Deck 16: Accounting for Income Taxes

Question 1

What is the accepted method of accounting for taxes under IFRS and ASPE? Accrual method or taxes payable method?

Answer 1

Currently,the accrual method is the accepted approach in both IFRS and ASPE.The taxes payable method is an accepted alternative to the accrual method under ASPE.

Question 2

Which method does not use "temporary differences" to account for income tax expense?

A)The taxes payable method.
B)The deferral method.
C)The accrual method.
D)The tax allocation method.

Answer 2

A

Question 3

How much tax would be reported under the taxes payable method for FY2017?

A)23,750
B)25,500
C)27,500
D)36,000

Answer 3

A

Question 4

Which statement is accurate?

A)The taxes payable method is also known as the "deferral method."
B)The deferral method and the accrual method are "tax allocation" approaches.
C)The income statement approach is also known as the "accrual method."
D)The balance sheet approach is also known as the "deferral method."

Question 5

What is the tax expense under the deferral method for FY2018?

A)$27,500
B)$36,000
C)$36,750
D)$52,500

Question 6

What is one reason to use the taxes payable method?

A)It is a complicated method,but results in the least tax expense.
B)A company only pays tax once a year under this method.
C)It results in the best matching for the balance sheet.
D)It is the least costly method for tax accounting.

Question 7

Which statement is correct?

A)IFRS allows the taxes payable method because it is consistent with accrual accounting generally and with the IFRS Conceptual Framework.
B)The taxes payable method is similar to accrual basis accounting and reflects the effect of transactions when they occur.
C)ASPE permits the taxes payable approach because of the different costs and benefits faced by private enterprises.
D)Recording the effect of deferred taxes is inconsistent with the definition and recognition criteria for assets and liabilities.

Question 8

What is the tax expense under the deferral method for FY2017?

A)$23,750
B)$25,500
C)$27,500
D)$36,000

Question 9

What is the income tax payable under the deferral method for FY2016?

A)$25,500
B)$30,000
C)$30,750
D)$36,000

Question 10

Which statement is correct about the "taxes payable method"?

A)It is the accounting method used under both ASPE and IFRS.
B)It records an amount for income tax equal to the tax payments required.
C)It matches income with the associated income tax expense.
D)It records an amount for income tax equal to the net income before tax.

Question 11

How much tax would be reported under the taxes payable method for F2018?

A)25,500
B)31,500
C)33,750
D)36,000

Question 12

Which method reflects the tax effect in the period that tax is payable?

A)Accrual method.
B)Taxes payable method.
C)Deferral method.
D)Tax allocation method.

Question 13

What is the tax expense under the deferral method for FY2016?

A)$25,500
B)$30,000
C)$30,750
D)$36,000

Question 14

Why is the taxes payable method not an accepted approach under IFRS? What difference explains why ASPE permits this approach in addition to the accrual approach?

Question 15

Which accurately describes the purpose of the taxes payable method?

A)It represents the amount of income recognized for accounting purposes.
B)It represents the amount of income recognized for tax purposes.
C)It calculates tax expense based on the accounting income before tax.
D)It calculates tax expense based on the amount payable to tax authorities.

Question 16

Which statement is correct?

A)Financial reporting rules are generally consistent with tax reporting rules.
B)Tax rules are generally consistent the principles used in accrual accounting.
C)Tax rules generally require a higher degree of reliability than financial reporting.
D)Accounting income is generally similar to taxable income.

Question 17

Which statement is accurate?

A)Accounting income is generally higher than taxable income.
B)Accounting income is determined by financial reporting.
C)The balance sheet is unaffected by the tax accounting method.
D)The taxes payable method is a "tax allocation" approach.

Question 18

Which statement best describes the "deferral method"?

A)This method focuses on the balance sheet.
B)This method is an example of a "tax allocation" approach.
C)This is the same as the "accrual method" of tax accounting.
D)This method is used by companies reporting using IFRS.

Question 19

Which statement is not correct?

A)The accrual method focuses on the balance sheet.
B)The deferral method focuses on the income statement.
C)The deferral method matches tax expense to the balance sheet.
D)The accrual and deferral methods are both tax allocation methods.

Question 20

What is the income tax payable under the deferral method for FY2017?

A)$23,750
B)$25,500
C)$27,500
D)$36,000

Question 21

Describe what is meant by a permanent difference.

Question 22

Describe what is meant by a timing difference.

Question 23

What is the income tax payable under the deferral method for FY2018?

A)$27,500
B)$36,000
C)$36,750
D)$52,500

Question 24

A company earns $490,000 in pre-tax income,while its tax return shows taxable income of $380,000.At a tax rate of 35%,how much is the income tax expense under the taxes payable method permitted under ASPE?

Question 25

Match the following terms with their definitions.

Question 26

Withering Inc.began operations in 2015.Due to the untimely death of its founder,Edwin Delaney,the company was wound up in 2017.The following table provides information on Withering's income over the three years.

The statutory income tax rate remained at 45% throughout the three years.
Required:
a.For each year and for the three years combined,compute the following:
- income tax expense under the taxes payable method;
- the effective tax rate (= tax expense / pre-tax income)under the taxes payable method;
- income tax expense under the accrual method;
- effective tax rate under the accrual method.
b.Briefly comment on any differences between the effective tax rates and the statutory rate of 45%.

Question 27

A company facing a 45% tax rate has calculated its taxable income for the year to be $2,100,000.It made installment payments during the year totalling $955,000;this amount has been recorded in an asset account as "income tax installments"
Required:
Prepare the journal entry to record the adjusting entry for income taxes at the end of the year under the taxes payable method.

Question 28

Under the accrual method,what is the FY2017 tax expense before making any adjustments for deferred tax liabilities?

A)11,000
B)42,500
C)52,500
D)63,500

Question 29

What is the deferred tax liability under the deferral method for FY2017?

A)$3,750
B)$23,750
C)$27,500
D)$36,000

Question 30

What is a deferred tax asset?

A)A deductible temporary difference that results in future taxable income being less than accounting income.
B)The amount of income tax recoverable in future periods as a result of deductible temporary differences,losses carried forward,or tax credits carried forward.
C)A deductible temporary difference that results in future taxable income being higher than accounting income.
D)The amount of income tax payable in future periods as a result of taxable temporary differences.

Question 31

Under the accrual method,what is the current year temporary difference in FY2016?

A)4,500
B)30,500
C)5,000
D)39,500

Question 32

Which of the following is true?

A)A deductible temporary difference is a temporary difference that results in future taxable income being more than accounting income.
B)A Deferred Tax Liability is the amount of income tax payable in future deferred tax liability periods as a result of taxable permanent differences.
C)A Taxable Temporary Difference is a temporary difference that results in future taxable income being less than accounting income.
D)A deferred tax asset is the amount of income tax recoverable in future periods as a result of deductible temporary differences,losses carried forward,or tax credits carried forward.

Question 33

A company earns $390,000 in pre-tax income,while its tax return shows taxable income of $280,000.At a tax rate of 35%,how much is the income tax expense under the taxes payable method permitted under ASPE?

Question 34

SEG Company reported $490,000 in income tax expense for the year under the accrual method.Its balance sheet reported an overall increase in deferred income tax liability of $20,000 and a decrease in income tax payable of $25,000.How much would SEG report as income tax expense had it used the taxes payable method?

Question 35

What is a "taxable" temporary difference?

A)Results in future taxable income being higher than accounting income.
B)Results in future taxable income being less than accounting income.
C)The amount of income tax payable in the current and future periods.
D)Result of an event affecting accounting and taxable income in different periods.

Question 36

Under the accrual method,what is the current year temporary difference in FY2017?

A)5,000
B)27,500
C)45,000
D)37,500

Question 37

Which statement is correct?

A)The deferral and accrual methods produce the same tax expense when tax rates are constant.
B)The deferral method applies new tax rates to accumulated tax balances.
C)The accrual method applies new tax rates to only to current year's income.
D)The deferral and accrual methods produce the same tax expense when tax rates are falling.

Question 38

What is the deferred tax liability under the deferral method for FY2016?

A)$10,500
B)$25,500
C)$30,750
D)$36,000

Question 39

Which of the following is an example of a "permanent difference"?

A)Warranty provisions.
B)Dividends received by corporations.
C)Depreciation on capital assets.
D)Completed contract method.

Question 40

What is the deferred tax liability under the deferral method for FY2018?

A)$52,500
B)$36,750
C)$27,500
D)$15,750

Question 41

Which statement is correct?

A)Undepreciated capital cost (UCC)is the net carrying amount of an asset or asset class for tax purposes.
B)A deductible temporary difference is a temporary difference that results in future taxable income being more than accounting income.
C)A terminal loss is the tax loss arising from the sale of an asset for proceeds above its undepreciated capital cost.
D)Recaptured depreciation is the taxable income recorded for the reversal of previous capital cost allowance when the sale proceeds of an asset are less than its undepreciated capital cost.

Question 42

The following summarizes information relating to Gonzalez Corporation's operations for the current year.

Required:
Compute the amount of taxes payable and income tax expense for Gonzalez Corporation.

Question 43

When will there be a recapture of depreciation?

A)When proceeds of disposal are less than undepreciated capital cost.
B)When proceeds of disposal are between undepreciated capital cost and original cost.
C)When proceeds of disposal are more than undepreciated capital cost.
D)When proceeds of disposal are less than original cost.

Question 44

The following information relates to the accounting income for Ontario Uranium Enterprises (OUE)for the current year ended December 31.

During the year,the company sold one of its machines with carrying value of $85,000 for proceeds of $10,000,resulting in an accounting loss of $75,000.This loss has been included in the pre-tax income figure of $850,000 shown above.For tax purposes,the proceeds from the disposal were removed from the undepreciated capital cost (VCC)of Class 8 assets.
The deferred income tax liability account on January 1 had a credit balance of $230,000.This balance is entirely related to property,plant,and equipment (PPE).
Required:
Prepare the journal entries to record income taxes for OUE.

Question 45

A company has income before tax of $350,000,which includes a permanent difference of $65,000 relating to non-taxable dividend income.There are no other permanent or temporary differences.The income tax rate is 45%.
Required:
Compute the amount of taxes payable and income tax expense.

Question 46

A company has income before tax of $200,000.The company also has a temporary difference of $80,000 relating to capital cost allowance (CCA)in excess of depreciation expense recorded for the year.There are no other permanent or temporary differences.The income tax rate is 40%.
Required:
Compute the amount of taxes payable and income tax expense.

Question 47

Indicate whether the item would result in future income taxes being higher,future income taxes being lower or neither:

Question 48

At the beginning of the current fiscal year,Withering Corporation had a deferred income tax liability balance of $20,000,which relates to depreciable assets.During the year,Withering reported the following information:
∙ Income before income taxes for the year was $300,000 and the tax rate was 45%.
∙ Depreciation expense was $150,000 and CCA was $130,000.
∙ Unearned rent revenue was reported at $120,000.Rent revenue is taxable when the cash is received.There was no opening balance in the unearned rent revenue account at the beginning of the year.
∙ No other items affected deferred tax amounts other than these transactions.
Required:
Prepare the journal entry or entries to record income taxes for the year.

Question 49

The following data represent the differences between accounting and tax income for Seafood Imports Inc. ,whose pre-tax accounting income is $650,000 for the year ended December 31.The company's income tax rate is 45%.Additional information relevant to income taxes includes the following.
a.Capital cost allowance of $270,000 exceeded accounting depreciation expense of $160,000 in the current year.
b.Rents of $25,000,applicable to next year,had been collected in December and deferred for financial statement purposes but are taxable in the year received.
c.In a previous year,the company established a provision for product warranty expense.A summary of the current year's transactions appears below:

For tax purposes,only actual amounts paid for warranties are deductible.
d.Insurance expense to cover the company's executive officers was $6,800 for the year,and you have determined that this expense is not deductible for tax purposes.
Required:
Prepare the journal entries to record income taxes for Seafood Imports.

Question 50

When will there be recapture and a capital gain?

A)When proceeds of disposal are less than undepreciated capital cost.
B)When proceeds of disposal are between undepreciated capital cost and original cost.
C)When proceeds of disposal are more than undepreciated capital cost.
D)When proceeds of disposal are more than original cost.

Question 51

Indicate whether the item will result in a deductible temporary difference,taxable temporary difference or neither.

Question 52

For each of the following differences between the amount of taxable income and income recorded for financial reporting purposes,compute the effect of each difference on deferred taxes balances on the balance sheet.Treat each item independently of the others.Assume a tax rate of 25%.

Question 53

Why is it necessary to distinguish permanent differences from temporary differences?

Question 54

The following summarizes information relating to Gonzalez Corporation's operations for the current year.

Required:
Compute the amount of taxes payable and income tax expense for Gonzalez Corporation.

Question 55

For each of the following differences between the amount of taxable income and income recorded for financial reporting purposes,compute the effect of each difference on deferred taxes balances on the balance sheet.Treat each item independently of the others.Assume a tax rate of 30%.

Question 56

When will a terminal loss occur?

A)When proceeds of disposal are less than undepreciated capital cost.
B)When proceeds of disposal are between undepreciated capital cost and original cost.
C)When proceeds of disposal are more than undepreciated capital cost.
D)When proceeds of disposal are less than original cost.

Question 57

The following information relates to the accounting income for Saskatchewan Real Estate Company (SREC)for the current year ended December 31.

During the year,the company sold one of its buildings with carrying value of $780,000 for proceeds of $1,000,000,resulting in an accounting gain of $220,000.This gain has been included in the pre-tax income figure of $670,000 shown above.For tax purposes,the acquisition cost of the building was $870,000.For purposes of CCA,it is a Class 1 Asset,which treats each building as a separate class.The undepreciated capital cost (UCC)on the building at the time of disposal was $660,000.
Required:
Prepare the journal entries to record income taxes for SREC.

Question 58

Which statement is correct?

A)A deductible temporary difference results in future taxable income being higher than accounting income.
B)A deductible temporary difference results in future taxable income being less than accounting income.
C)A deductible temporary difference refers to the amount of income tax payable in the current
D)A deductible temporary difference results from an event affecting accounting and taxable income in the same periods.

Question 59

The following information relates to the accounting income for Withering Press Company (WPC)for the current year ended December 31.

The company had purchased land some years ago for $600,000.Recently,it was discovered that this land is contaminated by industrial pollution.Because of the soil remediation costs required,the value of the land has decreased.For tax purposes,the impairment loss is not currently deductible.In the future when the land is sold,half of any losses is deductible against taxable capital gains (ie. ,the other half that is not taxable or deductible is a permanent difference).
The deferred income tax liability account on January 1 had a credit balance of $45,000.This balance is entirely related to property,plant,and equipment (PPE).
Required:
Prepare the journal entries to record income taxes for WPC.

Question 60

What is an "originating difference"?

A)The net carrying amount of a capital asset or capital asset class for tax purposes in Canada.
B)A temporary item that narrows that gap between accounting and tax values of an asset or liability.
C)A temporary item that widens the gap between accounting and tax values of an asset or liability.
D)The terminology used for depreciation of capital assets under for tax purposes in Canada.

Question 61

A company has a deferred tax liability of $60,000 at the beginning of the fiscal year relating to a taxable temporary difference of $300,000.The tax rate for the year increased from 20% to 25%.
Required:
Provide the journal entry to reflect the tax rate change.

Question 62

A company has a deferred tax liability of $112,500 at the beginning of the fiscal year relating to a taxable temporary difference of $450,000.The tax rate for the year increased from 25% to 35%.
Required:
Provide the journal entry to reflect the tax rate change.

Question 63

How much tax expense would be recorded under the accrual method for FY2017?

A)5,000
B)27,500
C)32,500
D)37,500

Question 64

Which is correct regarding the effect of tax rate changes on income tax expense,assets and liabilities?

A)When a company makes no sales and has no expenses such that its pre-tax income is zero,a change in tax rate always results in zero net income.
B)Enterprises need to take account of changes in future tax rates legislation only if it has been passed into legislation and not if it is only considered "substantively enacted."
C)When the tax rate decreases,the decrease in deferred tax liabilities creates a tax expense.
D))When the tax rate increases,the increase in deferred tax liabilities creates tax expense.

Question 65

Under the accrual method,what is the effect of the tax rate change in FY2016?

A)Increase of 5,000.
B)Decrease of 5,000.
C)Increase of 30,000.
D)Decrease of 30,000.

Question 66

What is the opening balance of the deferred tax liability account considering the rate change?

A)100,000 debit
B)100,000 credit
C)120,000 debit
D)120,000 credit

Question 67

What is the opening balance of the deferred tax liability account considering the rate change?

A)100,000 credit
B)160,000 credit
C)120,000 credit
D)200,000 credit

Question 68

What is the ending balance of the current year deferred tax liability?

A)30,000 debit
B)30,000 credit
C)150,000 credit
D)190,000 credit

Question 69

Under the accrual method,what is the effect of the tax rate change in FY2019?

A)Increase of 5,000.
B)Decrease of 5,000.
C)Increase of 30,000.
D)Decrease of 30,000.

Question 70

The following summarizes information relating to Crockodile Corporation's operations for the current year.

Required
Compute the amount of taxes payable and income tax expense for Crockodile Corporation.

Question 71

Why does Capital Cost Allowance (CCA)usually exceed the amount of depreciation for tax purposes?

Question 72

Why does the tax system appear to treat profits and losses asymmetrically?

Question 73

Under the accrual method,what is the effect of the tax rate change in FY2016?

A)Increase of 11,000.
B)Decrease of 11,000.
C)Decrease of 62,500.
D)Increase of 63,500.

Question 74

Under the accrual method,what is the tax expense in FY2017?

A)4,500
B)30,500
C)35,000
D)39,500

Question 75

How much tax expense would be recorded under the accrual method for FY2017?

A)5,000
B)40,500
C)32,500
D)50,500

Question 76

How much tax expense would be recorded under the accrual method for FY2018?

A)11,000
B)42,500
C)52,500
D)63,500

Question 77

What adjustment is required to the opening deferred taxes as a result of the rate change?

A)40,000 debit
B)40,000 credit
C)130,000 credit
D)190,000 credit

Question 78

Explain the large and growing amount of deferred tax liabilities on corporations' balance sheets mentioned in the opening vignette of this chapter.

Question 79

What adjustment is required to the opening deferred taxes as a result of the rate change?

A)30,000 credit
B)90,000 credit
C)40,000 credit
D)40,000 debit

Question 80

In 2017,Graham Cracker Co.sells a building with a cost of $10 million and undepreciated capital cost (UCC)of $5 million for tax purposes.For financial reporting,the building has carrying amount of $7 million.The sale price of the building is $3 million.Aside from the sale of the building,the company has other income (before taxes)of $5 million.There are no other permanent or temporary differences.The company faces an income tax rate of 30%.
Required: Provide the journal entries for the company for 2017.