Ch 18

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

b) False

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

a) Product warranty liabilities.

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

a) True

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

a) True

Companies should classify deferred tax accounts on the balance sheet as current assets or current liabilities. a) True b) False

b) False

A temporary difference arises when a revenue item is reported for tax purposes in a period After it is reported in financial income (yes/no) Before it is reported in financial income (yes/no)

yes, yes

Taxable income of a corporation differs from pretax financial income because of Permanent Differences (yes/no) Temporary Differences (yes/no)

yes, yes

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

a) a deferred tax asset only.

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

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

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

a) the future tax rates have been enacted into law.

All of the following are procedures for the computation of deferred income taxes except to a) measure the total deferred tax liability for taxable temporary differences. b) measure the total deferred tax liability for deductible temporary differences. c) determine taxes payable. d) identify the types and amounts of existing temporary differences.

b) measure the total deferred tax liability for deductible temporary differences.

Under the asset-liability method, a deferred income tax asset or liability is usually classified as a a) current or non-current according to the expected reversal date of the temporary difference. b) non-current asset or liability. c) current or non-current based on the classification of the related asset (liability) for financial reporting purposes. d) current asset.

b) non-current asset or liability.

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

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

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

c) reduce a deferred tax asset.

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

c) taxable income.

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

c) the establishment of a deferred tax asset.

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 I and IV only d) items II and III only

d) items II and III only

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be a) 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. 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) handled retroactively in accordance with the guidance related to changes in accounting principles. d) reported as an adjustment to income tax expense in the period of change.

d) reported as an adjustment to income tax expense in the period of change.

A major distinction between temporary and permanent differences is a) temporary differences occur frequently, whereas permanent differences occur only once. b) permanent differences are not representative of acceptable accounting practice. 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.