Chapter 19

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Taxable / Future Deductible 1)YesYes 2)YesNo 3)NoYes 4)NoNo

1) Future Taxable / Future Deductible; Depreciation can result in both future taxable amounts and future deductible amounts.

A deferred tax liability represents the decrease in taxes payable in future years as a result of a taxable temporary difference.

False

A loss carryback may be foregone and used as a loss carryforward for up to 25 years. True False

False; A company may choose to carry a loss back 2 years or forward 20 years.

Taxable temporary differences give rise to recording deferred tax assets.

False; Taxable temporary differences give rise to recording deferred tax liabilities

Permanent differences result in deferred tax consequences.

False; When a difference is permanent there can be no subsequent consequences. Temporary differences result in deferred tax consequences.

Under the asset-liability method, the measurement of current and deferred tax liabilities and assets is based on provisions of the anticipated future tax law.

False; based on provisions of the enacted tax law.

Which of the following is a permanent difference? Interest received on state and municipal obligations. Installment sales accounted for on an accrual basis. Deductible pension funding exceeding expense. Product warranty liabilities.

Interest received on state and municipal obligations.

Which of the following are temporary differences that are normally classified as expenses or losses and are deductible after they are recognized in financial income? Product warranty liabilities. Advance rental receipts. Fines and expenses resulting from a violation of law. Depreciable property.

Product warranty liabilities.

Which of the following statement related to loss carryback is NOT correct? The company must apply the loss to the earlier year first and then to the second year. The company may carry forward any loss remaining after the two-year carryback to offset future taxable income. The company may carry the net operating loss back two years and receive refunds for income taxes paid in those years. The company may carry the net operating loss back three years and receive refunds for income taxes paid in those years.

The company may carry the net operating loss back three years and receive refunds for income taxes paid in those years.

Proceeds from life insurance carried by the company on key officers or employees is an example of a permanent difference. True False

True

To determine the deferred tax expense (benefit), the beginning and ending balances of the deferred income tax accounts need to be compared.

True

To determine the deferred tax expense (benefit), the beginning and ending balances of the deferred income tax accounts need to be compared. True False

True

To determine the deferred tax expense (benefit), the beginning balance of the deferred income tax account and the income taxes payable account need to be compared.

True

Under GAAP, companies using the asset-liability method should classify all deferred taxes as non-current.

True

Using the asset-liability method, deferred taxes should be classified into a net current amount and a net non-current amount.

True

A deferred tax asset is the deferred tax consequence attributable to deductible temporary differences. True False

True; A deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.

The valuation allowance account should be evaluated at the end of each accounting period. True False

True; The evaluation is necessary to adjust the allowance account for any changes in the amount of the expected deferred asset to be realized.

A deferred tax valuation allowance account is used to recognize a reduction in a deferred tax liability only. both a deferred tax asset and a deferred tax liability. a deferred tax asset only. income tax expense.

a deferred tax asset only.

A deferred tax valuation allowance account is used to recognize a reduction in: both a deferred tax asset and deferred tax liability. a deferred tax asset only. income tax expense. a deferred tax liability only.

a deferred tax asset only.

Gulfport 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 Gulfport would be: a balance in the Unearned Rent account at year-end. making installment sales during the year. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. a fine resulting from violations of OSHA regulations.

a fine resulting from violations of OSHA regulations.

Under the asset-liability method, deferred taxes should be presented on the balance sheet in two amounts: one for the net debit amount and one for the net credit amount. as either net noncurrent deferred tax assets or noncurrent deferred tax liabilities. as one net debit or credit amount. as reductions of the related asset or liability accounts.

as either net noncurrent deferred tax assets or noncurrent deferred tax liabilities.

The FASB believes that the most consistent method for accounting for income taxes is the asset-liability method. benefit-obligation method. carryback-carryforward method. temporary-permanent method.

asset-liability method.

The FASB believes that the most consistent method for accounting for income taxes is the: benefit-obligation method. carryback-carryforward method. asset-liability method. temporary-permanent method.

asset-liability method.

In computing deferred income taxes for which graduated tax rates are a significant factor, companies are required to use the: actual rates. average rates. graduated rates. incremental rates.

average rates.

All of the following are examples of temporary differences that result in tax deductions (benefits) in future years, except: litigation accruals. estimated liabilities related to discontinued operations. depreciable property. product warranty liabilities.

depreciable property; Differences in depreciation used for taxes and financial reporting result in taxable amounts in future years.

A deferred tax asset represents a: future taxable amount. future tax liability. future tax expense. future tax benefit.

future tax benefit.

Deferred income taxes are based on the: future tax rates in all cases. future tax rates if they have been enacted into law. current tax rate or future tax rates, depending on when the temporary difference will reverse. current tax rate in all cases.

future tax rates if they have been enacted into law.

Deferred tax expense is the: increase in a deferred tax asset. decrease in a deferred tax liability. increase in a deferred tax liability. amount of income taxes payable for the period.

increase in a deferred tax liability.

Deferred tax expense is the: increase in a deferred tax liability. decrease in a deferred tax asset. decrease in a deferred tax liability. none of the above.

increase in a deferred tax liability.

A deferred tax liability represents the: decrease in taxes saved in future years as a result of deductible temporary differences. increase in taxes payable in future years as a result of taxable temporary differences. increase in taxes saved in future years as a result of deductible temporary differences. decrease in taxes payable in future years as a result of taxable temporary differences.

increase in taxes payable in future years as a result of taxable temporary differences.

A deferred tax liability represents the: decrease in taxes saved in future years as a result of deductible temporary differences. increase in taxes saved in future years as a result of deductible temporary differences. decrease in taxes payable in future years as a result of taxable temporary differences. increase in taxes payable in future years as a result of taxable temporary differences.

increase in taxes payable in future years as a result of taxable temporary differences.

A deferred tax asset represents the: decrease in taxes saved in future years as a result of deductible temporary differences. increase in taxes saved in future years as a result of deductible temporary differences. decrease in taxes payable in previous years as a result of cumulative temporary differences. increase in taxes payable in future years as a result of deductible temporary differences.

increase in taxes saved in future years as a result of deductible temporary differences.

The deferred tax expense is the increase in the balance of the deferred tax liability minus the increase in the balance of the deferred tax asset. increase in the balance of the deferred tax asset plus the increase in the balance of the deferred tax liability. increase in the balance of the deferred tax asset minus the increase in the balance of the deferred tax liability. decrease in the balance of the deferred tax asset minus the increase in the balance of the deferred tax liability.

increase in the balance of the deferred tax liability minus the increase in the balance of the deferred tax asset.

Income tax expense is based on income from continuing operations. operating income. taxable income. pretax income.

pretax income.

Income tax expense is based on: taxable income. income from continuing operations. operating income. pretax income.

pretax income.

A valuation account is used to: increase a deferred tax asset. reduce a deferred tax asset. increase a deferred tax liability. reduce a deferred tax liability.

reduce a deferred tax asset.

The last procedure (step) in the computation of deferred income taxes is to: measure the total deferred tax asset (liability) using the appropriate tax rate. identify the types and amounts of existing temporary differences. reduce deferred tax assets by a valuation allowance if necessary. measure deferred tax assets for each type of tax credit carryforward.

reduce deferred tax assets by a valuation allowance if necessary.

Taxable amounts are temporary differences that: require the recording of a deferred tax liability. require the recording of a deferred tax asset. decrease taxable income in future years. increase pretax financial income in future years.

require the recording of a deferred tax liability.

Income tax expense is determined based on all of the following except: the following except: pretax financial income. income for book purposes. taxable income. income for financial reporting purposes.

taxable income - for Income taxes payable

Income tax payable is based (computed) on: income for book purposes. income before taxes. taxable income. pretax financial income.

taxable income.

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount for financial statement reporting if it appears likely that a future tax rate will be greater than the current tax rate. it is probable that a future tax rate change will occur. it appears likely that a future tax rate will be less than the current tax rate. the enacted tax rate is expected to apply in future years.

the enacted tax rate is expected to apply in future years.

Recognition of tax benefits in the loss year due to a loss carryforward requires the establishment of a deferred tax liability. the establishment of an income tax refund receivable. the establishment of a deferred tax asset. only a note to the financial statements.

the establishment of a deferred tax asset.