Deck 21: Income Taxes

Question 1

Income tax is comprised of which two components:

A) Deferred tax assets and deferred tax liabilities.
B) Current tax and deferred tax.
C) Ordinary taxes and capital gains taxes.
D) Temporary timing difference and permanent differences.

Answer 1

Current tax and deferred tax.

Question 2

Jose Entity depreciates on a straight-line basis. Taxes are calculated based on an accelerated depreciation method. In the initial years of depreciation, a __________ tax __________ is created.

A) Deferred, Asset
B) Deferred, Liability
C) Current, Gain
D) Permanent, Difference

Answer 2

Deferred, Liability

Question 3

Extraordinaire, creator of Europe's favorite superhero, Catman, depreciates using the double-declining balance method. Taxes are calculated based on a straight-line method. In the initial years of depreciation, a _________ tax __________ is created.

A) Deferred, Asset
B) Deferred, Liability
C) Current, Gain
D) Permanent, Difference

Answer 3

Deferred, Asset

Question 4

Claudio Abbado Group (CAG) has certain tax assets that will be realized in five years. The tax assets amount to 5 million Swiss francs. The applicable tax rate is 30 percent. CAG's risk premium is 5 percent while the risk-free rate is 3 percent. What is the value of CAG's tax assets today?

A) 1,020,875 Swiss francs
B) 3,402,916 Swiss francs
C) 5,000,000 Swiss francs
D) None of the above

Question 5

Walther Bradfield & Sons (WBS) has operations in several countries. In Sweden, WBS has a €10 million in deferred tax assets and €5 million in deferred tax liabilities. In Switzerland, WBS has €6 million in deferred tax assets and €3 million in deferred tax liabilities. Sweden and Switzerland have completely different tax laws. How will these be reported on the financial statements assuming that WBS has the legal right to offset current tax accounts?

A) Sweden: 10 million DTA and 5 million DTL
Switzerland: 6 million DTA and 3 million DTL
B) Sweden: 5 million net DTA
Switzerland: 3 million net DTA
C) 6 million net DTA
D) None of the above

Question 6

Which tax rate would be considered substantively enacted?

A) Formal decree of a tax increase in two years
B) Automatic tax cut in two years
C) A tax increase (in two years) that might be approved by parliament
D) More than one of the above
E) All of the above

Question 7

If the tax payable exceeds the amount of tax paid during the reporting period,

A) a tax liability is recognized
B) a deferred tax is recognized.
C) a permanent difference is recognized.
D) a tax asset is recognized.

Question 8

When legislation allows, a tax loss results in

A) a tax liability
B) a tax asset
C) a tax expense
D) a tax permanent difference

Question 9

Melbourne Supply Entity (MSE) deposited $50,000 at a bank. The deposit will earn interest based on a floating interest rate. When will MSE pay taxes on the interest?

A) When interest is accrued.
B) At MSE's financial reporting date.
C) Whenever MSE makes quarterly tax payments.
D) When cash is collected.

Question 10

Deferred tax assets are recognized

A) for all deductible temporary differences.
B) when the recognition of deductible temporary differences is probable.
C) for all taxable temporary differences.
D) When current taxes payable exceed current tax expense.

Question 11

Since taxes are ancillary to the main purposes of most companies and small in comparison to total cash flows, tax planning is not a primary concern for most entities.

Question 12

Current tax is the amount of income tax payable or refundable on the entity's taxable profit or tax loss for the period, as determined by taxing authority.

Question 13

Goodwill is amortized over 20 years for tax purposes while it remains as an intangible asset on the books indefinitely. Goodwill is considered a permanent book-tax difference.

Question 14

The existence of an unexpired NOL carry-forward that is five years old indicates a company that is currently profitable.

Question 15

Current tax liabilities are measured at the amount expected to be paid to the taxation authorities using the tax rates and laws that have been enacted or substantively enacted by the reporting date.

Question 16

IFRS recognizes tax assets by analyzing whether it is "more likely than not" that the asset will be realized.

Question 17

Deferred tax assets and liabilities are measured on a discounted basis.

Question 18

Recognizing deferred tax assets or liabilities in a business combination affects the amount of goodwill.

Question 19

A deferred tax asset or liability is recognized for the future tax effects of all temporary differences and carryforwards.

Question 20

Current tax is the amount of income tax payable or refundable on the entity's taxable profit or tax loss for the period, as determined by taxing authority.

Question 21

Why can't tax expense simply be computed by multiplying accounting profits by the tax rate?

Question 22

Benoit Entity (BE) incurred $75,000 in tax losses for the current tax year ending on December 31, 20X7. BE's taxable income in 20X5 and 20X6 was respectively $40,000 and $35,000, The relevant tax rates were as follows: 30% in 20X2 and 35% in 20X3. In BE's jurisdiction, the tax legislation permits entities to carry back losses two years with the requirement to offset losses against the most recent period possible. What is BE's journal entry for 20X7?

Question 23

TruSport, a sports equipment manufacturer has a contingent liability that has been realized this year. The contingent liability caused TruSport to have a net tax loss of $25 million for the year. TruSport can carry the loss back for 2 years. Two years ago, Trusport had a net profit of $15 million, and one year ago, Trusport had a net profit of $5 million. What is the refund for this year, and what is TruSport's NOL carry-forward?

Question 24

Use the following information to create journal entries for Sherman Entity for each year:
$$\begin{array} { | l | l | l | l | } \hline & 20 \mathrm { X } 1 & 20 \mathrm { X } 2 & 20 \mathrm { X } 3 \\\hline \begin{array} { l } \text { Pretax Accounting Profit } \\\text { (excluding depreciation) }\end{array} & 2,000 & 2,000 & 3,000 \\\hline \text { Accounting Depreciation } & 350 & 350 & 400 \\\hline \text { Tax Depreciation } & 550 & 450 & 350 \\\hline\end{array}$$

Question 25

Le Maire Madeleine manufactures the finest clothes in all of Paris. Depreciation on certain sewing machines is as follows:
$$\begin{array} { | l | l | l | l | } \hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline \text { Depreciation Expense } & 500 & 500 & 500 \\\hline \text { Tax Depreciation } & 600 & 500 & 400 \\\hline \text { Enacted Tax Rate } & 20 \% & 30 \% & 40 \% \\\hline\end{array}$$ It is currently year 0. What is the total non-current portion of deferred tax asset or liability?