's disclosure notes regarding NOL carryforwards?

Back 45

expiration date and amount of NOL

Front 46

Rocky Corp receives rent in advance of $100K in 2015. The timing difference is expected to reverse $30K in 2016 and $70K in 2017. The enacted tax rates are 30% in 2015 and 2016 & 40% in 2017. What is the amount in the deferred tax asset account at December 31, 2015?

Back 46

$37,000

Front 47

Little Corp has pretax accounting income of $100K. Little has interest on municipal bonds of $9K. Depreciation for tax purposes is $4K greater than depreciation for financial reporting purposes. Little paid life insurance on executive officers of $5K. Warranty expense was $10K and warranties paid for tax purposes was $8K. Calculate taxable income.

Back 47

$94K

Front 48

___________ expense is calculated as the result of the combination of income tax payable and any changes in deferred tax assets and liabilities

Back 48

tax

Front 49

Interest on municipal bonds & life insurance proceeds on an insured executive are ________________

Back 49

permanent differences

Front 50

A deduction that is allowed on the tax return in one year, but is not recognized in financial income until a later period is an example of a

Back 50

temporary difference

Front 51

An amount that is deducted on the tax return but not included as an expense on the income statement & revenue included on the income statement but not on the tax return will create a

Back 51

deferred tax liability

Front 52

In year 1, Casa Corp has depreciation exp for income statement purposes of $20K. The depreciation deduction on the tax return was $30K. The enacted tax rate is 40%. if this is the only difference between pretax income and taxable income the JE to record tax expense for the year would include

Back 52

credit taxes payable of $36K; debit tax expense of $40K, credit deferred tax liability of $4K

Front 53

An underlying assumption of the balance sheet is that ________ will be recovered and __________ will be settled.

Back 53

assets; liabilities

Front 54

Deferred tax assets are recognized when temporary differences cause

Back 54

taxable income to be higher than financial income

Front 55

Companies with large investment in buildings and equipment often have large deferred tax liabilities from temporary differences in

Back 55

depreciation

Front 56

Jenson includes $100K of income on the tax return but does not report it on the income statement until the following year. This difference will result in a deferred tax

Back 56

asset

Front 57

Subscriptions collected in advance would create a deferred tax

Back 57

asset

Front 58

When a deferred tax liability is created, the deferred tax liability account is __________, and when the item reverses, the deferred tax account is ___________.

Back 58

credited;debited

Front 59

Noncurrent deferred tax liabilities should be netted against

Back 59

noncurrent deferred tax assets

Front 60

The two steps used for reporting uncertain tax positions:

Back 60

It is more likely than not that the position will be sustained & the tax benefit is measured as the largest amount of benefit that is greater than 50% likely to be realized

Front 61

Income tax expense is comprised of what components?

Back 61

current income tax payable and deferred tax amount

Front 62

Payne Corporation has a permanent difference of $20K for life insurance premiums on corporate executives. What effect does this have on the effective tax rate?

Back 62

it is higher than the statutory rate

Front 63

The benefit of future deductible amounts can be realized when?

Back 63

only if future income is at least equal to the deferred deduction amount

Front 64

They make an unprofitable company an attractive target for acquisition and the potential tax benefit can provide cash savings for the company in the future. These are the benefits of a

Back 64

NOL carryforward

Front 65

The determination as to whether a deferred tax asset or liability is current or noncurrent relies on

Back 65

the classification of the related asset or liability

Front 66

What three things occur when a company repatriates foreign earnings and repatriates cash?

Back 66

Higher effective tax rate, higher tax bill, higher tax expense

Front 67

A NOL can be carried back ______ years and carried forward 20 years.

Back 67

2

Front 68

Accelerated depreciation on the tax return in excess of depreciation on the income statement & unrealized gains from recording investments at fair value can create a deferred tax __________

Back 68

liability

Front 69

Companies are/are not required to include a reconciliation of the beginning and ending balance of the liability for unrecognized tax benefits in a disclosure note

Back 69

are

Front 70

Deferred tax assets and liabilities can be based on

Back 70

future deductible and taxable amounts & present temporary book-tax differences

Front 71

Items related to these make up other comprehensive income:

Back 71

Derivatives; investments; post-retirement benefit plans; foreign currency translations

Front 72

Included in the JE for deferred taxes:

Back 72

change in deferred tax asset or liability; income tax payable and income tax expense or benefit

Front 73

The effects of a valuation allowance account for deferred taxes:

Back 73

increases tax expense and reduces the deferred tax asset account

Front 74

Deferred tax assets result when taxable income is _______ now than later.

Back 74

higher

Front 75

When managers make decisions, they consider tax effects because their goal is to

Back 75

minimize or delay payment of taxes

Front 76

When a company takes an uncertain tax position and it is uncertain when the position will be resolved, where should liability for potential additional tax be reported on the financial statements?

Back 76

As a long term liability

Front 77

The effective tax rate equals __________ divided by pretax accounting income

Back 77

tax expense

Front 78

When estimated expenses are recognized in income statements when incurred, but deducted on tax returns in later years when paid ___________ is created

Back 78

deferred tax asset

Front 79

When a company recognizes a deferred tax asset relative to revenue, what is the effect?

Back 79

the company is prepaying the income tax on the revenue

Front 80

The income tax benefit of both a NOL carryback and a NOL carryforward is recognized when?

Back 80

in the year the NOL occurs

Front 81

The carryforward election is a choice that must be made in the year the NOL occurs, and the choice is

Back 81

irrevocable

Front 82

Deferred tax liability is _______________ for managing cash flows and minimizing taxes paid int he current year.

Back 82

more desirable

Front 83

A company may elect to forego the NOL carryback provision when

Back 83

tax rates are expected to increase

Front 84

The valuation allowance for deferred tax assets is reevaluated how often?

Back 84

at the end of each reporting period

Front 85

Deferred tax liabilities __________ risk as measured by the debt to equity ratio.

Back 85

increase

Front 86

The income tax benefit of a NOL carryforward is recognized for accounting purposes when?

Back 86

in the year the NOL occurs

Front 87

When is the effect of a change in tax rate on deferred tax liabilities and deferred tax assets reflected in the financial statements?

Back 87

in the year of the enactment of the change in tax rate

Front 88

Discontinued operations are a separate line item reported net of tax T/F

Back 88

true

Front 89

When the enacted tax rates change, deferred tax assets and liabilities are revalued and the resulting amount of the adjustment is reflected in which account

Back 89

income tax expense

Front 90

Temporary differences are

Back 90

all differences that will result in taxable or deductible amounts in future periods

Front 91

A deferred tax liability will result in tax being paid

Back 91

in a subsequent year