Question 1

A valuation allowance reflects uncertainty that the taxpayer will be able to recover a deferred tax asset.

Accepted Answer

A valuation allowance is established when the taxpayer determines that it is more likely than not that a deferred tax asset will not be fully recoverable. This uncertainty may arise from factors such as future taxable income, changes in tax laws, or other uncertainties. Therefore, a valuation allowance reflects uncertainty regarding the ability of the taxpayer to recover a deferred tax asset.

Question 2

Kling Corporation reports a $150,000 cash tax savings from a temporary book-tax difference. This item has the same effect on Kling's current year effective tax rate as a $150,000 cash tax savings that is a permanent book-tax difference.

Accepted Answer

Temporary book-tax differences reverse over time and affect the timing of tax payments, but not the total amount of taxes paid. Permanent book-tax differences affect the total amount of taxes paid and do not reverse over time, thus impacting the effective tax rate differently.

Question 3

The release of a valuation allowance may relate to a tax planning strategy adopted by the taxpayer that will produce taxable income in the future.

Accepted Answer

A release of a valuation allowance is often due to the belief that future taxable income will be sufficient to utilize the previously reserved tax assets. This can be the result of a tax planning strategy implemented by the taxpayer.

Question 4

Create, Inc., a domestic corporation, owns 100% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 12% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's income statement for current year financial reporting purposes?

Accepted Answer

The answer of Create, Inc., a domestic corporation, owns 100%...

Question 5

A CFO probably prefers a tax planning strategy that produces a temporary book-tax savings difference to one that produces a permanent difference.

Accepted Answer

The answer of A CFO probably prefers a tax planning...

Question 6

Create, Inc., a domestic corporation, owns 90% of Vinyl, Ltd., a foreign corporation and Digital, Inc., a domestic corporation. Create also owns 60% of Record, Inc., a domestic corporation. Create receives no distributions from any of these corporations. Which of these entities' net income are included in Create's Federal tax return for the current year assuming Create elects to include all eligible entities in its consolidated Federal income tax return?

Accepted Answer

Create and Digital, Inc. are included in the consolidated Federal income tax return because they are domestic corporations. Vinyl, Ltd., being a foreign corporation, is not eligible for inclusion. Record, Inc. is not included because Create does not own at least 80% of it, which is required for consolidation.

Question 7

ASC 740 (FIN 48) addresses how an entity should report uncertain tax positions in their financial statements.

Accepted Answer

ASC 740 (FIN 48) provides guidance on how to report uncertain tax positions in financial statements.

Question 8

Under GAAP, a corporation can defer reporting the U.S. tax expense related to the earnings of foreign subsidiaries, by taking into account its repatriation plans for these earnings.

Accepted Answer

This is known as the "indefinite reinvestment assertion" and is allowed under GAAP. However, if the corporation does not have a reliable plan to repatriate the earnings, it must report the tax expense.

Question 9

Purple, Inc., a domestic corporation, owns 80% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 50% of Green, Inc., a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities' net income are included in Purple's Federal tax return for the current year assuming Purple elects to include all eligible entities in its consolidated Federal income tax return?

Accepted Answer

In a consolidated Federal income tax return, only domestic corporations in which the parent corporation owns at least 80% of the stock are included. Therefore, Purple and Yellow's net income are included, but not Blue (foreign corporation) or Green (only 50% owned).

Question 10

The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.

Accepted Answer

The valuation allowance is specifically used to reduce a deferred tax asset to the amount that is more likely than not to be realized. It does not apply to deferred tax liabilities.

Question 11

The IRS decides upon audit whether the taxpayer can claim the tax deferral benefits of ASC 740-30.

Accepted Answer

The taxpayer must determine whether they qualify for tax deferral benefits under ASC 740-30 and must disclose this information in their financial statements. The IRS does not make this determination during an audit; they may examine the taxpayer's compliance with the requirements of the tax law and the accuracy of the taxpayer's financial statement disclosures.

Question 12

ASC 740 (FIN 48) is the GAAP equivalent of the Form 1120 Schedule UTP.

Accepted Answer

ASC 740 (FIN 48) and Form 1120 Schedule UTP both relate to uncertain tax positions and require disclosure of such positions in financial statements and tax returns, respectively. However, ASC 740 (FIN 48) is the accounting standard for uncertain tax positions under GAAP, while Form 1120 Schedule UTP is the IRS form used by businesses to report uncertain tax positions for tax purposes.

Question 13

Purple, Inc., a domestic corporation, owns 100% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 40% of Green, Inc., a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities' net income are included in Purple's GAAP income statement for current year financial reporting purposes?

Accepted Answer

The answer of Purple, Inc., a domestic corporation, owns 100%...

Question 14

A deferred tax liability represents a potential future tax benefit associated with income reported in the current year GAAP financial statements.

Accepted Answer

A deferred tax liability represents a potential future tax obligation, not a potential future tax benefit. It arises when there is a difference between the amount of income reported for tax purposes and the amount of income reported for financial reporting purposes, causing the company to potentially owe more in taxes in the future.

Question 15

The taxpayer should use ASC 740-30 (APB 23) income deferral only when the tax rates that apply to the subsidiary are less than those of the applicable U.S. income tax rate.

Accepted Answer

ASC 740-30 (APB 23) income deferral is used when the tax rates in the local jurisdiction are lower than those in the U.S. If the rates are higher, using the deferral method would result in a higher overall tax liability.

Question 16

In the "rate reconciliation" of GAAP tax footnotes, temporary book-tax differences are reconciled between book income as if taxed at U.S. tax rates and the actual book income tax expense.

Accepted Answer

The answer of In the "rate reconciliation" of GAAP tax...

Question 17

If a valuation allowance is decreased (released) in the current year, the corporation's effective tax rate is lower than if the valuation allowance had not increased.

Accepted Answer

This is because the release of a valuation allowance means that more deferred tax assets can be utilized to offset taxable income, resulting in a lower effective tax rate.

Question 18

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23) benefits were previously adopted will decrease a corporation's current year effective tax rate.

Accepted Answer

Adopting ASC 740-30 (APB 23) benefits means that the corporation has deferred paying taxes on prior year earnings from the foreign subsidiary. Repatriating those earnings will trigger a tax liability, thus increasing the current year effective tax rate.

Question 19

The income tax footnote to the GAAP financial statements includes a reconciliation of a corporation's hypothetical tax on book income to its book tax expense as if it were taxed in full at the applicable U.S. income tax rates.

Accepted Answer

The income tax footnote to the GAAP financial statements typically includes a reconciliation of a corporation's hypothetical tax on book income to its book tax expense as if it were taxed in full at the applicable U.S. income tax rates. This reconciliation is often required by accounting standards and is designed to help investors and analysts better understand a company's tax position and the factors influencing its tax liability.

Question 20

Which of the following taxes are included in the total income tax expense of a corporation as reported on its GAAP financial statements?

Accepted Answer

All taxes listed in the options (federal income taxes, foreign income taxes, and state income taxes) are included in the total income tax expense reported on a corporation's GAAP financial statements.

Quiz 14: Taxes on the Financial Statements