Acc 306 Chapter 16 – Flashcards
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GAAP regarding accounting for income taxes requires the following procedure: A. Computation of deferred tax assets and liabilities based on temporary differences. B. Computation of deferred income tax based on permanent differences. C. Computation of income tax expense based on taxable income. D. Computation of deferred income tax based on temporary and permanent differences.
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A. Computation of deferred tax assets and liabilities based on temporary differences.
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Which of the following causes a temporary difference between taxable and pretax accounting income? A. Investment expenses incurred to generate tax-exempt income. B. MACRS used for depreciating equipment. C. The dividends received deduction. D. Life insurance proceeds received due to the death of an executive.
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B. MACRS used for depreciating equipment.
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Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability? A. Interest income on municipal bonds. B. Proceeds from life insurance received due to death of an executive. C. Prepaid rent. D. None of the above.
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C. Prepaid rent.
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A result of inter-period tax allocation is that: A. Large fluctuations in a company's tax liability are eliminated. B. The income tax expense is allocated among the income statement items that caused the expense. C. The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year. D. The income tax expense shown in the income statement is equal to the deferred taxes for the year.
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C. The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year.
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Which of the following creates a deferred tax liability? A. An unrealized loss from recording inventory at lower of cost or market. B. Accelerated depreciation in the tax return. C. Estimated warranty expense. D. Subscriptions collected in advance.
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B. Accelerated depreciation in the tax return.
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Which of the following circumstances creates a future taxable amount? A. Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned. B. Accrued compensation costs for future payments. C. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting. D. Investment expenses incurred to obtain tax-exempt income (not tax deductible).
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C. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting.
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Which of the following usually results in an increase in a deferred tax liability? A. Accrual of estimated operating expenses. B. Revenue collected in advance. C. Prepaid operating expenses, currently deductible. D. All of the above are correct.
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C. Prepaid operating expenses, currently deductible.
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Ignoring operating expenses and additional sales in 2014, what deferred tax liability would Isaac report in its year-end 2014 balance sheet? A. $54 million B. $144 million C. $126 million D. $180 million.
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C. $126 million. Total future taxable income ($420 million) x tax rate of 30% = $126 million.
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Suppose that, in 2014, legislation revised the income tax rates so that Isaac would be taxed in 2015 and beyond at 40%, rather than 30%. Assume that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses and additional sales in 2014, what deferred tax liability would Isaac report in its year-end 2014 balance sheet? A. $168 million B. $144 million C. $126 million D. $240 million.
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A. $168 million. Total future taxable income ($420 million) x tax rate of 40% = $168 million.
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In the statement of cash flows, by using the indirect method for determining cash flows from operating activities, a decrease in deferred tax liabilities is: A. Added to net income. B. Subtracted from net income. C. Ignored. D. Included under financing activities.
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B. Subtracted from net income.
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Which of the following statements is true as to GAAP regarding accounting for income taxes, and its use of the asset and liability approach? A. Considerable flexibility is permitted in the balance sheet classification of deferred tax amounts. B. The approach recognizes the time value of money. C. The approach is consistent with a balance sheet emphasis of U.S. GAAP and the International Financial Reporting Standards (IFRS). D. The approach is consistent with cash basis accounting.
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C. The approach is consistent with a balance sheet emphasis of U.S. GAAP and the International Financial Reporting Standards (IFRS)
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Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was: A. $390 million. B. $210 million. C. $150 million. D. $180 million.
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B. $210 million.
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During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $15 million. Stern's taxable income for the year would be: A. $30 million. B. $60 million. C. $50 million. D. $45 million.
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B. $60 million.
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Using straight-line depreciation for financial reporting purposes and MACRS for tax purposes in the first year of an asset's life creates a: A. Future deductible amount. B. Permanent difference not requiring inter-period tax allocation. C. Deferred tax asset. D. Deferred tax liability.
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D. Deferred tax liability.
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A deferred tax asset represents a: A. Future income tax benefit. B. Future cash collection. C. Future tax refund. D. Future amount of money to be paid out.
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A. Future income tax benefit.
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Of the following temporary differences, which one ordinarily creates a deferred tax asset? A. Intangible drilling costs. B. MACRS depreciation. C. Rent received in advance. D. Installment sales.
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C. Rent received in advance.
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Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset? A. Tax depreciation in excess of book depreciation. B. Revenue collected in advance. C. The installment sales method for tax purposes. D. None of the above.
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B. Revenue collected in advance.
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Which of the following creates a deferred tax asset? A. An unrealized loss from recording investments at fair value. B. Prepaid insurance. C. An unrealized gain from recording investments at fair value. D. Accelerated depreciation in the tax return.
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A. An unrealized loss from recording investments at fair value.
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Which of the following circumstances creates a future deductible amount? A. Earning of non-taxable interest on municipal bonds. B. Sales of property (installment method for tax purposes). C. Prepaid advertising expense. D. Accrued warranty expenses.
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D. Accrued warranty expenses
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Estimated employee compensation expenses earned during the current period but expected to be paid in the next period causes: A. An increase in a deferred tax asset. B. A decrease in a deferred tax asset. C. An increase in a deferred tax liability. D. A decrease in a deferred tax liability.
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A. An increase in a deferred tax asset.
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A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record: A. An increase in a deferred tax asset. B. A decrease in a deferred tax asset. C. An increase in a deferred tax liability. D. A decrease in a deferred tax liability.
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B. A decrease in a deferred tax asset.
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In 2013, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2013, Magic Table Inc incurs: A. An increase in a deferred tax asset. B. A decrease in a deferred tax asset. C. An increase in a deferred tax liability. D. A decrease in a deferred tax liability.
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A. An increase in a deferred tax asset.
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Which of the following usually results in an increase in a deferred tax asset? A. Accelerated depreciation for tax reporting and straight-line depreciation for financial reporting. B. Prepaid insurance. C. Subscriptions delivered for which customers had paid in advance. D. None of the above is correct.
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D. None of the above is correct.
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At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A disclosure note reveals that the entire $400,000 will be earned in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a: A. Noncurrent deferred tax liability. B. Noncurrent deferred tax asset. C. Current deferred tax liability. D. Current deferred tax asset.
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D. Current deferred tax asset.
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The valuation allowance account that is used in conjunction with deferred tax assets is a(n): A. Liability. B. Component of shareholders' equity. C. Asset. D. Contra asset.
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D. Contra asset.
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The valuation allowance account that is used in conjunction with deferred taxes relates: A. Only to deferred tax liabilities. B. To both deferred tax assets and liabilities. C. Only to deferred tax assets. D. Only to income taxes receivable due to net operating loss carrybacks.
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C. Only to deferred tax assets.
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In 2012, HD had reported a deferred tax asset of $90 million with no valuation allowance. At December 31, 2013, the account balances of HD Services showed a deferred tax asset of $120 million before assessing the need for a valuation allowance and income taxes payable of $80 million. HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. HD made no estimated tax payments during 2013. What amount should HD report as income tax expense in its 2013 income statement? A. $50 million. B. $80 million. C. $86 million. D. $116 million.
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C. $86 million. The tax expense of $80 million is adjusted for two items. (1) It is reduced by the $30 million increase in the deferred tax asset, and (2) it is increased by the $36 million increase in the valuation allowance (30% x $120 million).
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For classification purposes, a valuation allowance: A. Is allocated proportionately between deferred tax assets and deferred tax liabilities. B. Is allocated proportionately between the current and noncurrent portions of the deferred tax asset. C. Is allocated proportionately between the current and noncurrent portions of the deferred tax liability. D. Is added to the deferred tax asset.
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B. Is allocated proportionately between the current and noncurrent portions of the deferred tax asset
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If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is: A. Probable that sufficient taxable income will be generated in future years to realize the full tax benefit. B. Probable that sufficient financial income will be generated in future years to realize the full tax benefit. C. More likely than not that sufficient taxable income will be generated in future years to realize the full tax benefit. D. More likely than not that sufficient financial income will be generated in future years to realize the full tax benefit.
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C. More likely than not that sufficient taxable income will be generated in future years to realize the full tax benefit.
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Which of the following causes a permanent difference between taxable income and pretax accounting income? A. The installment method used for sales of property. B. MACRS depreciation method used for equipment. C. Interest income on municipal bonds. D. Percentage-of-completion method for long-term construction contracts.
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C. Interest income on municipal bonds.
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In reconciling net income to taxable income, interest earned on municipal bonds is: A. Ignored. B. A temporary difference. C. A reversing difference. D. A permanent difference.
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D. A permanent difference.
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Which of the following causes a permanent difference between taxable income and pretax accounting income? A. Advance collections of revenues. B. MACRS depreciation method used for equipment. C. The installment method used for sales of merchandise. D. Interest earned on municipal securities.
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D. Interest earned on municipal securities.
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Which of the following would never require reporting deferred tax assets or deferred tax liabilities? A. Depreciation on equipment. B. Accrual of warranty expense. C. Life insurance premiums for the payer's benefit. D. Rent revenue received in advance.
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C. Life insurance premiums for the payer's benefit.
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When tax rates are changed subsequent to the creation of a deferred tax asset or liability, GAAP requires that: A. All deferred tax accounts be adjusted to reflect the new tax rates. B. The beginning deferred tax accounts are left unchanged. C. Only the current deferred tax accounts are adjusted to reflect the new tax rates. D. Only the noncurrent deferred tax accounts are adjusted to reflect the new tax rates.
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A. All deferred tax accounts be adjusted to reflect the new tax rates.
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Pretax accounting income for the year ended December 31, 2013, was $50 million for Truffles Company. Truffles' taxable income was $60 million. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The enacted tax rate is 30% for 2013 and 40% thereafter. What amount should Truffles report as the current portion of income tax expense for 2013? A. $15 million. B. $18 million. C. $20 million. D. $24 million.
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B. $18 million. $60,000 x 30%
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The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $150,000 at December 31, 2013. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 30% for 2013 and 40% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2013, balance sheet as: A. A liability of $45,000. B. A liability of $60,000. C. An asset of $45,000. D. An asset of $60,000.
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B. A liability of $60,000. $150,000 x 40%
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The effect of a change in tax rates: A. Results in a prior period adjustment. B. Is allocated between discontinued operations and continuing operations. C. Is reported separately after extraordinary items. D. Is reflected in income from continuing operations.
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D. Is reflected in income from continuing operations.
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Giada Foods reported $940 million in income before income taxes for 2013, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for 2013 was 35%, but the enacted rate for years after 2013 is 40%. The balance in the deferred tax liability in the December 31, 2013, balance sheet is: A. $16 million. B. $35 million. C. $40 million. D. $56 million.
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C. $40 million. $100,000 x 40% = $40,000 deferred tax liability Permanent differences have no effect on deferred taxes.
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In its first year of operations, Woodmount Corporation reported pretax accounting income of $500 million for the current year. Depreciation reported in the tax return in excess of depreciation in the income statement was $60 million. The excess tax will reverse itself evenly over the next three years. The current year's tax rate of 40% will be reduced under the current law to 35% next year and 30% for all subsequent years. At the end of the current year, the deferred tax liability related to the excess depreciation will be: A. $21 million. B. $24 million. C. $18 million. D. $19 million.
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D. $19 million. 20 * .35 = 7. 40*.3 = 12. 12 + 7 = 19
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Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000, and accrued warranty expense of $400 on the books although no warranty work was performed. What is Bumble Bee's pretax accounting income? A. $4,400. B. $3,600. C. $9,600. D. $2,600.
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C.) 9600. 7000 - 400 + 3000
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For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and MACRS depreciation amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's income tax payable currently, assuming a tax rate of 40%? A. 19.6 million. B. 25.2 million. C. 27.6 million. D. 29.2 million.
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C. 27.6 million.
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For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and MACRS depreciation amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income? A. $73 million. B. $69 million. C. $63 million. D. $49 million.
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B. $69 million.
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Under current tax law, generally a net operating loss may be carried back: A. 2 years. B. 5 years. C. 15 years. D. 20 years.
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A. 2 years.
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Under current tax law a net operating loss may be carried forward up to: A. 5 years. B. 10 years. C. 15 years. D. 20 years.
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D. 20 years.
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If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is more likely than not that: A. Sufficient accounting income will be generated in future years to realize the full tax benefit. B. Sufficient accounting and taxable income will exist in future years to realize the full tax benefit. C. Sufficient taxable income will be generated in future years to realize the full tax benefit. D. Tax rates will not change in future years.
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C. Sufficient taxable income will be generated in future years to realize the full tax benefit.
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A net operating loss (NOL) carryforward cannot result in the balance sheet at the end of the NOL year showing: A. A receivable under current assets for an income tax refund. B. A current deferred tax asset. C. A noncurrent deferred tax asset. D. Both a current and a noncurrent deferred tax asset.
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A. A receivable under current assets for an income tax refund.
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The tax effect of a net operating loss (NOL) carryback usually: A. Results in a current receivable at the end of the NOL year. B. Is subject to a valuation allowance. C. Is reflected as deferred tax asset at the end of the NOL year. D. Is reflected as a deferred tax liability at the end of the NOL year.
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A. Results in a current receivable at the end of the NOL year.
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Recognizing tax benefits in a loss year due to a net operating loss carryforward requires: A. Creating a tax refund receivable. B. Note disclosure only. C. Creating a deferred tax asset. D. Creating a deferred tax liability.
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C. Creating a deferred tax asset.
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In 2013, Bodily Corporation reported $300,000 pretax accounting income. The income tax rate for that year was 30%. Bodily had an unused $120,000 net operating loss carryforward from 2011 when the tax rate was 40%. Bodily's income tax payable for 2013 would be A. $54,000 B. $42,000 C. $90,000 D. $72,000
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A. $54,000
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According to GAAP for accounting for income taxes, when a company has a net operating loss carryforward: A. A deferred tax liability is recognized. B. A receivable is created. C. A deferred tax equity account is created. D. A deferred tax asset is recorded along with any applicable valuation allowance.
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D. A deferred tax asset is recorded along with any applicable valuation allowance.
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Before considering a net operating loss carryforward of $80 million, Fama Corporation reported $200 million of pretax accounting and taxable income in the current year. The income tax rate for all previous years was 40%. On January 1 of the current year, a new tax law was enacted, reducing the rate to 30% effective immediately. Fama's income tax payable for the current year would be: A. $48 million. B. $28 million. C. $60 million. D. $36 million.
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D. $36 million.
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Reliable Corp. had a pretax accounting income of $30 million this year. This included the collection of $40 million of life insurance proceeds when several key executives died in a plane crash. Temporary differences for the current year netted out to zero. Reliable has had a 40% tax rate and taxable income of $120 million over the previous two years and plans to elect an operating loss carryback for any NOL. In the current year financial statements, Reliable would report: A. Net income of $34 million. B. A tax benefit of $10 million. C. Net income of $26 million. D. A deferred tax asset of $4 million.
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A. Net income of $34 million.
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For reporting purposes, current deferred tax assets and current deferred tax liabilities are: A. Netted against one another in the balance sheet. B. Reported separately in the balance sheet. C. Reflected only in the footnotes. D. Combined respectively with noncurrent deferred tax assets and noncurrent deferred tax liabilities in the balance sheet.
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A. Netted against one another in the balance sheet.
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Financial statement disclosure of the components of income tax expense: A. Must be made on the face of the income statement. B. Usually is included in the disclosure notes. C. Is not necessary when only permanent differences exist. D. Must include the amount of cash paid for taxes.
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B. Usually is included in the disclosure notes.
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At December 31, 2013, Moonlight Bay Resorts had the following deferred income tax items: Deferred tax asset of $54 million related to a current liability Deferred tax asset of $36 million related to a noncurrent liability Deferred tax liability of $120 million related to a noncurrent asset Deferred tax liability of $72 million related to a current asset Moonlight Bay should report in the current section of its December 31, 2013, balance sheet a: A. Noncurrent asset of $90,000 and a non-current liability of $192,000. B. Current tax liability of $18,000. C. Noncurrent asset of $84,000 and a non-current liability of $45,000. D. Noncurrent liability of $30,000. The net current amount is the $72 million current liability minus the $54 million current asset.
answer
B. Current tax liability of $18,000
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Due to differences between depreciation reported in the income statement and depreciation deducted for tax purposes, Lucas Corp. has $2 million in temporary differences that will increase taxable income next year. Assuming that Lucas has no other temporary differences, deferred income taxes should be reported in this year's ending balance sheet as a: A. Current deferred asset. B. Noncurrent deferred tax liability. C. Current deferred tax liability. D. Noncurrent deferred tax asset.
answer
B. Noncurrent deferred tax liability.
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On its tax return at the end of the current year Webnet Inc. has $6 million of tax depreciation in excess of depreciation in its income statement. A disclosure note reveals that $1 million of the $6 million difference will reverse itself next year, and the remainder will reverse over the next 4 years. In the absence of other temporary differences, in the balance sheet at the end of the current year Webnet would report: A. Both a current deferred tax asset and a noncurrent deferred tax asset. B. A noncurrent deferred tax asset. C. Both a current deferred tax liability and a noncurrent deferred tax liability. D. A noncurrent deferred tax liability.
answer
D. A noncurrent deferred tax liability.
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Madison Company has taken a position in its tax return to claim a tax credit of $60 million (direct reduction in taxes payable) and has determined that its sustainability is "more likely than not," based on its technical merits. The tax credit would be a direct reduction in current taxes payable. Madison believes the likelihood that a $60 million, $36 million, or $12 million tax benefit will be sustained is 25%, 30%, and 45%, respectively. Madison's taxable income is $510 million for the year. Its effective tax rate is 40%. What is Madison's income tax expense for the year? A. $24 million. B. $144 million. C. $168 million. D. $204 million.
answer
C. $168 million.
