Chapter 18 / 20

which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates? I. accrual for product warranty liability II. subscriptions received in advance III. prepaid insurance expense I and II only

I and II only

when applying the present value test, the lease payments determined by the lessee include: I. fixed payments II. variable payments based on an index III. a margin purchase option IV. a guaranteed residual value I, II, III, and IV

I, II, III, and IV

which of the following would be included in the lease receivable account I. guaranteed residual value II. unguaranteed residual value III. executory costs IV. rental payments I, II, IV

I, II, IV

which of the following are reasons why a company is involved in leasing to other companies I. interest revenue II. high residual values III. tax incentives IV. guaranteed bargin purchase options I, II, and III

I, II, and III

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in CHART future taxable amounts , future deductible amounts YES YES

YES YES

a temporary difference arises when a revenue item is reported for tax purposes in a. period CHART - after it is reported in financial income, before it is reported in financial income YES YES

YES YES

taxable income of a corporation differs from pretax financial income because of CHART permanent differences and temporary differences YES YES

YES YES

Tanner, Inc. incurred a financial and taxable loss for 2025. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2025 financial statements? a. The reduction of the loss should be reported as a prior period adjustment. b. The refund claimed should be reported as a deferred charge and amortized over five years. c. The refund claimed should be reported as revenue in the current year. d. The refund claimed should be shown as a reduction of income tax expense in 2025.

d. The refund claimed should be shown as a reduction of income tax expense in 2025.

Uncertain tax positions I. Are positions for which the tax authorities may disallow a deduction in whole or in part. II. Include instances in which the tax law is clear and in which the company believes an audit is likely. III. Give rise to tax expense by increasing payables or increasing a deferred tax liability. a. I, II, and III. b. I and III only. c. II only. d. I only.

d. I only.

If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is therefore accounted for as a capital lease, who records the asset on its books and which party records interest expense during the lease period? Party recording the asset on its books, Party recording interest expense a. Seller-lessee, Purchaser-lessor b. Purchaser-lessor, Seller-lessee c. Purchaser-lessor, Purchaser-lessor d. Seller-lessee, Seller-lessee

d. Seller-lessee, Seller-lessee

A company uses the equity method to account for an investment. This would result in what type of difference and in what type of deferred income tax? Type of Difference, Deferred Tax a. Permanent Asset b. Permanent Liability c. Temporary Asset d. Temporary Liability

d. Temporary Liability

An example of a permanent difference is a. proceeds from life insurance on officers. b. interest expense on money borrowed to invest in municipal bonds. c. insurance expense for a life insurance policy on officers. d. all of these.

d. all of these

Major reasons for disclosure of deferred income tax information is (are) a. better assessment of quality of earnings. b. better predictions of future cash flows. c. that it may be helpful in setting government policy. d. all of these.

d. all of these.

Additional lease adjustments that affect the measurement of lease assets and liabilities include each of the following except? 1. internal costs

1. internal costs

the net lease receivable in a direct financing lease 1. is the lease receivable minus the deferred gross profit

1. is the lease receivable minus the deferred gross profit

in an operating lease, the lessee records 1. lease expense

1. lease expense

the right of use asset is increased by 1. lease prepayments made by the lessee and initial direct cots incurred by the lessee

1. lease prepayments made by the lessee and initial direct cots incurred by the lessee

all of the following are procedures for the computation of deferred income taxes except to 1. measure the total deferred tax liability for deductible temporary differences

1. measure the total deferred tax liability for deductible temporary differences

when a company sells property and then leases it back in an arrangement that qualifies as a financing transaction (failed sale), which of the following is not correct accounting treatment on the books of the lease 1. no further depreciation is recorded on the asset

1. no further depreciation is recorded on the asset

the classifications of a lease by the lessee are 1. operating and finance leases

1. operating and finance leases

Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported as 1. operating income

1. operating income

From the lessee's perspective, in the earlier years of a lease 1. operating leases will cause income to be greater than with financing leases

1. operating leases will cause income to be greater than with financing leases

in a finance lease. the lessee records 1. amortization expense and interest expense

1. present value of the lease payments

the amount to be recorded as the cost of an asset under a finance lease is equal to 1. present value of the lease payments

1. present value of the lease payments

which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized information financial income 1. product warranty liabilities

1. product warranty liabilities

the basic difference between a direct financing lease and a sales types lease is the 1. recognition of the profit on the sale

1. recognition of the profit on the sale

when a company sells property and then leases it back, any gain on the sale should usually be 1. recognized in the current year

1. recognized in the current year

companies are permitted to offset an balances in income taxes payable against 1. related income tax refund receivable or prepaid income taxes balances

1. related income tax refund receivable or prepaid income taxes balances

in a finance lease, the lease receivable amount includes the present value of 1. rental payments plus the present value of the expected residual value probable of being owned

1. rental payments plus the present value of the expected residual value probable of being owned

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be 1. reported as an adjustment to income tax expense in the period of change

1. reported as an adjustment to income tax expense in the period of change

which of the following is not considered a permanent difference? 1. stock based compensation expense

1. stock based compensation expense

a major distinction between temporary and permanent difference is 1. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

1. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

Recognition of tax benefits in the loss year due to a loss carryforward requires 1. the establishment of a deferred tax asset

1. the establishment of a deferred tax asset

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if 1. the future tax rates have been enacted into law

1. the future tax rates have been enacted into law

which of the following is a correct statement of one of the classification tests 1. the lease term is equal to or more than 75% of the estimated economic life of the leased property

1. the lease term is equal to or more than 75% of the estimated economic life of the leased property

what impact does a margin purchase option have on the present value of the lease payments computed by the lessee? 1. the lessee must increase the present value of the lease payments by the present value of the option price

1. the lessee must increase the present value of the lease payments by the present value of the option price

when a lease is classified as an operating lease 1. the lessee records a right of use asset and a lease liability

1. the lessee records a right of use asset and a lease liability

If none of the five lease tests are satisfied in a sale-leaseback transaction, which of the following statements is incorrect? 1. the purchaser-lessor records a gain

1. the purchaser-lessor records a gain

A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts 1. the sales price less the present value of the unguaranted residual value

1. the sales price less the present value of the unguaranted residual value

in computing the present value of the lease payments, the lessee should 1. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee

1. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee

When lessors account for residual values related to leased assets, they 1. include the residual value in the receivable measurement because it is assumed the residual value will be realized

1. include the residual value in the receivable measurement because it is assumed the residual value will be realized

At the December 31, 2024 balance sheet date, Unruh Corporation reports an accused recieveable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2025, a future taxable amount will occur and 1. Unruh will record a decrease in a deferred tax liability in 2025

1. Unruh will record a decrease in a deferred tax liability in 2025

accounting for income taxes can result in the reporting of deferred taxes as 1. a concurrent liability

1. a concurrent liability

in a direct financing lease 1. a lessor relinquishes control of the asset to the lessee but there is also involvement by a third party

1. a lessor relinquishes control of the asset to the lessee but there is also involvement by a third party

which of the following best describes current practice in accounting for leases? 1. all long term leases are capitalized

1. all long term leases are capitalized

companies are recquired to disclose the total of each of the following except 1. all of these choices must be disclosed

1. all of these choices must be disclosed

which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income 1. an installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes

1. an installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes

a single lease expense is recognized on the income statement for 1. an operating lease

1. an operating lease

the initial direct costs of leasing 1. are expensed in the period of the sale under a sales-type lease

1. are expensed in the period of the sale under a sales-type lease

Deferred taxes should be presented on the balance sheet 1. as a noncurrent amount

1. as a noncurrent amount

a lesseee with a financing lease containing a bargin purchase option should depreciate the leased asset over 1. asset's remaining economic life

1. asset's remaining economic life

deferred tax expense is the 1. change in the deferred tax liability balance from the beginning to the end of the accounting period

1. change in the deferred tax liability balance from the beginning to the end of the accounting period

which of the following is not one of the lease classification tests 1. collectibility

1. collectibility

Recognizing a valuation allowance for a deferred tax asset requires that a company 1. consider all positive and negative information in determining the need for a valuation allowance

1. consider all positive and negative information in determining the need for a valuation allowance

under the operating lease method, the lessor 1. continues to recognize the underlying asset on its balance sheet and recognizes lease revenue

1. continues to recognize the underlying asset on its balance sheet and recognizes lease revenue

The Lease Liability account should be disclosed as 1. current portions in current liabilities and the remainder in concurrent liabilities

1. current portions in current liabilities and the remainder in concurrent liabilities

any gross profit resulting from a direct financing lease agreement is 1. deferred and recognized over the life of the lease

1. deferred and recognized over the life of the lease

Taxable income of a corporation 1. differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting

1. differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting

which of the following is not an advantage to the lessee in sale-leaseback transaction 1. elimination of lease liability on the balance sheet

1. elimination of lease liability on the balance sheet

which of the following differences would result in future taxable amounts? 1. expenses or losses that are tax deductible before they are recognized in financial income

1. expenses or losses that are tax deductible before they are recognized in financial income

If the lease transfers control (or ownership) of the underlying asset to a lessee, then the lease is classified as an 1. financing lease

1. financing lease

which of the following described the lease term test 1. if the lease term is 75% or more of the economic life, it is a financing lease

1. if the lease term is 75% or more of the economic life, it is a financing lease

in accounting for a finance lease, 1. include the present value of a guaranteed residual in the calculation of the lease liability account and in the right of use asset account

1. include the present value of a guaranteed residual in the calculation of the lease liability account and in the right of use asset account

which of the following will not result in a temporary difference? 1. interest recieeved on municipal obligations

1. interest recieeved on municipal obligations

a company records an unrealized loss on trading securities. this would result in what type of difference and in what type of deferred income tax? Type of Difference, Deferred Tax a. Permanent Asset b. Permanent Liability c. Temporary Asset d. Temporary Liability

c. Temporary Asset

Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be a. a balance in the Unearned Rent account at year end. b. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. c. a fine resulting from violations of OSHA regulations. d. making installment sales during the year.

c. a fine resulting from violations of OSHA regulations

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that a. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal. b. at the end of the lease the property usually can be purchased by the lessee. c. a lease reflects the purchase or sale of a quantifiable right to the use of property. d. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.

c. a lease reflects the purchase or sale of a quantifiable right to the use of property.

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when a. it is probable and can be reasonably estimated. b. there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities. c. it is more likely than not that the tax position will be sustained upon audit. d. Any of the above exist.

c. it is more likely than not that the tax position will be sustained upon audit.

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes. a. item II only b. items I and II only c. items II and III only d. items I and IV only

c. items II and III only

For a sales-type lease, a. the sales price includes the present value of the unguaranteed residual value. b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d. none of these

c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.