Intermediate Accounting CH 19 M/C

**Weatherly Company reported the following results for the year ended December 31, 2016, its first year of operations: Income (per books before income taxes) $3,300,000 Taxable income 4,450,000 The disparity between book income and taxable income is attributable to a temporary difference, which will reverse in 2017. What should Weatherly record as a net deferred tax asset or liability for the year ended December 31, 2016, assuming that the enacted tax rates in effect are 35% in 2016 and 30% in 2017? A) $345,000 deferred tax asset B) $345,000 deferred tax liability C) $402,500 deferred tax asset D) $402,500 deferred tax liability

A) $345,000 deferred tax asset

Which of the following will not result in a temporary difference? A) All of these will result in a temporary difference B) Product warranty liabilities C) Installment sales D) Advance rental receipts

A) All of these will result in a temporary difference

**"A deferred tax asset is the deferred tax consequence attributable to deductible temporary differences." A) True B) False

A) True

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

A) a fine resulting from violations of OSHA regulations.

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

A) non-current asset or liability.

**A valuation account is used to: A) reduce a deferred tax asset. B) increase a deferred tax asset. C) reduce a deferred tax liability. D) increase a deferred tax liability.

A) reduce a deferred tax asset.

**"Income tax payable is based (computed) on:" A) taxable income. B) pretax financial income. C) income before taxes. D) income for book purposes.

A) taxable income.

At the beginning of 2015, Pitman Co. purchased an asset for $1,200,000 with an estimated useful life of 5 years and an estimated salvage value of $100,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2015 and all future years. At the end of 2015, what are the book basis and the tax basis of the asset? Book basis Tax basis Entry field with correct answer A) $880,000 $720,000 B) $980,000 $620,000 C) $980,000 $720,000 D) $880,000 $620,000

C) $980,000 $720,000

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) Interest received on a municipal obligation. 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) Subscriptions 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.

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) II only. B) III only. C) I and II only. D) I and III only.

C) I and II only.

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) the length of time the deferred tax amounts will generate future tax deferral benefits. C) the classification of the related asset or liability. D) heir debit or credit balance.

C) the classification of the related asset or liability.

**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) Depreciable property. B) Fines and expenses resulting from a violation of law. C) Prepaid expenses that are deducted on the tax return in the period paid. D) Product warranty liabilities.

D) Product warranty liabilities.

**A loss carryback may be foregone and used as a loss carryforward for up to 25 years T F

F

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

T

At the December 31, 2014 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2015, a future taxable amount will occur and A) Unruh will record a decrease in a deferred tax liability in 2015. B) Total income tax expense for 2015 will exceed current tax expense for 2015. C) Pretax financial income will exceed taxable income in 2015. D) Unruh will record an increase in a deferred tax asset in 2015.

A) Unruh will record a decrease in a deferred tax liability in 2015.

**"Taxable income of a corporation differs from pretax financial income because of:" Permanent Differences Temporary Differences A) Yes Yes B) Yes No C) No No D) No Yes

A) Yes Yes

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

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

At the beginning of 2015, Pitman Co. purchased an asset for $1,200,000 with an estimated useful life of 5 years and an estimated salvage value of $100,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2015 and all future years. At the end of 2015, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet? Account Balance A) Deferred tax liability $156,000 B) Deferred tax liability $104,000 C) Deferred tax asset $104,000 D) Deferred tax asset $156,000

B) Deferred tax liability $104,000

Which of the following differences would result in future taxable amounts? A) Revenues or gains that are taxable before they are recognized in financial income. B) Expenses or losses that are tax deductible before they are recognized in financial income. C) Expenses or losses that are tax deductible after they are recognized in financial income. D) Revenues or gains that are recognized in financial income but are never included in taxable income.

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

**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 Before it is reported in financial income A) Yes No B) Yes Yes C) No Yes D) No No

B) Yes Yes

Deferred taxes should be presented on the balance sheet A) 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. C) as one net debit or credit amount. D) in two amounts: one for the net debit amount and one for the net credit amount.

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) decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability. D) increase in balance of deferred tax asset plus 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.

**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 II and III only. C) items I and II only. D) items I and IV only.

B) 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 liability for deductible temporary differences. D) determine taxes payable.

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

**Hawkins Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 35% in 2017, its first year of operations. During 2017 the company had the following transactions: Received rent from Barrett Co. for 2018 $64,000 Municipal bond income $80,000 Depreciation for tax purposes in excess of book depreciation $40,000 Installment sales revenue to be collected in 2018 $108,000 For 2017, what is the amount of income taxes payable for Hawkins Inc.? A) $603,400 B) $628,600 C) $648,200 D) $572,600

D) $572,600

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 No B) No Yes C) No No D) Yes Yes

D) Yes Yes

**"A deferred tax valuation allowance account is used to recognize a reduction in:" A) both a deferred tax asset and a deferred tax liability. B) a deferred tax liability only. C) income tax expense. D) a deferred tax asset only.

D) a deferred tax asset only.

An example of a permanent difference is A) interest expense on money borrowed to invest in municipal bonds. B) proceeds from life insurance on officers. C) insurance expense for a life insurance policy on officers. D) all of these answers are correct.

D) all of these answers are correct.

**"A deferred tax liability represents the:" A) decrease 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 saved in future years as a result of deductible 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.

**When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be A) considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. B) 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) 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) 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.

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

D) the establishment of a deferred tax asset.

**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 appears likely that a future tax rate will be less than the current tax rate. 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) the future tax rates have been enacted into law.

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