- Chapter 19

Temporary difference

A difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively.

Asset liability method

A method used to account for income taxes that recognizes the amount of taxes payable or refundable for the current year and records deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns.

Reversing difference

A temporary difference that originated in prior periods is eliminated and the related tax effect is removed from the deferred tax account.

Tax-planning strategy

An action that meets certain criteria and that would be implemented to realize a tax benefit for an operating loss or tax credit carryforward before it expires.

Alternative minimum tax

An alternative tax system used to ensure that corporations do not avoid paying a fair share of income taxes through various tax avoidance approaches.

Loss carrybacks

Deductions or credits that cannot be utilized on the tax return during a year and that may be carried back to reduce taxable income or taxes paid in a prior year.

Loss carryforwards

Deductions or credits that cannot be utilized on the tax return during a year and that may be carried forward to reduce taxable income or taxes payable in a future year.

Permanent differences

Differences between taxable income and pretax financial income that are caused by items that (1) enter into pretax financial income but never into taxable income or (2) enter into taxable income but never into pretax financial income.

Income taxes

Domestic and foreign (national), state, and local (including franchise) taxes based on income.

Pretax financial income

Financial accounting term often referred to as income before income taxes, income for financial reporting purposes, or income for book purposes.

Income taxes currently payable (refundable)

Refer to current tax expense (benefit).

Deductible temporary difference

Temporary differences that result in deductible amounts in future years when the related asset or liability is recovered or settled, respectively.

Taxable temporary difference

Temporary differences that result in taxable amounts in future years when the related asset or liability is recovered or settled, respectively.

Current tax expense (benefit)

The amount of income taxes paid or payable (or refundable) for a year as determined by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues for that year.

Average tax rate

The amount of income taxes payable for the period divided by taxable income.

Deferred tax expense (benefit)

The change during the year in an enterprise's deferred tax liabilities and assets.

Deferred tax asset

The deferred tax consequences attributable to deductible temporary differences and carryforwards.

Deferred tax liability

The deferred tax consequences attributable to taxable temporary differences.

Taxable income

The excess of taxable revenues over tax deductible expenses and exemptions for the year as defined by the governmental taxing authority. EQUATION: pretax income + permanent differences - permanent differences = adjusted pretax income + temporary taxable differences - temporary deductible differences = taxable income

Deferred tax consequences

The future effects of income taxes as measured by the enacted tax rate and provisions of the enacted tax law resulting from temporary differences and carryforwards at the end of the current year.

Originating temporary difference

The initial difference between the book basis and the tax basis of an asset or liability, regardless of whether the tax basis of the asset or liability exceeds or is exceeded by the book basis of the asset or liability.

Valuation allowance

The portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized.

Income tax expense (benefit)

The sum of current tax expense (benefit) and deferred tax expense (benefit).

Effective tax rate

Total income tax expense for the period divided by pretax financial income.

Net operating loss (NOL)

When tax deductible expenses exceed taxable revenues for the tax year.

"More Likely than not"

a level of likelihood of at least more than 50%. it is more likely than not that it will not realize some portion or all of the deferred tax asset.

Enacted Tax Rate

a tax rate that is set by the government. If tax rates are expected to change in the future, a company should use the enacted tax rate expected to apply that will be effective for particular future year(s).

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. a. I and II only. b. II only. c. III only. d. I and III only.

a. I and II only.

A temporary difference arises when a revenue item is reported for tax purposes in a period: After it is reported in financial income Before it is reported in financial income a. Yes Yes b. Yes No c. No Yes d. No No

a. Yes Yes

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Taxable Amounts Future Deductible Amounts: a. Yes Yes b. Yes No c. No Yes d. No No

a. Yes Yes

Recognizing a valuation allowance for a deferred tax asset requires that a company: a. consider all positive and negative information in determining the need for a valuation allowance. b. consider only the positive information in determining the need for a valuation allowance. c. take an aggressive approach in its tax planning. d. pass a recognition threshold, after assuming that it will be audited by taxing authorities.

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

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

b. Product warranty liabilities.

Type of Difference Deferred Tax: A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax? a. Temporary Liability b. Temporary Asset c. Permanent Liability d. Permanent Asset

b. Temporary Asset

At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2011, a future taxable amount will occur and: a. pretax financial income will exceed taxable income in 2011. b. Unruh will record a decrease in a deferred tax liability in 2011. c. total income tax expense for 2011 will exceed current tax expense for 2011. d. Unruh will record an increase in a deferred tax asset in 2011.

b. Unruh will record a decrease in a deferred tax liability in 2011.

Taxable income of a corporation: a. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. b. differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. c. is based on generally accepted accounting principles. d. is reported on the corporation's income statement.

b. differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.

Deferred taxes should be presented on the balance sheet: a. as one net debit or credit amount b. in two amounts: one for the net current amount and one for the net noncurrent amount. c. in two amounts: one for the net debit amount and one for the net credit amount. d. as reductions of the related asset or liability accounts.

b. in two amounts: one for the net current amount and one for the net noncurrent amount.

The deferred tax expense is the: a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability. b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability. d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

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

Recognition of tax benefits in the loss year due to a loss carry forward requires: a. the establishment of a deferred tax liability. b. the establishment of a deferred tax asset. c. the establishment of an income tax refund receivable. d. only a note to the financial statements.

b. the establishment of a deferred tax asset.

Which .of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income? a. Subscriptions received in advance. b. Prepaid royalty received in advance. c. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes. d. Interest received on a municipal obligation

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

Taxable income of a corporation differs from pretax financial income because of: Permanent Differences Temporary Differences a. No No b. No Yes c. Yes Yes d. Yes No

c. Yes Yes

Accounting for income taxes can result in the reporting of deferred taxes as any of the following except: a. a current or long-term asset. b. a current or long-term liability. c. a contra-asset account. d. All of these are acceptable methods of reporting deferred taxes.

c. a contra-asset account.

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.

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be: a. the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year. b. totally eliminated from the financial statements if the amount is related to a noncurrent asset. c. based on the classification of the related asset or liability for financial reporting purposes. d. the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

c. based on the classification of the related asset or liability for financial reporting purposes.

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

All of the following are procedures for the computation of deferred income taxes except to: a. identify the types and amounts of existing temporary differences. b. measure the total deferred tax liability for taxable temporary differences. c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks. d. All of these are procedures in computing deferred income taxes.

c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks.

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be: a. handled retroactively in accordance with the guidance related to changes in accounting principles. b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. c. reported as an adjustment to tax expense in the period of change. d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

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

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if: a. it is probable that a future tax rate change will occur. b. it appears likely that a future tax rate will be greater than the current tax rate. c. the future tax rates have been enacted into law. d. it appears likely that a future tax rate will be less than the current tax rate.

c. the future tax rates have been enacted into law.

Which of the following will not result in a temporary difference? a. Product warranty liabilities b. Advance rental receipts c. Instalment sales d. All of these will result in a temporary difference.

d. All of these will result in a temporary difference.

Which of the following differences would result in future taxable amounts? a. Expenses or losses that are tax deductible after they are recognized in financial income. b. Revenues or gains that are taxable before they are recognized in financial income. c. Revenues or gains that are recognized in financial income but are never included in taxable income. d. Expenses or losses that are tax deductible before they are recognized in financial income.

d. Expenses or losses that are tax deductible before they are recognized in financial income.

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.

Which of the following is not considered a permanent difference? a. Interest received on municipal bonds. b. Fines resulting from violating the law. c. Premiums paid for life insurance on a company's CEO when the company is the beneficiary. d. Stock-based compensation expense.

d. Stock-based compensation expense.

Type of Difference Deferred Tax: 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? a. Permanent Asset b. Permanent Liability c. Temporary Asset d. Temporary Liability

d. Temporary Liability

Tanner, Inc. incurred a financial and taxable loss for 2010. 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 2010 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 the loss in 2010.

d. The refund claimed should be shown as a reduction of the loss in 2010.

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.

A major distinction between temporary and permanent differences is: a. permanent differences are not representative of acceptable accounting practice. b. temporary differences occur frequently, whereas permanent differences occur only once. c. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time. d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

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

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on: a. their expected reversal dates. b. their debit or credit balance. c. the length of time the deferred tax amounts will generate future tax deferral benefits. d. the classification of the related asset or liability.

d. the classification of the related asset or liability.

Deductible Amounts

decrease taxable income/liability in future years from someones adjusted gross income.