Deck 16: Accounting for Income Taxes

Question 1

An unrealized gain from marking an investment to fair value typically creates a deferred tax asset.

Answer 1

False

Question 2

A temporary difference originates in one period and reverses, or turns around, in one or more later periods.

Answer 2

True

Question 3

Rent collected in advance results in deferred tax assets.

Answer 3

True

Question 4

A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as current to the extent that the NOL will be recovered in the following year.

Question 5

The classification of deferred tax assets is sometimes dependent on when the benefit will be realized.

Question 6

A deferred tax asset represents the tax effect of the temporary difference between the financial carrying value of an asset or liability and its tax basis.

Question 7

Which of the following causes a temporary difference between taxable and pretax accounting income?

A) Investment expenses incurred to generate tax-exempt income.
B) MACRS used for depreciating equipment.
C) The dividends received deduction.
D) Life insurance proceeds received due to the death of an executive.

Question 8

Future taxable amounts result in deferred tax assets.

Question 9

Deferred tax assets and liabilities typically are classified as current or long term according to when the underlying temporary difference is expected to reverse.

Question 10

GAAP regarding accounting for income taxes requires which of the following procedures?

A) Computation of deferred tax assets and liabilities based on temporary differences.
B) Computation of deferred income tax based on permanent differences.
C) Computation of income tax expense based on taxable income.
D) Computation of deferred income tax based on temporary and permanent differences.

Question 11

Valuation allowances reduce deferred tax liabilities to the amount that is more likely than not to be payable in the future.

Question 12

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

A) Interest income on municipal bonds.
B) Proceeds from life insurance received due to death of an executive.
C) Prepaid utilities.
D) None of these answer choices are correct.

Question 13

Revenues from installment sales of property reported on financial statements in prior years and currently reported in the tax return create deferred tax assets.

Question 14

A result of inter-period tax allocation is that:

A) Large fluctuations in a company's tax liability are eliminated.
B) The income tax expense is allocated among the income statement items that caused the expense.
C) The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year.
D) The income tax expense shown in the income statement is equal to the deferred taxes for the year.

Question 15

The tax benefit of a net operating loss carried back two years represents a current receivable for income tax to be refunded.

Question 16

MACRS depreciation typically creates deferred tax liabilities early in the life of an asset.

Question 17

Expenditures currently deducted in the tax return but not included with expenses in the income statement until subsequent years create deferred tax liabilities.

Question 18

Changes in enacted tax rates that do not become effective in the current period affect deferred tax accounts only after the new rates take effect.

Question 19

The basic issue in deciding whether to record a valuation allowance for a deferred tax asset is if probable taxable income is anticipated to be insufficient to realize the tax benefit.

Question 20

Changes in enacted tax rates only affect income tax expense in the years those changes affect tax payable.

Question 21

Isaac Inc. began operations in January 2018. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2018, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes.

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Ignoring operating expenses and additional sales in 2019, what deferred tax liability would Isaac report in its year-end 2019 balance sheet?

A) $54 million.
B) $144 million.
C) $126 million.
D) $180 million.

Question 22

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): The applicable tax rate is 40%. There are no other temporary or permanent differences.

-Which of the following must Franklin Freightways disclose related to the income tax expense reported in the income statement ($ in millions)?

A) Only the current portion of tax expense of $66.
B) Only the total tax expense of $82.
C) Both the current portion of the tax expense of $66 and the deferred portion of the tax expense of $16.
D) None of these answer choices are correct.

Question 23

Which of the following statements is true as to GAAP regarding accounting for income taxes, and its use of the asset and liability approach?

A) Considerable flexibility is permitted in the balance sheet classification of deferred tax amounts.
B) The approach recognizes the time value of money.
C) The approach is consistent with a balance sheet emphasis of U.S. GAAP and the International Financial Reporting Standards (IFRS).
D) The approach is consistent with cash basis accounting.

Question 24

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%. Assume that no estimated taxes have been paid.

- What should Tringali report as its income tax expense for its first year of operations?

A) $120,000.
B) $114,000.
C) $106,000.
D) $8,000.

Question 25

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): The applicable tax rate is 40%. There are no other temporary or permanent differences.

-Franklin's balance sheet at the end of its first year would report:

A) A deferred tax liability of $16 million among noncurrent liabilities.
B) A deferred tax liability of $16 million among current liabilities.
C) A deferred tax asset of $16 million among noncurrent assets.
D) A deferred tax asset of $16 million among current assets.

Question 26

Which of the following circumstances creates a future taxable amount?

A) Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned.
B) Accrued compensation costs for future payments.
C) Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting.
D) Investment expenses incurred to obtain tax-exempt income (not tax deductible).

Question 27

Which of the following creates a deferred tax liability?

A) An unrealized loss from recording inventory at lower of cost or market.
B) Accelerated depreciation in the tax return.
C) Estimated warranty expense.
D) Subscriptions collected in advance.

Question 28

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

A) Depreciation early in the life of an asset.
B) Unrealized gain from recording investments at fair value.
C) Subscriptions collected in advance.
D) None of these answer choices are correct.

Question 29

Isaac Inc. began operations in January 2018. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2018, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes.

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Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2018 balance sheet?

A) $18 million.
B) $162 million.
C) $180 million.
D) $540 million.

Question 30

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): The applicable tax rate is 40%. There are no other temporary or permanent differences.

-Franklin Freightways experienced ($ in millions) a:

A) Tax liability of $66.
B) Tax liability of $36.
C) Tax liability of $70.6.
D) Tax benefit of $10 due to the NOL.

Question 31

Isaac Inc. began operations in January 2018. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2018, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes.
Suppose that, in 2019, legislation revised the income tax rates so that Isaac would be taxed in 2020 and beyond at 40%, rather than 30%. Assume that there were no other differences in income for financial statement and tax purposes.

-Ignoring operating expenses and additional sales in 2019, what deferred tax liability would Isaac report in its year-end 2019 balance sheet?

A) $168 million.
B) $144 million.
C) $126 million.
D) $240 million.

Question 32

Which of the following usually results in an increase in a deferred tax liability?

A) Accrual of estimated operating expenses.
B) Revenue collected in advance.
C) Prepaid operating expenses, currently deductible.
D) All of these answer choices are correct.

Question 33

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): The applicable tax rate is 40%. There are no other temporary or permanent differences.

-Franklin's net income ($ in millions) is:

A) $134.
B) $124.
C) $119.4.
D) $118.

Question 34

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%. Assume that no estimated taxes have been paid.

- What should Tringali report as income tax payable for its first year of operations?

A) $120,000.
B) $114,000.
C) $106,000.
D) $8,000.

Question 35

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Tringali's tax rate is 40%. Assume that no estimated taxes have been paid.

-What should Tringali report as its deferred income tax liability as of the end of its first year of operations?

A) $35,000.
B) $20,000.
C) $14,000.
D) $8,000.

Question 36

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

A) Depreciation early in the life of an asset.
B) Unrealized losses from recording investments at fair value.
C) Rent collected in advance.
D) None of these answer choices are correct.

Question 37

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): The applicable tax rate is 40%. There are no other temporary or permanent differences.

-Franklin's taxable income ($ in millions) is:

A) $40.
B) $165.
C) $110.
D) $160.

Question 38

Brady's listing of deferred tax assets and liabilities includes the following for operations in the tax jurisdictions of Tambura and Nileboo:

- Brady files separate tax returns in Tambura and Nileboo. Brady's balance sheet would include the following disclosure of deferred tax assets and liabilities:

A) A deferred tax asset of $4 million.
B) A deferred tax liability of $17 million and a deferred tax asset of $21 million.
C) A deferred tax liability of $11 million and a deferred tax asset of $15 million.
D) A deferred tax liability of $19 million and a deferred tax asset of $23 million.

Question 39

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

A) Unrealized loss from recording inventory impairments.
B) Prepaid expenses.
C) Installment sales for which taxable income recognized when cash is collected.
D) None of these answer choices are correct.

Question 40

In the statement of cash flows, by using the indirect method for determining cash flows from operating activities, a decrease in deferred tax liabilities is:

A) Added to net income.
B) Subtracted from net income.
C) Ignored.
D) Included under financing activities.

Question 41

Plutonic Inc. had $400 million in taxable income for the current year. Plutonic also had an increase in deferred tax liabilities of $50 million and recognized tax expense of $80 million. The company is subject to a tax rate of 40%. The change in deferred tax assets (ignoring any valuation allowance) was a/an:

A) increase of $30 million.
B) increase of $130 million.
C) decrease of $30 million.
D) decrease of $130 million.

Question 42

Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was:

A) $390 million.
B) $210 million.
C) $150 million.
D) $180 million.

Question 43

A deferred tax asset represents a:

A) Future income tax benefit.
B) Future cash collection.
C) Future tax refund.
D) Future amount of money to be paid out.

Question 44

At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A disclosure note reveals that the entire $400,000 will be recognized in the income statement in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:

A) Noncurrent deferred tax liability.
B) Noncurrent deferred tax asset.
C) Current deferred tax liability.
D) Current deferred tax asset.

Question 45

Using straight-line depreciation for financial reporting purposes and MACRS for tax purposes in the first year of an asset's life creates a:

A) Future deductible amount.
B) Permanent difference not requiring inter-period tax allocation.
C) Deferred tax asset.
D) Deferred tax liability.

Question 46

Which of the following usually results in an increase in a deferred tax asset?

A) Accelerated depreciation for tax reporting and straight-line depreciation for financial reporting.
B) Prepaid insurance.
C) Subscriptions delivered for which customers had paid in advance.
D) None of these answer choices are correct.

Question 47

Of the following temporary differences, which one ordinarily creates a deferred tax asset?

A) Intangible drilling costs.
B) MACRS depreciation.
C) Rent received in advance.
D) Installment sales.

Question 48

Wayne Co. had a decrease in deferred tax liability of $20 million, a decrease in deferred tax assets of $10 million, and an increase in tax payable of $100 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was:

A) $90 million.
B) $100 million.
C) $110 million.
D) $130 million.

Question 49

Information for Kent Corp. for the year 2018: Reconciliation of pretax accounting income and taxable income: Cumulative future taxable amounts all from depreciation temporary differences: The enacted tax rate was 30% for 2017 and thereafter.

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What should be the balance in Kent's deferred tax liability account as of December 31, 2018?

A) $5,200.
B) $7,500.
C) $25,000.
D) None of these answer choices are correct.

Question 50

Information for Kent Corp. for the year 2018: Reconciliation of pretax accounting income and taxable income: Cumulative future taxable amounts all from depreciation temporary differences: The enacted tax rate was 30% for 2017 and thereafter.

-
What should Kent report as the current portion of its income tax expense in the year 2018?

A) $45,900.
B) $49,500.
C) $54,000.
D) None of these answer choices are correct.

Question 51

In 2018, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2018, Magic Table Inc incurs:

A) An increase in a deferred tax asset.
B) A decrease in a deferred tax asset.
C) An increase in a deferred tax liability.
D) A decrease in a deferred tax liability.

Question 52

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

A) Tax depreciation in excess of book depreciation.
B) Revenue collected in advance.
C) The installment sales method for tax purposes.
D) None of these answer choices are correct.

Question 53

Information for Kent Corp. for the year 2018: Reconciliation of pretax accounting income and taxable income: Cumulative future taxable amounts all from depreciation temporary differences: The enacted tax rate was 30% for 2017 and thereafter.

-
What would Kent's income tax expense be in the year 2018?

A) $42,300.
B) $45,900.
C) $49,500.
D) None of these answer choices are correct.

Question 54

During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $15 million. Stern's taxable income for the year would be:

A) $30 million.
B) $60 million.
C) $50 million.
D) $45 million.

Question 55

A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record:

A) An increase in a deferred tax asset.
B) A decrease in a deferred tax asset.
C) An increase in a deferred tax liability.
D) A decrease in a deferred tax liability.

Question 56

Which of the following circumstances creates a future deductible amount?

A) Earning of non-taxable interest on municipal bonds.
B) Sales of property (installment method for tax purposes).
C) Prepaid advertising expense.
D) Accrued warranty expenses.

Question 57

Woody Corp. had taxable income of $8,000 in the current year. The amount of MACRS depreciation was $3,000, while the amount of depreciation reported in the income statement was $1,000. Assuming no other differences between tax and accounting income, Woody's pretax accounting income was:

A) $5,000.
B) $6,000.
C) $10,000.
D) $11,000.

Question 58

Which of the following creates a deferred tax asset?

A) An unrealized loss from recording investments at fair value.
B) Prepaid insurance.
C) An unrealized gain from recording investments at fair value.
D) Accelerated depreciation in the tax return.

Question 59

Of the following temporary differences, which one ordinarily creates a deferred tax asset?

A) Completed-contract method for long-term construction contracts for tax reporting.
B) Installment sales for tax reporting.
C) Accrued warranty expense.
D) Accelerated depreciation for tax reporting.

Question 60

Estimated employee compensation expenses earned during the current period but expected to be paid in the next period causes:

A) An increase in a deferred tax asset.
B) A decrease in a deferred tax asset.
C) An increase in a deferred tax liability.
D) A decrease in a deferred tax liability.

Question 61

Which of the following would never require reporting deferred tax assets or deferred tax liabilities?

A) Depreciation on equipment.
B) Accrual of warranty expense.
C) Life insurance premiums for the payer's benefit.
D) Rent revenue received in advance.

Question 62

Under current tax law a net operating loss may be carried forward up to:

A) 5 years.
B) 10 years.
C) 15 years.
D) 20 years.

Question 63

When tax rates are changed subsequent to the creation of a deferred tax asset or liability, GAAP requires that:

A) All deferred tax accounts be adjusted to reflect the new tax rates.
B) The beginning deferred tax accounts are left unchanged.
C) Only the current deferred tax accounts are adjusted to reflect the new tax rates.
D) Only the noncurrent deferred tax accounts are adjusted to reflect the new tax rates.

Question 64

In 2017, HD had reported a deferred tax asset of $90 million with no valuation allowance. At December 31, 2018, the account balances of HD Services showed a deferred tax asset of $120 million before assessing the need for a valuation allowance and income taxes payable of $80 million. HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. HD made no estimated tax payments during 2018. What amount should HD report as income tax expense in its 2018 income statement?

A) $50 million.
B) $80 million.
C) $86 million.
D) $116 million.

Question 65

For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and MACRS depreciation amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's income tax payable currently, assuming a tax rate of 40%?

A) 19.6 million.
B) 25.2 million.
C) 27.6 million.
D) 29.2 million.

Question 66

The effect of a change in tax rates:

A) Results in a prior period adjustment.
B) Is allocated between discontinued operations and continuing operations.
C) Is reported separately after discontinued operations.
D) Is reflected in income from continuing operations.

Question 67

Pretax accounting income for the year ended December 31, 2018, was $50 million for Truffles Company. Truffles' taxable income was $60 million. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The enacted tax rate is 30% for 2018 and 40% thereafter. What amount should Truffles report as the current portion of income tax expense for 2018?

A) $15 million.
B) $18 million.
C) $20 million.
D) $24 million.

Question 68

Which of the following causes a permanent difference between taxable income and pretax accounting income?

A) The installment method used for sales of property.
B) MACRS depreciation method used for equipment.
C) Interest income on municipal bonds.
D) Percentage-of-completion method for long-term construction contracts.

Question 69

For classification purposes, a valuation allowance:

A) Is allocated proportionately between deferred tax assets and deferred tax liabilities.
B) Is allocated proportionately between the current and noncurrent portions of the deferred tax asset.
C) Is contra to the deferred tax asset and classified as noncurrent.
D) Is added to the deferred tax asset and classified as current.

Question 70

The valuation allowance account that is used in conjunction with deferred taxes relates:

A) Only to deferred tax liabilities.
B) To both deferred tax assets and liabilities.
C) Only to deferred tax assets.
D) Only to income taxes receivable due to net operating loss carrybacks.

Question 71

In its first year of operations, Woodmount Corporation reported pretax accounting income of $500 million for the current year. Depreciation reported in the tax return in excess of depreciation in the income statement was $60 million. The excess tax will reverse itself evenly over the next three years. The current year's tax rate of 40% will be reduced under the current law to 35% next year and 30% for all subsequent years. At the end of the current year, the deferred tax liability related to the excess depreciation will be:

A) $21 million.
B) $24 million.
C) $18 million.
D) $19 million.

Question 72

Giada Foods reported $940 million in income before income taxes for 2018, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for 2018 was 35%, but the enacted rate for years after 2018 is 40%. The balance in the deferred tax liability in the December 31, 2018, balance sheet is:

A) $16 million.
B) $35 million.
C) $40 million.
D) $56 million.

Question 73

The valuation allowance account that is used in conjunction with deferred tax assets is a(an):

A) Liability.
B) Component of shareholders' equity.
C) Asset.
D) Contra asset.

Question 74

The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $150,000 at December 31, 2018. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 30% for 2018 and 40% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2018, balance sheet as:

A) A liability of $45,000.
B) A liability of $60,000.
C) An asset of $45,000.
D) An asset of $60,000.

Question 75

Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000, and accrued warranty expense of $400 on the books although no warranty work was performed. What is Bumble Bee's pretax accounting income?

A) $4,400.
B) $3,600.
C) $9,600.
D) $2,600.

Question 76

In reconciling net income to taxable income, interest earned on municipal bonds is:

A) Ignored.
B) A temporary difference.
C) A reversing difference.
D) A permanent difference.

Question 77

For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included warranty expense of $6 and $20 in depreciation expense. Two million of warranty costs were incurred, and MACRS depreciation amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income?

A) $73 million.
B) $69 million.
C) $63 million.
D) $49 million.

Question 78

If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is:

A) Probable that sufficient taxable income will be generated in future years to realize the full tax benefit.
B) Probable that sufficient financial income will be generated in future years to realize the full tax benefit.
C) More likely than not that sufficient taxable income will be generated in future years to realize the full tax benefit.
D) More likely than not that sufficient financial income will be generated in future years to realize the full tax benefit.

Question 79

Which of the following causes a permanent difference between taxable income and pretax accounting income?

A) Investment expenses incurred to obtain tax-exempt income.
B) Unrealized gains from recording investments at fair value.
C) Rent collected in advance.
D) Prepaid expenses.

Question 80

Under current tax law, generally a net operating loss may be carried back:

A) 2 years.
B) 5 years.
C) 15 years.
D) 20 years.