chapter 18

Tax benefits arising from an operating loss carryforward are a.recorded as a deferred tax liability. b.recorded as a deferred tax asset. c.not recorded. d.recorded as a tax expense.

b.recorded as a deferred tax asset.

Items that are allowable deductions for income tax reporting but do not qualify as expenses under GAAP are known as a.quasi differences. b.material differences. c.permanent differences. d.temporary differences.

c.permanent differences.

What is the formula to calculate the tax liability? a.Pretax Income ÷ Applicable Tax Rate = Income Tax Payable b.Taxable Income ÷ Applicable Tax Rate = Income Tax Payable c.Taxable Income × (1 - Applicable Tax Rate) = Income Tax Payable d.Taxable Income × Applicable Tax Rate = Income Tax Payable

d.Taxable Income × Applicable Tax Rate = Income Tax Payable

If a corporation's taxable income for the past 2 years is not enough to offset the amount of the currently reported operating loss, it then sequentially carries forward the loss for up to as many as _____ years and offsets the loss against future taxable income, if there is any. a.5 b.3 c.10 d.20

20

The amount owed to the IRS is recorded in the accounting records in which of the following accounts? a.Income Tax Payable b.Deferred Tax Liability c.Deferred Tax Expense d.Income Tax Expense

a.Income Tax Payable

The second step for an uncertain position is to a.measure the tax benefit as the largest dollar amount above the "more likely than not" threshold. b.evaluate whether the tax position is "more likely than not". c.measure the tax liability as the smallest dollar amount above the "more likely than not" threshold. d.recognize the deferred tax asset up to the amount for which it is probable that the company will have sufficient future taxable income against which to utilize the deferred tax asset.

a.measure the tax benefit as the largest dollar amount above the "more likely than not" threshold.

A corporation measures a deferred tax asset for an operating loss carryforward using what tax rate? a.Effective interest rate b.Enacted future tax rate c.Implicit rate d.Statutory rate

b.Enacted future tax rate

Which of the following is not required by GAAP for intraperiod income tax allocation to income (or loss) related to a.prior period adjustments. b.discontinued operations. c.income from operations. d.retrospective adjustments.

c.income from operations.

Differences between pretax financial accounting income and taxable income that are expected to reverse in one or more future accounting periods are called a.material differences. b.quasi differences. c.temporary differences. d.permanent differences.

c.temporary differences.

A corporation must recognize the tax benefit of an operating loss carryforward in the period of the loss as a(n) a.long-term asset. b.expense. c.liability. d.current asset.

currentr asset

Area In reference to intraperiod income tax allocation, a corporation will determine the amount of the income tax expense or tax credit by applying the __________ tax rate to each item. a.statutory b.intraperiod c.incremental d.effective

incremental

Fit n Fun Corporation reports the following pretax accounting (and taxable) income items during 2019:Income from continuing operations$100,000 ($400,000 revenues - $300,000 expenses)Loss from operations of discontinued division(8,000)Gain from disposal of discontinued division20,000Assume a tax rate of 15% on the first $45,000 of income and a rate of 30% on income in excess of $45,000. What is the amount of taxable income? a.$112,000 b.$100,000 c.$108,400 d.$92,000

112,000

Fit n Fun Corporation reports the following pretax accounting (and taxable) income items during 2019:Income from continuing operations$100,000 ($400,000 revenues - $300,000 expenses)Loss from operations of discontinued division(8,000)Gain from disposal of discontinued division20,000Assume a tax rate of 15% on the first $45,000 of income and a rate of 30% on income in excess of $45,000. What is the amount of income tax expense for Fit and Fun? a.$23,250 b.$30,000 c.$16,500 d.$15,000

23250

Fit n Fun Corporation reports the following pretax accounting (and taxable) income items during 2019:Income from continuing operations$100,000 ($400,000 revenues - $300,000 expenses)Loss from operations of discontinued division(8,000)Gain from disposal of discontinued division20,000Assume a tax rate of 15% on the first $45,000 of income and a rate of 30% on income in excess of $45,000. What will be the amount of the income tax payable? a.$26,850 b.$23,250 c.$15,000 d.$30,000

26,850

Scooter Company began operations in 2019 and, for that calendar year, reported an operating loss of $230,000. Due to sufficient verifiable positive evidence, no valuation allowance was established to reduce the deferred tax asset as of December 31, 2019. During 2020, Scooter reported pretax accounting income of $350,000. Assuming an income tax rate of 30%, what should Scooter record as income tax payable at the end of 2020? a.$0 b.$69,000 c.$105,000 d.$36,000

36000 (350,000-230,000)*30%

How many steps must a corporation make to measure and record the amount of its current and deferred income taxes? a.4 b.5 c.6 d.7

6

Jackie Mo Company is in its first year of business. The company has taxable income of $40,000 (tax rate 30%) for the year and reports a deferred tax asset of $2,200 at the end of the year. What amount would you debit Income Tax Expense for at year-end, assuming that Jackie Mo does not use a valuation allowance? a.$9,800 b.$13,540 c.$10,460 d.$14,400

9,800

Which of the following statements regarding the objectives of financial accounting and the Internal Revenue Code is true? a.An objective of financial accounting is to provide useful information to decision makers. b.Most accountants favor conformity between financial accounting and the Internal Revenue Code in all instances. c.The overall objective of the Internal Revenue Code is to enable investors to make buy-hold-sell decisions. d.The objectives of financial accounting and the Internal Revenue Code are the same.

a.An objective of financial accounting is to provide useful information to decision makers.

Which of the following statements is not true? a.For intraperiod income tax allocation purposes, on its income statement a corporation reports the income tax expense applicable to its pretax income from continuing operations together with the income tax related to other components of income. b.A corporation matches its income tax expense against the components of its pretax income. c.Comprehensive income is reported net of related income tax effects. d.Disclosures related to tax credits are noted parenthetically or in a note to the financial statements.

a.For intraperiod income tax allocation purposes, on its income statement a corporation reports the income tax expense applicable to its pretax income from continuing operations together with the income tax related to other components of income.

Which of the following statements is not true? a.Unlike U.S. GAAP, IFRS require that a company report its deferred tax balances as separate items on its balance sheet, with some offset of deferred tax assets and liabilities allowed. b.IFRS require that tax effects of any equity adjustments be reported directly in equity. c.Under U.S. GAAP, current or noncurrent classification is allowed depending on the classification of the related asset or liability that gives rise to the temporary difference. d.For an uncertain tax position, a company first evaluates whether the tax position is "more likely than not" to be upheld during its audit.

a.Unlike U.S. GAAP, IFRS require that a company report its deferred tax balances as separate items on its balance sheet, with some offset of deferred tax assets and liabilities allowed.

The first step to measure and record the amount of current and deferred income taxes is a.apply the Internal Revenue Code to determine the company's taxable income and income tax obligation. b.measure the year-end deferred tax liability for each future taxable amount using the applicable tax rate. c.record the income tax expense and income tax obligation. d.identify temporary differences.

a.apply the Internal Revenue Code to determine the company's taxable income and income tax obligation.

A corporation matches its income tax expense against the major components that do not include a.cash flows. b.discontinued operations. c.prior period adjustments. d.extraordinary items.

a.cash flows.

Permanent differences impact a.current tax liabilities. b.deferred tax liabilities. c.deferred tax assets. d.current deferred taxes.

a.current tax liabilities.

Trio Company has a deferred tax liability at the end of 2019 of $120 as a result of a temporary future taxable amount of $400. If, in May 2020, Congress increases the income tax rate from 30% to 35%, then Trio will record the change as a a.debit to Income Tax Expense of $20. b.credit to Deferred Tax Liability of $120. c.credit to Deferred Tax Liability of $140. d.debit to Income Tax Expense of $140

a.debit to Income Tax Expense of $20.

All of the following involve a temporary difference for purposes of income tax allocation except a.interest on municipal bonds. b.MACRS depreciation for tax purposes and straight-line for accounting purposes. c.product warranty expenses. d.gross profit on installment sales for tax purposes.

a.interest on municipal bonds.

During its first year of operations, Penn Mac Corporation reported an operating loss of $1 million for financial reporting and income tax purposes. The tax rate is 40%. What amount can Penn Mac carry forward as a tax benefit, if any? a.$0 b.$400,000 c.It can carry $200,000 back 1 year and $200,000 forward 1 year. d.It can only carry back an amount.

b.$400,000

Which of the following is not an example of an expense subtracted to compute pretax financial income before it is deducted to compute taxable income? a.Loss on inventory b.Interest expense c.Product warranty cost d.Bad debt expense

b.Interest expense

Which of the following statements is not true? a.Tax credits are a form of permanent difference. b.When a corporation reports an operating loss in a given year, the IRC allows the corporation to carry back the loss to offset taxable income reported in previous years and/or to carry forward the loss to offset future taxable income. c.A corporation reports some items of revenue and expense in one period for financial purposes but in an earlier or later period for tax purposes. d.Differences between pretax and taxable income are due to measurement and timing differences.

b.When a corporation reports an operating loss in a given year, the IRC allows the corporation to carry back the loss to offset taxable income reported in previous years and/or to carry forward the loss to offset future taxable income.

When a corporation reports an operating loss in a given year, the tax code allows the corporation to a.carry back the loss but not carry forward the loss. b.carry back the loss 2 years and, if necessary, carry forward the remainder of the loss. c.carry back the loss only. d.carry forward the loss only.

d.carry forward the loss only.

A corporation matches its income tax expense against the major components that do not include a.extraordinary items. b.discontinued operations. c.prior period adjustments. d.cash flows.

d.cash flows.

The difference between the tax benefit recognized in the financial statements and the tax benefit reflected in the tax return would result in all of the following except a(n) a.increase in a deferred tax liability. b.increase in the income tax liability. c.decrease in a deferred tax asset. d.decrease in a deferred tax liability.

d.decrease in a deferred tax liability.

The temporary difference will result in a deferred tax liability when, in the year that the difference originates, pretax financial income is a.equal to taxable income. b.less than taxable income. c.reduced by prior year tax. d.greater than taxable income.

d.greater than taxable income.

Interperiod income tax allocation is based on the assumption that a.the amount of income tax expense reported on the income statement should be the same as the income tax obligation on the corporation's income tax return. b.permanent differences ultimately reverse and require interperiod tax allocation. c.total income tax expense should be apportioned among numerous line items on the income statement. d.permanent differences do not have deferred tax consequences.

d.permanent differences do not have deferred tax consequences.