ACCT 3021 Chapter 19

If a $82,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_______.

$205,000 ($82,000 divided by 40%)

If a corporation's tax return shows taxable income of $94,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for "Income taxes payable" if the company has made estimated tax payments of $33,900 for Year 2? $_________

$3,700 [($94,000 x 40%) - $33,900]

Pringle Corporation reported $200,000 in revenues in its 2016 financial statements, of which $88,000 will not be included in the tax return until 2017. The enacted tax rate is 40% for 2016 and 35% for 2017. What amount should Pringle report for deferred income tax liability in its balance sheet at December 31, 2016? $35,200 $30,800 $44,800 $39,200

$30,800 $88,000 .35 = $30,800 The 35% tax rate is used to calculate the deferred income tax amount since it is the enacted tax rate expected to apply in future years.

An income statement that reports current tax expense of $85,000 and deferred tax benefit of $24,000 will report total income tax expense of $______ .

$61,000 ($85,000 - $24,000)

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 1)Yes Yes 2)Yes No 3)No Yes 4)No No 4 2 3 1

1

On their 2020 income statement, Leong Electronics reported income before taxes of $500,000. However, their taxable income is only $200,000 due to timing differences. If Leong has a tax rate of 20%, the corporation should report a net income of A : $400,000. B : $100,000. C : $40,000. D : $225,000.

A : $400,000.

Which of the following companies is most likely to use the carryforward provision to account for a net operating loss of $100,000? 1. Jensen, Inc. just completed its first year of operations. 2. Paulson Company has operated profitably for a decade. 3. Blue Enterprises has sustained operating losses for 3 years. A : 1, 2 or 3 B : 1 C : 2 D : 3

A : 1, 2 or 3

Federal law permits corporations to use net operating losses of one year to offset profits from other years. The period of time over which operating losses can be offset include A : a loss carryforward indefinitely. B : 2 years' loss carryback and 20 years' loss carryforward . C : 10 years' loss carryback or carryforward. D : 3 years' loss carryback and 15 years' loss carryforward.

A : a loss carryforward indefinitely.

The division of income tax expense into current expense and deferred expense should be reported A : either in the income statement or in the notes to the financial statements. B : neither in the income statement nor in the notes to the financial statements. C : in the notes to the financial statements but not in the income statement. D : in the income statement but not in the notes to the financial statements.

A : either in the income statement or in the notes to the financial statements.

A permanent difference that is recognized for tax purposes but not for financial reporting purposes includes A : the deduction for dividends received from U.S. corporations. B : interest received on state and municipal bonds. C : a litigation accrual. D : compensation expense associated with certain employee stock options.

A : the deduction for dividends received from U.S. corporations.

In 2019, Troy Enterprises had revenues of $250,000 for book purposes and $220,000 for tax purposes. Troy also had expenses of $125,000 for both book and tax purposes. If Troy has a 20% tax rate, what are Troy's income taxes payable for 2019? A : $77,000. B : $19,000. C : $50,000. D : $95,000.

B : $19,000. (220,000-125,000)* 20%

Which of the following would result in an inequitable tax burden? A : Requiring a company to apply the loss to the earlier year first and then to the second year while carrying forward 20 years any remaining balance. B : Companies are taxed during profitable periods without receiving any tax relief during periods of net operating losses. C : An income-averaging provision whereby net operating losses are carried back or carried forward. D : Net operating losses must first be carried back 2 years before being carried forward.

B : Companies are taxed during profitable periods without receiving any tax relief during periods of net operating losses.

Which of the following statements is true about a deferred tax liability according to GAAP? A : It results from a past transaction and is a present obligation but does not represent a future sacrifice. B : It results from a past transaction, is a present obligation, and represents a future sacrifice. C : It results from a past transaction and represents a future sacrifice but is not a present obligation. D : It is a present obligation and represents a future sacrifice, but does not result from a past transaction.

B : It results from a past transaction, is a present obligation, and represents a future sacrifice.

Which of the following is a major distinction between permanent differences and temporary differences in tax accounting? A : Permanent differences are not representative of acceptable accounting practice. B : Temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. 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 occur frequently, whereas permanent differences occur only once.

B : Temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

If a company expects to have lower taxes in a future year because of expected deductions that it cannot record in the present year, it should record a deferred tax A : liability. B : asset. C : expense. D : revenue.

B : asset.

Mowery Enterprises reported accounts receivable of $50,000 in 2019. They expect to recover the cash from these receivables in 2020 and 2021. Because accounts receivable have a zero tax basis, this will result in a ________ for 2019. A : current tax liability B : deferred tax liability C : current tax expense D : deferred tax expense

B : deferred tax liability

Mahaffey Enterprises has a temporary difference resulting in future deductible amounts of $500,000, income taxes payable of $800,000, and a tax rate of 20 percent. What should they record as their income tax expense for this period? A : $100,000 B : $800,000 C : $700,000 D : $300,000

C : $700,000

How does a change in tax rate affect existing deferred income tax accounts? A : It is handled retroactively in accordance with the guidance related to changes in accounting principles. B : It is 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 : It is reported as an adjustment to tax expense in the period of change. D : It is considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.

C : It is reported as an adjustment to tax expense in the period of change.

A difference that would result in future taxable amounts includes A : revenues or gains that are recognized in financial income but are never included in taxable income. B : expenses or losses that are tax deductible after they are recognized in financial income. C : expenses or losses that are tax deductible before they are recognized in financial income. D : revenues or gains that are taxable before they are recognized in financial income.

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

Temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income include A : depreciable property. B : advance rental receipts. C : product warranty liabilities. D : fines and expenses resulting from a violation of law.

C : product warranty liabilities.

One objective of using the asset-liability method for accounting for income taxes is to A : identify permanent differences between book values and tax values. B : recognize the total income tax expenses that should be deducted in the current year. C : recognize deferred tax liabilities and assets for their future tax consequences. D : identify temporary differences between book values and tax values.

C : recognize deferred tax liabilities and assets for their future tax consequences.

Which of the following will result if a company uses accelerated depreciation for tax purposes and straight-line depreciation for accounting purposes? A : The asset will be fully depreciated for tax purposes in half the time it takes to become fully depreciated for accounting purposes. B : Over the asset's useful life, a larger amount of depreciation expense will be shown on the tax return than on the income statement. C : There will be a loss on the sale of the asset in question if it is sold for its book value before its useful life expires. D : In the last year of the asset's useful life, a larger amount of depreciation expense will be shown on the income statement than on the tax return.

D : In the last year of the asset's useful life, a larger amount of depreciation expense will be shown on the income statement than on the tax return.

At the end of its first year of operations, Eagle Manufacturing has a deductible temporary difference of $100,000. Eagle has income taxes payable of $90,000 due to a tax rate of 20%. Eagle also recorded a deferred tax asset. Later, they determined that it is more likely than not that $15,000 of the deferred tax asset will not be realized. What entry should Eagle make to record the reduction in asset value? A : Income Taxes Payable $15,000 Income TaxExpense $15,000 B : Allowance to Reduce Deferred Tax Asset to Expected Realizable Value $15,000 Income TaxExpense $15,000 C : Income TaxExpense $15,000 Deferred Tax Asset $15,000 D : Income TaxExpense $15,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value $15,000

D : Income TaxExpense $15,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value $15,000

Jewett Enterprises had a deferred tax liability balance due to a temporary difference at the beginning of 2019 related to $200,000 of excess depreciation. In December of 2019, a new income tax act is signed into law that raises the corporate rate from 20% to 25%, effective January 1, 2021. If taxable amounts related to the temporary difference are scheduled to be reversed by $100,000 for both 2020 and 2021, Jewett should increase or decrease deferred tax liability by what amount? A : Decrease by $10,000. B : Decrease by $5,000. C : Increase by $10,000. D : Increase by $5,000.

D : Increase by $5,000.

For which of the following reasons are companies required to disclose information about their income taxes? A : It helps creditors assess the income-to-tax ratio of the company. B : It helps creditors assess the net cash available to the company. C : It helps investors assess pre- and post-tax earnings per share. D : It helps investors assess the quality of the company's earnings.

D : It helps investors assess the quality of the company's earnings.

Taxable temporary differences give rise to recording deferred tax assets. True False

False Taxable temporary differences give rise to recording deferred tax liabilities, not deferred tax assets.

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. True False

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

Permanent differences result in deferred tax consequences. True False

False When a difference is permanent there can be no subsequent consequences. Temporary differences, not permanent differences, result in deferred tax consequences.

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

False When a temporary difference causes a decrease in future taxes payable, a deferred tax asset, not a deferred tax liability, is created.

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

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? Depreciable property. Advance rental receipts. Product warranty liabilities. Fines and expenses resulting from a violation of law.

Product warranty liabilities.

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

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

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 False

True

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

True

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

True

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

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 liability only. a deferred tax asset only. income tax expense.

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

a fine resulting from violations of OSHA regulations.

A Deferred tax asset represents a: a. Future tax benefit b. Future cash collection c. Future tax refund d. Future amount of money to be paid out

a. Future tax benefit

Deferred taxes _______ recorded to account for permanent differences. are or are not

are not

Under the asset-liability method, deferred taxes should be presented on the balance sheet 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. 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.

The FASB believes that the most consistent method for accounting for income taxes is the asset-liability method. carryback-carryforward method. benefit-obligation 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: graduated rates. actual rates. average rates. incremental rates.

average rates.

Financial statement disclosure of the components of income tax expense. a. Must be made on the face of the income statement. b. Is usually done in the notes of the financial statements. c. Is not necessary when only permanent differences exist. d. Must include the amount of cash paid for taxes.

b. Is usually done in the notes of the financial statements.

At the end of the current year, Joey Co. has $400,000 of subscriptions received in advance included on its balance sheet. A footnote reveals that the entire $400,000 will be earned in next year. In the absence of other temporary differences, on the balance sheet one would also expect to find a: a. Noncurrent deferred tax liability. b. Noncurrent deferred tax asset. c. Current deferred tax liability. d. Current deferred tax asset.

b. Noncurrent deferred tax asset.

If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _______ . benefit or expense

benefit

If total tax expense is $45,000 and deferred tax expense is $63,000, then the current portion of the expense computation is referred to as current tax _______ of $_______. expense or benefit

benefit $18,000

If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is more likely than not that: a. Sufficient financial income will be generated in future years to realize the full tax benefit. b. Sufficient financial and taxable income will exists in future years to realize the full tax benefit. c. Sufficient taxable income will be generated in future years to realize the full tax benefit. d. Tax rates will not change in future years.

c. Sufficient taxable income will be generated in future years to realize the full tax benefit.

On December 31, 2017, Winston Inc. has determined that it is more likely than not that $240,000 of a $600,000 deferred tax asset will not be realized. The journal entry to record this reduction in asset value will include a credit to Income Tax Expense for $360,000. debit to Income Tax Payable of $240,000. debit to Income Tax Expense for $360,000. credit to the Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000.

credit to the Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000.

In reconciling net income to taxable income, interest earned on municipal bonds is: a. Ignored b. A temporary difference c. A Reversing Difference d. A Permanent Difference

d. A Permanent Difference

Under current tax law a net operating loss may be carried back: a. 5 years b. 10 years c. 15 years d. Can't be carried back.

d. Can't be carried back.

Under current tax law a net operating loss may be carried forward up to: a. 5 years b. 10 years c. 20 years d. Indefinitely

d. Indefinitely

An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______ to the Income Tax Expense account. debit or credit

debit

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

future tax benefit.

In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ pretax financial income. less than or greater than

greater than

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

increase in a deferred tax liability.

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

A deferred tax liability represents the: 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. 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.

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

A deferred tax asset represents the: increase in taxes payable in future years as a result of deductible temporary differences. 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 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. 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 asset minus the increase in the balance of the deferred tax liability. 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 liability minus the increase in the balance of the deferred tax asset.

If a taxable temporary difference originates in 2017, it will cause taxable income for 2017 to be _______ pretax financial income for 2017. less than or greater than

less than

A valuation account is needed whenever it is judged to be ________ that a portion of a deferred tax asset _______ realized. more likely than not or unlikely will be or will not be

more likely than not will not be

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

pretax income.

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

reduce a deferred tax asset.

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

reduce deferred tax assets by a valuation allowance if necessary.

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

require the recording of a deferred tax liability.

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

taxable income.

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

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 is probable that a future tax rate change will occur. the enacted tax rate is expected to apply in future years. it appears likely that a future tax rate will be greater than the current tax rate. 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.

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

the establishment of a deferred tax asset.