Ch 16 Smartbook

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Under which accounting standards are valuation allowances used for deferred tax assets? Multiple choice question. IFRS only U.S. GAAP only both U.S. GAAP and IFRS

U.S. GAAP only

Baskin's pretax accounting income in Year 2 is $100,000. Baskin received cash rental payments in advance for $20,000 in Year 1 and $30,000 in Year 2, which are taxed in the year of receipt. It is expected the rent will be recognized for financial reporting purposes as $25,000 in Year 3 and $25,000 in Year 4. The income tax rate is 40%. What is Baskin's tax basis for rental revenues in Year 2? Multiple choice question. $0 $30,000 $25,000 $20,000 $50,000

Smith Company receives $500,000 of subscription revenue in advance during Year 1. The subscription revenue is not included on the income statement, but is reported for tax purposes in Year 1. $250,000 will be recognized in Year 2 and $250,000 in Year 3. Smith Company is subject to a 40% tax rate. What is the amount of the deferred tax asset at the end of Year 2?

$100,000 Reason: $250,000 x 40% tax = $100,000

Mueller Corp. determines that it is more likely than not that $100,000 of its $500,000 deferred tax asset will not be realized in future years. Mueller should record a journal entry that includes a Blank______ to Blank______. Multiple choice question. $100,000 debit; income tax expense $400,000 credit; deferred tax liability $400,000 credit; valuation allowance $100,000 debit; valuation allowance.

$100,000 debit; income tax expense

Garrett has a deferred tax asset of $20,000. At the end of the year, Garrett has determined that it is more likely than not that $4,000 of the deferred tax asset will not be realized. The deferred tax asset should be reported in the balance sheet at Multiple choice question. $20,000. $16,000. $4,000. $24,000.

$16,000.

In Year 1, Warren Company includes $50,000 of installment sales income on its income statement. $25,000 will be collected in Year 2 and $25,000 in Year 3 and will be reported on the tax return when collected. The enacted tax rate is 40%. What amount of deferred tax liability does Warren report at the end of Year 1? Multiple choice question. $20,000 $10,000 $50,000 $0

$20,000

Rosa's pretax accounting income in Year 2 is $3,000. Rosa deducts depreciation for tax purposes in excess of accounting depreciation of $300 in Year 1 and $700 in Year 2. It is expected the depreciation deduction will reverse $500 in Year 3 and $500 in Year 4. The income tax rate is 40%. What is the amount in the deferred tax liability account at the end of Year 2? Multiple choice question. $200 $280 $400 $120

$400

Parson's pretax accounting income in Year 2 is $100,000. Parson deducts depreciation for tax purposes in excess of accounting depreciation of $5,000 in Year 1 and $10,000 in Year 2. It is expected the depreciation deduction will reverse $7,000 in Year 3 and $8,000 in Year 4. The income tax rate is 40%. What is the amount in the deferred tax liability account at the end of Year 2? Multiple choice question. $6,000 $2,800 $4,000 $2,000

$6,000 Reason: ($5,000 + $10,000) x 40% = $6,000

In year 1, Ling estimates warranty expense of $60,000 for financial reporting purposes. The amount of warranties deducted on the tax return was $40,000. The difference will be deducted on the tax return in the following year. The income tax rate is 40%. What is the balance in the deferred tax asset account at the end of year 1? Multiple choice question. $16,000 $8,000 $24,000 $20,000

$8,000 Reason: 40% x (60,000 - 40,000) = $8,000

Which of the following will create a deferred tax liability? (Select all that apply.) Multiple select question. Revenue included on the tax return but not on the income statement. An amount that is included as an expense on the income statement but is not on the tax return. An amount that is deducted on the tax return but not included as an expense on the income statement. Revenue included on the income statement but not on the tax return.

An amount that is deducted on the tax return but not included as an expense on the income statement. Revenue included on the income statement but not on the tax return.

How frequently is the valuation allowance for deferred tax assets reevaluated? Multiple choice question. Any time a deferred tax asset reverses. At the end of each reporting period. Any time a deferred tax asset is created.

At the end of each reporting period.

Which of the following items are classified as deferred tax liabilities? (Select all that apply.) Multiple select question. Bad debt deductions in excess of bad debt expense. Warranty expense in excess of warranty deductions. Rent received in advance not included in financial income. Depreciation deducted for tax in excess of depreciation expense.

Bad debt deductions in excess of bad debt expense. Depreciation deducted for tax in excess of depreciation expense.

Adjustments to the valuation allowance are based on the amount of the deferred tax asset that will not be realized due to insufficient ____________ ____________in future years.

Blank 1: taxable Blank 2: income

A _______________ difference is created when there is a timing difference of when an item is included in pretax accounting income and taxable income, whereas a _______________ difference is one in which the amount is different between pretax accounting income and taxable income and never reverses.

Blank 1: temporary Blank 2: permanent

If it is more likely than not that all or a portion of a deferred tax asset will not be realized, then the amount of the deferred tax asset reported on the balance sheet should be reduced by a _________ ____________

Blank 1: valuation Blank 2: allowance

Loran's pretax accounting income in Year 1 is $100,000. Loran had bad debt expense for financial reporting purposes of $14,000 in Year 1. In Year 1, Loran deducted $4,000 in bad debts. Loran expects the timing difference to reverse $3,000 in Year 2 and $7,000 in Year 3. The income tax rate is 40%. Which of the following entries would be included for the deferred tax entry required at the end of Year 2? Multiple choice question. Debit deferred tax asset $2,800. Credit deferred tax asset $1,200. Credit deferred tax asset $3,000. Debit deferred tax asset $4,000.

Credit deferred tax asset $1,200. Reason: At the end of year 2, $3,000 reverses reducing the deferred tax asset by $1,200.

Rosa's pretax accounting income in Year 2 is $3,000. Rosa deducts depreciation for tax purposes in excess of accounting depreciation of $300 in Year 1 and $700 in Year 2. It is expected the depreciation deduction will reverse by $500 in Year 3 and $500 in Year 4. The income tax rate is 40%. Which of the following entries is included in the journal entry to record deferred taxes for Year 2? Multiple choice question. Credit deferred tax liability $500. Debit income tax expense $400. Debit deferred tax expense $400. Credit deferred tax liability $280.

Credit deferred tax liability $280.

Parson's pretax accounting income in Year 2 is $100,000. Parson deducts depreciation for tax purposes in excess of accounting depreciation of $5,000 in Year 1 and $10,000 in Year 2. It is expected the depreciation deduction will reverse $7,000 in Year 3 and $8,000 in Year 4. The income tax rate is 40%. Which of the following entries is included in the journal entry to record deferred taxes at the end of Year 2? Multiple choice question. Debit tax expense $2,000. Credit deferred tax liability $4,000. Credit deferred tax liability $2,000. Debit deferred tax liability $6,000.

Credit deferred tax liability $4,000.

Baskin's pretax accounting income in Year 2 is $100,000. Baskin receives cash rental payments in advance for $20,000 in Year 1 and $30,000 in Year 2, which are taxed in the year of receipt. It is expected the rent will be recognized for financial reporting purposes as $25,000 in Year 3 and $25,000 in Year 4. The income tax rate is 40%. Which of the following entries is included in the journal entry to record deferred taxes at the end of Year 2?

Debit deferred tax asset $12,000.

Carson has a deferred tax asset of $10,000. At the end of the year, Carson's accountant determines that it is more likely than not that $3,000 of the deferred tax asset will not be realized. Which of the following is included in the journal entry at year-end? (Select all that apply.) Debit deferred tax asset $3,000. Debit income tax expense $3,000. Credit deferred tax asset $7,000. Credit valuation allowance—deferred tax asset $3,000.

Debit income tax expense $3,000. Credit valuation allowance—deferred tax asset $3,000.

Income tax expense is comprised of which of the following components? Multiple select question. Deferred tax amount Net income Current income tax payable Income tax receivable

Deferred tax amount Current income tax payable

When estimated expenses are recognized in income statements when incurred, but deducted on tax returns in later years when paid, what is created? Multiple choice question. Deferred tax asset Deferred tax revenue Deferred tax liability

Deferred tax asset

Which of the following is true related to deferred tax liabilities? Multiple choice question. Deferred tax liabilities arise when a company deducts costs in the tax return later than it recognizes them in the income statement. Deferred tax liabilities help companies avoid paying taxes. Deferred tax liabilities arise from permanent differences between taxable income and financial reporting income. Deferred tax liabilities arise when tax laws permit a company to delay paying taxes on income until a later date.

Deferred tax liabilities arise when tax laws permit a company to delay paying taxes on income until a later date.

Which item creates a future taxable amount? Multiple choice question. Receipt of rental revenue in advance. Depreciation for tax in excess of depreciation for financial reporting. Warranty expense on the income statement in excess of warranties deducted on the tax return.

Depreciation for tax in excess of depreciation for financial reporting.

Which of the following cause a deferred tax liability to occur? (Select all that apply.) Multiple select question. Expense being reported on the tax return before the income statement. Revenue being reported on the tax return before the income statement. Revenue being reported on the tax return after the income statement. Expense being reported on the tax return after the income statement.

Expense being reported on the tax return before the income statement. Revenue being reported on the tax return after the income statement.

True or false: Income tax expense is calculated directly. True false question. True False

False

Which of the following are effects of a valuation allowance account for deferred taxes? (Select all that apply.) Multiple select question. It reduces the deferred tax asset account. It increases the deferred tax liability account. It increases tax expense. It reduces tax expense.

It reduces the deferred tax asset account. It increases tax expense.

The tax basis of an asset or liability is Multiple choice question. Its original value for tax purposes reduced by any amounts included to date on income statements. Its original value for tax purposes increased by any amounts included to date on income statements. Its original value for tax purposes increased by any amounts included to date on tax returns. Its original value for tax purposes reduced by any amounts included to date on tax returns.

Its original value for tax purposes reduced by any amounts included to date on tax returns.

When can the benefit of future deductible amounts be realized? Multiple choice question. Only if future income is at least equal to the deferred deduction amount. Only if future income is less than the deferred deduction amount. Future deductible amounts can always be realized in the following year.

Only if future income is at least equal to the deferred deduction amount.

Reason: $500,000 x 40% tax = $200,000

In year 1, Kelley estimates bad debt expense of $10,000 for financial reporting purposes. The amount of bad debts deductible on the tax return was $2,000. The difference will be deducted on the tax return in the following year. The income tax rate is 40%. What is the balance in the deferred tax asset account at the end of year 1? Multiple choice question. $4,000 $800 $8,000 $3,200

Reason: 40% x (10,000 - 2,000) = $3,200

Reason: At the end of Year 2, the amount which has not yet reversed is $7,000. Therefore, the deferred tax asset is valued at $7,000 x 40% = $2,800.

Baskin's pretax accounting income in Year 2 is $100,000. Baskin receives cash rental payments in advance for $20,000 in Year 1 and $30,000 in Year 2, which are taxed in the year of receipt. It is expected the rent will be recognized for financial reporting purposes as $25,000 in Year 3 and $25,000 in Year 4. The income tax rate is 40%. What is the amount in the deferred tax asset account at the end of Year 3? Multiple choice question. $10,000 $8,000 12000 20000

Reason: The timing difference of $25,000 will turn around in Year 3. Therefore, the end balance in deferred taxes should be $25,000 x 40% = $10,000.

Which of the following is true regarding income tax expense? Multiple choice question. Tax expense is calculated directly. Tax expense combines tax payable and changes in the deferred tax accounts. Tax expense is the amount of tax currently payable based on the current year's return.

Tax expense combines tax payable and changes in the deferred tax accounts.

True or false: A deferred tax asset valuation allowance is up to managerial judgment. True false question. True False

True Reason: Management decides whether or not to use a valuation allowance and determines the amount.

Which of the following items would create a deferred tax liability? (Select all that apply.) Multiple select question. Unrealized gains from recording investments at fair value. Accelerated depreciation on the tax return in excess of depreciation on the income statement. Estimated expenses on the income statement not deductible on the tax return. Rent revenue collected in advance.

Unrealized gains from recording investments at fair value. Accelerated depreciation on the tax return in excess of depreciation on the income statement.

Which of the following items would create a deferred tax asset? Warranty expense in excess of warranty amounts paid and deducted for tax. Depreciation deduction for tax in excess of depreciation expense. Estimated compensation expense in excess of compensation deduction for tax. Deduction for rent paid in advance for tax in excess of rent expense

Warranty expense in excess of warranty amounts paid and deducted for tax. Estimated compensation expense in excess of compensation deduction for tax.

Deferred tax liabilities can arise from a revenue being reported on the tax return ______ the income statement, or an expense being reported on the tax return ______ the income statement.

after; before

A deferred tax____________occurs when there is a future deductible amount.

asset

Depreciation is typically reported on the tax return ______ it is reported on the income statement. Multiple choice question. after at the same time as before

before

A deferred tax liability will result in tax Multiple choice question. not being paid. being paid in a subsequent year. being paid in advance.

being paid in a subsequent year.

Income tax expense is calculated as the result of the combination of Multiple select question. prior year income tax expense changes in deferred tax assets and liabilities total assets and liabilities current income tax payable

changes in deferred tax assets and liabilities current income tax payable

In year 1, Casa Corp. has depreciation expense for income statement purposes of $20,000. The depreciation deduction on the tax return was $30,000. The enacted tax rate is 40%. Casa's pretax income for the year was $100,000, and its taxable income was $90,000. If this is the only difference between pretax income and taxable income, the journal entry to record tax expense for the year would include which of the following entries? (Select all that apply.) Multiple select question. credit taxes payable of $36,000 debit deferred tax asset of $10,000 debit tax expense of $40,000 credit deferred tax liability of $36,000 credit deferred tax liability of $4,000

credit taxes payable of $36,000 debit tax expense of $40,000 credit deferred tax liability of $4,000

An entry to increase the valuation allowance includes a Blank______ to the valuation allowance and a Blank______ to income tax expense.

credit; debit

In year 1, Heron Corp. has depreciation expense for income statement purposes of $10,000. The depreciation deduction on the tax return was $14,000. The enacted tax rate is 30%. Heron's pretax income for the year was $80,000, and its taxable income was $76,000. If this is the only difference between pretax income and taxable income, the journal entry to record tax expense for the year would include which of the following entries? (Select all that apply.) Multiple select question. debit tax expense of $24,000 credit taxes payable of $22,800 debit tax expense of $22,800 credit deferred tax liability of $4,000 credit deferred tax liability of $1,200

debit tax expense of $24,000 credit taxes payable of $22,800 credit deferred tax liability of $1,200

A future ______ amount creates a deferred tax asset, whereas a future ______ amount creates a deferred tax liability. Multiple choice question. taxable; deductible permanent; temporary temporary; permanent deductible; taxable

deductible; taxable

A ______ result(s) in future taxable amounts when the temporary difference reverses. Multiple choice question. deferred tax liability deferred tax liability and deferred tax asset deferred tax asset

deferred tax liability

In year 1, Casa Corp. has depreciation expense for income statement purposes of $20,000. The depreciation deduction on the tax return was $30,000. The enacted tax rate is 40%. If this is the only difference between pretax income and taxable income, Casa would record a Multiple choice question. deferred tax liability of $4,000. deferred tax liability of $10,000. deferred tax asset of $10,000. deferred tax asset of $4,000.

deferred tax liability of $4,000.

Which of the following items are permanent differences? (Select all that apply.)

interest on municipal bonds life insurance proceeds on an insured executive

A valuation allowance is needed if Blank______ that some portion or all of a deferred tax asset will not be realized. Multiple choice question. it is likely it is more likely than not it is 90% certain

it is more likely than not

Tax laws that permit the cost of a depreciable asset to be deducted in the tax return sooner than it is reported as depreciation for financial reporting purposes lead to the creation and subsequent reversal of deferred tax___________.

liabilities or liability

A deferred tax ______ occur(s) when there is a future taxable amount. Multiple choice question. liability asset and liability asset

liability

Tax laws permit installment sales, which are recognized in the year of sale for financial reporting purposes, to be reported in the tax return later when cash is received. This results in a deferred tax liability because taxable income is Blank______ than financial income in the year of sale, and Blank______ than financial income in later years when collected.

lower; higher

A temporary difference is a difference ______ and taxable income that will reverse in another year. Multiple choice question. operating income pretax accounting income net income gross profit

pretax accounting income

A temporary difference is a difference between ______ and taxable income that will reverse in another year. Multiple choice question. net income pretax accounting income operating income gross profit

pretax accounting income

A difference of when an item is included in financial income and when an item is included in taxable income is referred to as a ______ difference. Multiple choice question. nontaxable permanent temporary taxable

temporary

Deferred tax assets are recognized for the future tax benefits of ______ differences. Multiple choice question. both temporary and permanent temporary permanent

temporary

A deduction that is allowed on the tax return in one year, but is not recognized in financial income until a later period is an example of a Multiple choice question. permanent difference. tax credit. temporary difference.

temporary difference.

A valuation account for a deferred tax asset would likely be necessary if Multiple choice question. the company has experienced a net operating loss within the last 5 years. taxable income is greater than financial income in the current year. there is not sufficient estimated taxable income in the future to use future deductible amounts. deferred tax assets are greater than deferred tax liabilities.

there is not sufficient estimated taxable income in the future to use future deductible amounts.

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