Question 1

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

Accepted Answer

The current tax expense reported on the GAAP financial statements is the amount of taxes payable to domestic or foreign governmental authorities for the current period. This is also known as the income tax payable.

Question 2

A partnership owned at least 80% by a corporation is included in a consolidated group's U.S.income tax return.

Accepted Answer

A partnership cannot be included in a consolidated group's U.S. income tax return because consolidated tax returns are limited to corporations, and partnerships are treated as separate entities for tax purposes.

Question 3

Giant uses the "equity method" to account for the operations of its 40% owned subsidiary Little.A portion of Little's profits for the year are included in Giant's GAAP book income.

Accepted Answer

This statement is true. When accounting for investments in subsidiaries, the equity method is used when the investor has significant influence but not full control over the subsidiary. Under this method, the investor records its percentage of the subsidiary's net income or loss in its own financial statements. In this case, since Giant owns 40% of Little, it is considered to have significant influence and thus uses the equity method to account for Little's operations.

Question 4

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

Accepted Answer

A deferred tax liability represents a future tax payment a company expects to make to tax authorities due to temporary differences between its taxable income and its accounting earnings, not a current tax liability.

Question 5

"Permanent differences" include items that appear in the Federal income tax return as income or deduction, and in the GAAP financial statements as revenue or expense, but in different reporting periods.

Accepted Answer

Permanent differences are items that are included in the calculation of taxable income or financial income, but never both. They do not reverse over time, unlike temporary differences which may cause differences in timing between tax and financial reporting.

Question 6

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

Accepted Answer

A valuation allowance is specifically used to reduce a deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. It does not apply to deferred tax liabilities.

Question 7

Yahr, Inc., is a domestic corporation with no subsidiaries.It operates in almost every U.S.state.Yahr records no permanent or temporary book-tax differences this year.Yahr's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

Accepted Answer

The answer of Yahr, Inc., is a domestic corporation with...

Question 8

A valuation allowance expresses on the GAAP balance sheet that there exists uncertainty that the taxpayer will be able to recover a deferred tax asset.

Accepted Answer

A valuation allowance is a reserve that is recorded on the GAAP balance sheet to indicate that there is uncertainty regarding the ability of the taxpayer to recover a deferred tax asset. It is used to reduce the carrying amount of the deferred tax asset to the amount that is more likely than not to be realized.

Question 9

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

Accepted Answer

The answer of An example of a deferred tax asset...

Question 10

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

Repatriating earnings from a foreign subsidiary where ASC 740-30 (APB 23) benefits were previously adopted does not directly affect the current year's effective tax rate because the decision to repatriate and the associated tax implications were already accounted for in prior periods. The effective tax rate is influenced by current year income and taxes, not by the repatriation of prior year earnings.

Question 11

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current year GAAP financial statements.

Accepted Answer

A deferred tax asset represents the future tax benefit that will be realized when the temporary difference between book and tax basis reverses in the future. This future benefit is based on the current year's financial statements and can be recognized as an asset on the balance sheet.

Question 12

"Temporary differences" are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return, but not in the same reporting period.

Accepted Answer

Temporary differences arise when the timing of recognition of a transaction or event differs between the GAAP financial statements and the tax return. These differences result in either deferred tax assets or liabilities, which represent future tax consequences of these temporary differences.

Question 13

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 decreased.

Accepted Answer

When a valuation allowance is decreased, it means that the corporation is recognizing more deferred tax assets as probable to be realized in the future. This results in a decrease in the effective tax rate as the corporation can now reduce its tax liability by utilizing these deferred tax assets. Therefore, the statement is true.

Question 14

Only U.S.corporations are included in a combined GAAP financial statement.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) applies to all entities and not just limited to U.S. corporations. Therefore, financial statements prepared under GAAP can include both U.S. and non-U.S. corporations.

Question 15

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 statement is true. 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. This is because the earnings are not subject to U.S. taxation until they are repatriated (brought back) to the U.S. parent company.

Question 16

If a corporation has no operations outside the U.S., its GAAP book and taxable income are identical.

Accepted Answer

Even if a corporation has no operations outside the U.S., differences can still arise between GAAP book income and taxable income due to different treatment of certain items under U.S. Generally Accepted Accounting Principles (GAAP) and the Internal Revenue Code (tax laws).

Question 17

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return, if a proper election is made.

Accepted Answer

This is true under United States tax law. The parent corporation must make an election to include the subsidiary's operations in their consolidated tax return.

Question 18

The IRS decides upon audit whether the taxpayer can claim the tax deferral benefits of ASC 740-30 (APB 23).

Accepted Answer

The IRS does not decide whether a taxpayer can claim the tax deferral benefits of ASC 740-30 (APB 23); rather, this is an accounting principle that companies apply in their financial statements to determine whether earnings of foreign subsidiaries can be considered indefinitely reinvested, and thus not subject to U.S. income taxes until repatriated. The decision to apply ASC 740-30 is made by the company and its auditors, not the IRS.

Question 19

Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.

Accepted Answer

Schedule UTP (Uncertain Tax Position Statement) is used by certain corporations to report uncertain tax positions, not to reconcile financial statement net income after tax with taxable income. That reconciliation is generally part of Schedule M-1 or Schedule M-3 of the Form 1120.

Question 20

In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments, for the current year and all future years.

Accepted Answer

ASC 740 (SFAS 109) is a standard that guides accounting for income taxes. One of its main objectives is to determine and reveal the tax obligations of an entity to various governmental bodies, for both the current term and all subsequent periods.

Quiz 3: Taxation on the Financial Statements