Intermediate Accounting II: Chapter 19 Multiple Choice

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. take an aggressive approach in its tax planning. C. consider only the positive information in determining the need for a valuation allowance. 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.

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

A. increase in balance of deferred tax liability from the beginning to the end of the accounting period.

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. items II and III only. B. item II only. C. items I and IV only. D. items I and II only.

A. items II and III only.

Which of the following will not result in a temporary difference? A. Product warranty liabilities B. Interest received on municipal obligations. C. Advance rental receipts D. Installment sales

B. Interest received on municipal obligations.

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

B. Product warranty liabilities.

Companies are permitted to offset any balances in income taxes payable against A. deferred tax liabilities balances. B. related income tax refund receivable or prepaid income taxes balances. C. income tax expense. D. deferred tax assets balances.

B. related income tax refund receivable or prepaid income taxes balances.

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. reported as an adjustment to income tax expense in the period of change. C. 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. D. handled retroactively in accordance with the guidance related to changes in accounting principles.

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

A major distinction between temporary and permanent differences is A. 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. B. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. C. temporary differences occur frequently, whereas permanent differences occur only once. D. permanent differences are not representative of acceptable accounting practice.

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

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. 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. D. 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.

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

C. I and II only.

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 an income tax refund receivable. C. the establishment of a deferred tax asset. D. only a note to the financial statements.

C. the establishment of a deferred tax asset.

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 answers are correct as they are all examples of permanent differences.

D. All of these answers are correct as they are all examples of permanent differences.

Which of the following differences would result in future taxable amounts? 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. Revenues or gains that are taxable before they are recognized in financial 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.

Taxable income of a corporation differs from pretax financial income because of A. Permanent Differences - No. Temporary Differences - Yes. B. Permanent Differences - Yes. Temporary Differences - No. C. Permanent Differences - No. Temporary Differences - No. D. Permanent Differences - Yes. Temporary Differences - Yes.

D. Permanent Differences - Yes. Temporary Differences - Yes.

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. making installment sales during the year. D. a fine resulting from violations of OSHA regulations.

D. a fine resulting from violations of OSHA regulations.