Accy 304- Ch 19 Practice Q's

Which of the following is not a permanent difference? a. litigation accruals b. proceeds from life insurance carried on key officers c. interest received on municipal obligations d. fines resulting from a violation of law

A. litigation accruals

Under GAAP, companies should classify all deferred taxes as noncurrent.

False

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. After it is reported in financial income: Yes. Before it is reported in financial income: Yes

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

C. Permanent Differences: Yes Temporary Differences: Yes

Income tax expense is based on a. income from continuing operations b. taxable income c. pretax income d. operating income

C. pretax income

A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.

False

A company should add a decrease in a deferred tax liability to income tax payable in computing income tax expense.

False

Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities.

False

IFRS on income taxes is based on the different principles than U.S. GAAP.

False

Under IFRS, all tax effects are charged or credited to income.

False

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

True

Which of the following is false regarding accounting for deferred taxes under IFRS? a. A deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates. b. A deferred tax asset is recognized up to the amount that is probable to be realized. c. Tax effects of certain items are recognized in equity. d. The rate used to compute deferred taxes is either the enacted tax rate, or a substantially enacted tax rate (virtually certain).

A

With regard to recognition of deferred tax assets, IFRS requires Approach Recognition a. Affirmative judgment Recognize an asset up to the amount that is probable to be realized b. Impairment approach Recognize asset in full, reduced by valuation allowance if it's more likely than not that all or a portion of the asset won't be realized c. Affirmative judgment Recognize asset in full, reduced by valuation allowance if it's more likely than not that all or a portion of the asset won't be realized d. Impairment approach Recognize an asset up to the amount that is probable to be realized

A

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

A. Future Taxable Amounts: Yes Future Deductible Amounts: Yes

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

A. average rates

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

A. increase in a deferred tax liability

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

B. a deferred tax asset only

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

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

Permanent differences result in deferred tax consequences

False

Pretax financial income is determined according to the Internal Revenue Code.

False

A deferred tax liability is the deferred tax consequence attributable to taxable temporary differences.

True

Some examples of permanent differences are fines and penalties resulting from violations of the law, proceeds from life insurance carried by a company on key officers or employees, interest received on state or municipal obligations.

True

Taxable amounts increase taxable income in future years.

True

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

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

B. future tax rates if they have been enacted into law

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

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

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

D. all of these will result in a temporary difference

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.

Pretax financial income is the amount used to compute income tax payable.

False

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

False

Subscriptions received in advance will result in taxable amounts in the future years.

False

Taxable income is a tax accounting term and is also referred to as income before taxes.

False

Taxable temporary differences give rise to recording deferred tax assets.

False

The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

False

Under IFRS, a deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates.

False

Under U.S. GAAP, the rate used to compute deferred taxes is either the enacted tax rate, or a substantially enacted tax rate (virtually certain).

False

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

True

A deferred tax liability represents the increase in taxes payable in future years as a result of a taxable temporary differences

True

A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

True

A loss carryback may be foregone and used as a loss carryforward for up to 20 years.

True

A temporary difference arises when a revenue item is reported for tax purposes in a period after reported in financial/before reported in financial a. yes/yes b. yes/no c. no/yes d. no/no

A. yes/yes

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

B. temporary asset

Deferred income taxes are usually classified as a. current or noncurrent based on the classification of the related asset (liability) for financial reporting purposes b. noncurrent assets or noncurrent liabilities c. current or noncurrent according to the expected reversal date of the temporary difference d. current assets or current liabilities

A. current or noncurrent based on the classification of the related asset (liability) for financial reporting purposes

Which of the following statements related to a deferred tax liability is incorrect? a. it results from a past transaction b. it is a future obligation c. it represents a future sacrifice d. all of the options are correct

B. it is a future obligation

When accounting for income taxes, the differences between IFRS and U.S. GAAP involve: a. a few exceptions to the asset-liability approach. b. some minor differences in the recognition, measurement, and disclosure criteria. c. differences in implementation guidance. d. all of these answer choices are correct

D

Income tax expense should be accepted to all of the following except a. cumulative effect of account changes b. discontinued operations c. prior period adjustments d. unusual or infrequent items

D. unusual or infrequent items

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

False, it is the increase in taxes payable

The carry back election for net operating loss allows a company to ask for a refund of taxes paid as well as create a deferred tax asset for the tax benefit of the unutilized net operating loss.

True

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

The FASB believes that the most consistent method for accounting for income taxes in the: a. carryback-carryforward method b. temporary permanent method c. benefit obligation method d. asset liability method

D. asset liability method

A net operating loss a. must always be carried back 2 years b. may be carried back 2 years or carried forward up to 20 years c. occurs when a company reports a net loss in their income statement d. must always be carried forward 20 years

B. may be carried back 2 years or carried forward up to 20 years

Which of the following is not an example of a temporary difference that will result in a deductible amount in future years? a. royalties received in advance b. unearned subscriptions c. advanced rental receipts d. installment sales

D. installment sales

Multiple categories of deferred taxes should be classified into a net current amount and a net noncurrent amount.

True

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

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

All of the following are examples of temporary differences that result in tax deductions in future years except: a. depreciable property b. estimated liabilities related to discontinued operations c. product warranty liabilities d. litigation accruals

A. depreciable property

All of the following are possible sources of taxable income available to realize a tax benefit for deductible temporary differences except a. future reversals of existing deductible temporary differences b. tax planning strategies that would accelerate taxable amounts to utilize expiring carryforward c. future taxable income exclusive of reversing temporary differences d. taxable income in prior carryback years if carryback is permitted

A. future reversals of existing deductible temporary differences

Which of the following is a permanent difference? a. interest received on state and municipal obligations b. deductible pension funding exceeding expense c. installment sales of accounted for on an accrual basis d. product warranty liabilities

A. interest received on state and municipal obligations

Income tax expense is computed as income tax payable a. plus or minus the change in deferred income taxes b. plus or minus the change in provision for income taxes c. less an increase in deferred tax liability d. less a decrease in a deferred tax asset

A. plus or minus the change in deferred income taxes

The rationale for interperiod income tax allocation is to a. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date b. recognize a distribution of earnings to the taxing agency c. reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements d. adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet.

A. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date

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

A. reduce deferred tax assets by a valuation allowance if necessary

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

A. require the recording of a deferred tax liability

All of the following are examples of temporary differences that result in taxable amounts in future years except a. subscriptions received in advance b. installment sales c. investments accounted for under the equity method d. long-term construction contracts

A. subscriptions received in advance

Interperiod income tax allocation causes a. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year b. tax expense shown in the income statement to bear a normal relations to the tax liability c. tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement d. tax expense in the income statement to be presented with the specific revenues causing the tax

A. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year

At the December 31, 2012 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2013, a future taxable amount will occur and a. pretax financial income will exceed taxable income in 2013. b. Unruh will record a decrease in a deferred tax liability in 2013. c. total income tax expense for 2011 will exceed current tax expense for 2013. d. Unruh will record an increase in a deferred tax asset in 2013.

B. Unruh will record a decrease in a deferred tax liability in 2013.

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

Taxable income of a corporations a. differs from accounting income due to differences in intraperiod allocation between the 2 methods of income determination b. differs from accounting income due to differences in intraperiod allocation and permanent differences between the 2 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 intraperiod allocation and permanent differences between the 2 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 accounts: 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

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

Which of the following statements related to loss carrybacks and carryforwards is correct? a. the benefit due to a loss carryforward is reported only in the loss year b. the benefit due to a loss carryforward can be reported in both the loss year and future years c. the benefit due to a loss carryback is reported only in the 2nd year preceding the loss year d. the benefit due to a loss carryback can be reported in both the loss year and future years

B. the benefit due to a loss carryforward can be reported in both the loss year and future years

Recognition of tax benefits in the loss year due to a loss carryforward 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

Future deductible amounts will cause a. a decrease in pretax financial income in future years b. the recording of a deferred tax asset c. taxable income to be more than pretax financial income in the future d. the recording of a deferred tax liability

B. the recording of a deferred tax asset

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

C

Match the approach, IFRS or U.S. GAAP, with the location where tax effects are reported: Approach Location a. IFRS Charge or credit only taxable temporary differences to income b. U.S. GAAP Charge or credit certain tax effects to equity c. IFRS Charge or credit certain tax effects to equity d. U.S. GAAP Charge or credit only deductible temporary differences to income

C

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.

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.

Interperiod tax allocation results in a deferred tax liability from a. an income item partially recognized for financial purposes but fully recognized for tax purposes in any one year b. the amount of deferred tax consequences attributed to temporary differences that result in net deductible amounts in future years c. an income item fully recognized for tax and financial purposes in any one year d. the amount of deferred tax consequences attributed to temporary differences that result in net taxable amounts in future years

C. an income item fully recognized for tax and financial purposes in any one year

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

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 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.

Interperiod income tax allocation procedures are appropriate when a. an extraordinary loss will cause the amount of income tax expense to be less than the tax on ordinary net income b. an extraordinary gain will cause the amount of income tax expense to be greater than the tax on ordinary net income c. differences between net income for tax purposes and financial reporting occur because tax laws and financial accounting principles do not concur on the items to be recognized as revenue and expense d. differences between net income for tax purposes and financial reporting occur because even though financial accounting principles and tax laws concur on the item to be recognized as revenues and expenses, they don't concur on the timing of the recognition

D. differences between net income for tax purposes and financial reporting occur because even though financial accounting principles and tax laws concur on the item to be recognized as revenues and expenses, they don't concur on the timing of the recognition

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

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

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

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

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

D. reduce a deferred tax asset

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

Income tax payable is based (computed) on a. income before taxes b. income for book purposes c. pretax financial income d. taxable income

D. taxable income

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

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

Tanner, Inc. incurred a financial and taxable loss for 2013. 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 2013 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 2013.

D. the refund claimed should be shown as a reduction of the loss in 2013

Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.

False

Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.

False

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

Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.

False

When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.

False

A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.

True

An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.

True

Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.

True

Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.

True

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

True

Permanent differences do not give rise to future taxable or deductible amounts.

True

Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered.

True

The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.

True

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

True

Under IFRS an affirmative judgment approach is used for recognizing deferred tax assets by recognizing assets up to the amount that is probable to be realized.

True

Under IFRS, all potential liabilities associated with uncertain tax positions are recognized.

True