IA II - C249 (Chapter 19)

Parker Corporation prepared the following reconciliation for 2014, its first year of operations: Pretax financial income for 2014 - $ 2,060,000 Tax exempt interest - (350,000) Originating temporary difference - (690,000) Taxable income - $ 1,020,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 35%. The enacted tax rate for 2014 is 30%. What amount should Grey report in its 2014 income statement as the deferred portion of the provision for income taxes? $241,500 debit $207,000 credit $122,500 credit $119,000 debit

$241,500 debit $690,000 X 35%, or $241,500 as a debit value. 19

Pringle Corporation reported $200,000 in revenues in its 2012 financial statements, of which $88,000 will not be included in the tax return until 2013. The enacted tax rate is 40% for 2012 and 35% for 2013. What amount should Pringle report for deferred income tax liability in its balance sheet at December 31, 2012? $30,800 $39,200 $44,800 $35,200

$30,800 $88,000 ×.35 = $30,800. 19

Weatherly Company reported the following results for the year ended December 31, 2013, 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 2014. What should Weatherly record as a net deferred tax asset or liability for the year ended December 31, 2013, assuming that the enacted tax rates in effect are 35% in 2013 and 30% in 2014? $402,500 deferred tax asset $402,500 deferred tax liability $345,000 deferred tax asset $345,000 deferred tax liability

$345,000 deferred tax asset ($4,450,000 less $3,300,000) * 30% results in $345,000 deferred tax asset. 19

White Inc. reports a taxable and financial loss of $650,000 for 2013. Its pretax financial income for the last two years was as follows: 2011 - $300,000 2012 - 400,000 The amount that White Inc. reports as a net loss for financial reporting purposes in 2013, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is $195,000 loss. $455,000 loss. $650,000 loss. $ -0-.

$455,000 loss. $650,000 loss less the tax benefit of $195,000 ([$300,000 * 30%] plus [$350,000 * 30%]) results in a net loss of $455,000. 19

Jerome Co. has the following deferred tax liabilities at December 31, 2014: Amount Related to $100,000Installment sales, expected to be collected in 2015 $350,000Fixed asset, 10-year remaining useful life, 2014 tax depreciation exceeds book depreciation $90,000Prepaid insurance related to 2015 What amount would Jerome Co. report as a noncurrent deferred tax liability under IFRS and under U.S. GAAP? IFRS U.S. GAAP $540,000 - $540,000 $350,000 - $350,000 $0 - $450,000 $540,000 - $350,000

$540,000 - $350,000 19

Hawkins Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 35% in 2013, its first year of operations. During 2013 the company had the following transactions: Received rent from Barrett Co. for 2014 - $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 2014 - $108,000 For 2013, what is the amount of income taxes payable for Hawkins Inc.? $628,600 $572,600 $603,400 $648,200

$572,600 $1,800,000 + $64,000 - $80,000 - $40,000 - $108,000 = $1,636,000; $1,636,000 × .35 = $572,600. 19

Hopkins Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income - $1,500,000 Estimated litigation expense - 2,000,000 Extra depreciation for taxes - (3,000,000) Taxable income - $500,000 The estimated litigation expense of $2,000,000 will be deductible in 2015 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years. The deferred tax asset to be recognized is $450,000 current. $150,000 current. $300,000 current. $600,000 current.

$600,000 current 19

Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income - $800,000 Estimated litigation expense - 2,000,000 Installment sales - (1,600,000) Taxable income - $ 1,200,000 The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years. The deferred tax asset to be recognized is $0. $120,000 current. $600,000 current. $600,000 noncurrent.

$600,000 noncurrent. 19

Horner Corporation has a deferred tax asset at December 31, 2015 of $160,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2012-2014; 35% for 2015; and 30% for 2016 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of: $28,000 $24,000 $80,000 $32,000

$80,000 19

Hopkins Corp.'s 2013 income statement showed pretax accounting income of $1,035,000. To compute the federal income tax liability, the following 2013 data are provided: Income from exempt municipal bonds - $41,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes - 97,000 Estimated federal income tax payments made - 159,500 Enacted corporate income tax rate - 27.5% What amount of current federal income tax liability should be included in Hopkins' December 31, 2013 balance sheet? $87,175 $109,275 $132,578 $163,075

$87,175 ($1,035,000 - $41,000 - $97,000) × 27.5% = $246,675; $246,675 - $159,500 = $87,175. 19

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

A deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates. 19

With regard to recognition of deferred tax assets, IFRS requires Approach Recognition Affirmative judgment Recognize an asset up to the amount that is probable to be realized 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 Impairment approach Recognize an asset up to the amount that is probable to be realized 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

Affirmative judgment Recognize an asset up to the amount that is probable to be realized 19

Nondeductible fines and penalties result in deferred tax assets. True False

False 19

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

False 19

Under both GAAP and IFRS, the balances in the deferred tax accounts on the balance sheet are always classified as noncurrent. True False

False 19

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

False IFRS on income taxes is based on the same principles as U.S. GAAP—comprehensive recognition of deferred tax assets and liabilities. 19

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

False Under GAAP, companies should classify the balances in the deferred tax accounts on the balance sheet as current and noncurrent based on the classification of related assets and liabilities. 19

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. 19

Permanent differences result in deferred tax consequences. True False

False When a difference is permanent there can be no subsequent consequences. 19

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 is created. 19

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. I only. I, II, and III. I and III only. II only.

I only. 19

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

IFRS Charge or credit certain tax effects to equity 19

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

Interest received on state and municipal obligations. Only interest received on state and municipal obligations is a permanent difference. 19

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

Product warranty liabilities. 19

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

Product warranty liabilities. Product warranty liabilities are temporary differences normally classified as an expense or loss that are deductible after they are recognized in financial income. 19

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

The benefit due to a loss carryforward can be reported in both the loss year and future years. The benefit due to a loss carryforward is reported in both the loss year and future years when it is more likely than not that the entire loss carryforward will not be realized. 19

Companies should classify the balances in the deferred tax accounts on the balance sheet as current and noncurrent based on the classification of related assets and liabilities. True False

True 19

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

True GAAP requires that multiple categories of deferred taxes should be classified into a net current amount and a net noncurrent amount. 19

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

a deferred tax asset only. A valuation allowance account is established to recognize the reduction in a deferred tax asset. 19

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

a deferred tax asset only. A valuation allowance account is established to recognize the reduction in a deferred tax asset. 19

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

a fine resulting from violations of OSHA regulations. An item that would create a permanent difference in accounting and taxable incomes would be a fine resulting from violations of OSHA regulations. 19

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

all of these answer choices are correct. Differences between IFRS and U.S. GAAP involve a few exceptions to the asset-liability approach, some minor differences in the recognition, measurement, and disclosure criteria, and differences in implementation guidance. 19

The FASB believes that the most consistent method for accounting for income taxes is the: temporary-permanent method. carryback-carryforward method. asset-liability method. benefit-obligation method.

asset-liability method. 19

The FASB believes that the most consistent method for accounting for income taxes is the temporary-permanent method. carryback-carryforward method. asset-liability method. benefit-obligation method.

asset-liability method. The FASB believes the asset-liability model to be the most consistent method for accounting for income taxes. 19

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

average rates. When graduated tax rates are a significant factor, companies must determine the average tax rate and use that rate. 19

On December 31, 2013, 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 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000. debit to Income Tax Expense for $360,000. credit to Income Tax Expense for $360,000. debit to Income Tax Payable of $240,000.

credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000. A company reduces a deferred tax asset by a valuation account if it is more likely than not that it will not realize some portion or all of the deferred asset. 19

A deferred income tax asset or liability is usually classified as a noncurrent asset or liability. current or noncurrent according to the expected reversal date of the temporary difference. current asset. current or noncurrent based on the classification of the related asset (liability) for financial reporting purposes.

current or noncurrent based on the classification of the related asset (liability) for financial reporting purposes. 19

Taxable income of a corporation is reported on the corporation's income statement. is based on generally accepted accounting principles. differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.

differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. 19

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

future reversals of existing deductible temporary differences. 19

Deferred taxes should be presented on the balance sheet as one net debit or credit amount. in two amounts: one for the net debit amount and one for the net credit amount. as reductions of the related asset or liability accounts. in two amounts: one for the net current amount and one for the net noncurrent amount.

in two amounts: one for the net current amount and one for the net noncurrent amount. Deferred taxes should be reported on the balance sheet in two amounts: one for the net current amount and one for the net noncurrent amount. 19

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

increase in a deferred tax liability. Deferred tax expense is the increase in a deferred tax liability. 19

The deferred tax expense is the decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.

increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. Deferred tax expense is the increase in the balance of deferred tax liability minus the increase in balance of deferred tax asset. 19

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. increase in taxes saved 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 payable in future years as a result of taxable temporary differences. A deferred tax liability is the increase in future taxes payable due to temporary taxable differences. 19

A deferred tax asset represents the: decrease in taxes payable in previous years as a result of cumulative temporary differences. 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.

increase in taxes saved in future years as a result of deductible temporary differences. A deferred tax asset is the increase in future taxes saved due to a temporary deductible difference. 19

A deferred tax asset represents the decrease in taxes payable in future years as a result of deductible temporary differences. 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.

increase in taxes saved in future years as a result of deductible temporary differences. A deferred tax asset is the increase in taxes saved in future years due to a temporary deductible difference. 19

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities. it is probable and can be reasonably estimated. it is more likely than not that the tax position will be sustained upon audit. any of the above exist.

it is more likely than not that the tax position will be sustained upon audit. 19

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. items II and III only. items I and II only. items I and IV only. item II only.

items II and III only. 19

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

may be carried back 2 years or carried forward up to 20 years. 19

All of the following are procedures for the computation of deferred income taxes except to measure the total deferred tax liability for taxable temporary differences. all of these are procedures in computing deferred income taxes. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks. identify the types and amounts of existing temporary differences.

measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks. 19

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

pretax income. Income tax expense is based on pretax financial income. 19

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

reduce a deferred tax asset. A valuation account is used to reduce a deferred tax asset. 19

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

reduce deferred tax assets by a valuation allowance if necessary. 19

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

reduce deferred tax assets by a valuation allowance if necessary. The last step in the computation of deferred income taxes is to reduce deferred tax assets by a valuation allowance when necessary. 19

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be reported as an adjustment to income tax expense in the period of change. 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. handled retroactively in accordance with the guidance related to changes in accounting principles. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.

reported as an adjustment to income tax expense in the period of change. 19

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

require the recording of a deferred tax liability. Taxable amounts necessitate the recording of a deferred tax liability. 19

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

subscriptions received in advance. 19

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

taxable income. Taxable income is the amount upon which income tax payable is computed. 19

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

temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. 19

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

the establishment of a deferred tax asset. 19

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. Recognition of tax benefits in the loss year due to a loss carryforward requires the establishment of a deferred tax asset. 19

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

the future tax rates have been enacted into law. 19

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

the future tax rates have been enacted into law. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if the future tax rates have been enacted into law. 19

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

the recording of a deferred tax asset. 19