Question 1

Which of the following transactions would not create a temporary difference?

Accepted Answer

The cash collection from a life insurance policy on a company executive is not a taxable event and hence will not create a temporary difference.

The other options would create temporary differences as follows:
A) The sale recorded using the installment method for book purposes will create a temporary difference because for tax purposes, the entire profit will be recognized in the year of sale.
C) The cash collection for services to be provided during the next period will create a temporary difference because for tax purposes, the revenue will be recognized only when the services are provided.
D) The use of the percentage-of-completion method for book purposes will create a temporary difference because for tax purposes, the revenue and expenses will be recognized differently based on the completion percentage.

Question 2

Which of the following statements is not correct?

Accepted Answer

Permanent differences are items that only affect either book income or taxable income, but not both, and they do not reverse over time. Statement C incorrectly describes a permanent difference as affecting the timing between book and taxable income, which is actually a characteristic of temporary differences.

Question 3

Under IFRS rules,deferred tax assets and deferred tax liabilities are always reported as noncurrent in a classified balance sheet.

Accepted Answer

According to IFRS rules, deferred tax assets and deferred tax liabilities are reported as noncurrent in a classified balance sheet, as they are expected to be settled more than 12 months after the reporting date.

Question 4

The allocation of the tax cost (benefit)across various components of book income within a given period is called

Accepted Answer

The allocation of income tax expense (or benefit) across various components of book income within a given period is referred to as intraperiod tax allocation. This is done to properly match the tax expense with the related book income for the period. Interperiod tax allocation, on the other hand, involves the allocation of taxes across different accounting periods. Current income tax allocation and constructive receipt allocation are not relevant to the allocation of tax costs within a given period.

Question 5

Both IFRS and U.S.GAAP require that a valuation allowance when it is deemed more likely than not (greater than 50% likelihood)that the deferred tax asset will not be realized.

Accepted Answer

Under U.S. GAAP, a valuation allowance is required when it is more likely than not (greater than 50% likelihood) that some portion or all of the deferred tax asset will not be realized. However, IFRS does not use a valuation allowance in the same way; instead, the carrying amount of a deferred tax asset is reduced to the extent that it is no longer probable (i.e., more likely than not) that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Question 6

A temporary difference that causes book income to be greater than or less than taxable income when it is initially recorded is a/an

Accepted Answer

An originating temporary difference is a timing difference between book and tax accounting that occurs initially and causes book income to be greater than or less than taxable income. Reversing temporary differences eventually get reversed and return to the same amount in both book and tax income, while permanent differences do not change over time. Minor differences are immaterial discrepancies between book and tax accounting that do not require adjustment.

Question 7

The accounting principle violated if temporary differences are not taken into account is the

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the revenue they help generate. If temporary differences, such as differences in depreciation timing between financial statements and tax returns, are not taken into account, expenses may be recognized in a different period than the corresponding revenue, violating the matching principle.

Question 8

When depreciable assets are sold,the change in the deferred tax liability balance for depreciation reflects only current period book-versus-tax depreciation differences.

Accepted Answer

The change in the deferred tax liability balance for depreciation reflects not only the current period book-versus-tax depreciation differences but also adjustments for any cumulative differences that have arisen in prior periods.

Question 9

Under IFRS deferred tax assets are recognized only to the extent it is deemed probable that they will be realized.

Accepted Answer

Under IFRS, deferred tax assets are only recognized to the extent that it is probable that they will be realized. This means that the company must have sufficient future taxable income against which the asset can be utilized. If it is not likely that the asset will be fully utilized, it is not recognized on the balance sheet.

Question 10

The allocation of income tax expense across periods when book and tax income differ is called

Accepted Answer

Interperiod tax allocation is the process of allocating income tax expense across various periods when book and tax income differ. This is done to ensure that the financial statements reflect the true tax liability of the company and to avoid misstatements in financial reporting. Intraperiod tax allocation, on the other hand, deals with the allocation of income tax expense or benefit within a single accounting period, while current income tax allocation refers to the recognition of income taxes currently payable or receivable. Constructive receipt allocation is not a term commonly used in tax accounting.

Question 11

When tax expense equals current taxes payable to the IRS plus (minus)the increase (decrease)in deferred tax liabilities,tax expense is properly matched for the

Accepted Answer

Tax expense should be properly matched with the current period to reflect the taxes owed or paid for the current financial year. By including the current taxes payable to the IRS, and adjusting for changes in deferred tax liabilities, tax expense is accurately matched for the current period. Therefore, option A is correct. Options B, C, and D are incorrect because tax expense should be matched with the current period, not the previous or future periods or the tax return.

Question 12

A temporary difference created this year causes book income to be greater than taxable income;in future years book income will be less than taxable income.The temporary difference in the future years' incomes is referred to as

Accepted Answer

The temporary difference in book income being greater than taxable income this year is an originating temporary difference. However, in future years, when book income will be less than taxable income, this difference will reverse, making it a reversing temporary difference. Therefore, the answer is A.

Question 13

Which one of the following is a permanent difference between book and taxable income?

Accepted Answer

Interest received on municipal bonds is tax-exempt at the federal level, resulting in a permanent difference between book and taxable income.

Question 14

The GAAP solution for avoiding distortions that would result from setting income tax expense equal to taxes owed is called

Accepted Answer

Interperiod tax allocation is the GAAP solution for avoiding distortions in financial reporting by allocating income tax expense over different periods to match the income tax expense with the revenues that generate those taxes. This approach helps in presenting a more accurate picture of a company's financial performance over time.

Question 15

Both IFRS and U.S.GAAP require firms to classify deferred tax assets and liabilities as current or noncurrent depending on the classification of the asset or liability giving rise to the temporary difference.

Accepted Answer

Under U.S. GAAP, deferred tax assets and liabilities are classified as noncurrent on the balance sheet, whereas IFRS does not require such classification and allows entities to classify deferred tax based on the underlying asset or liability.

Question 16

Temporary differences that will cause taxable income in future periods to be lower than book income in future periods give rise to

Accepted Answer

Temporary differences that will cause taxable income in future periods to be lower than book income in future periods give rise to deferred tax assets. This is because the company will be able to use these temporary differences to offset future taxable income and therefore reduce their tax liability in the future.

Question 17

Which of the following transactions would not create a temporary difference?

Accepted Answer

The cash collection of interest earned on a municipal bond would not create a temporary difference because it does not involve timing differences between book and tax accounting. The other options involve timing differences that may create temporary differences between the book and tax basis of assets or liabilities.

Question 18

The two broad categories of differences that result from determining financial income and taxable income are

Accepted Answer

The two broad categories of differences that result from determining financial income and taxable income are temporary differences and permanent differences. Temporary differences arise because certain transactions are recognized for financial reporting purposes in one period but are recognized for tax purposes in a different period. Permanent differences arise because certain items are included in financial income but are not allowed as deductions in calculating taxable income, or vice versa.

Question 19

Temporary differences that will cause taxable income in future periods to be higher than book income in future periods give rise to

Accepted Answer

Temporary differences result from the difference in the recognition of income or expense for book and tax purposes. If taxable income will be higher in future periods due to these temporary differences, it means that the company will have to pay more tax in the future. This gives rise to a deferred tax liability, which represents the amount of tax that will be due in the future. Deferred tax assets, on the other hand, arise when taxable income will be lower than book income in the future, and the company will be able to reduce its tax liability. Permanent differences are differences that do not give rise to deferred tax assets or liabilities. A tax refund receivable is a separate item that represents an overpayment of tax in the current period that will be refunded in the future.

Question 20

Both IFRS and U.S.GAAP require a numerical reconciliation that explains the differences between statutory and effective tax rates.

Accepted Answer

Both IFRS and U.S.GAAP require a numerical reconciliation that explains the differences between statutory and effective tax rates.

Quiz 13: Income Tax Reporting

Which of the following transactions would not create a temporary difference?

Which of the following statements is not correct?

Under IFRS rules,deferred tax assets and deferred tax liabilities are always reported as noncurrent in a classified balance sheet.

The allocation of the tax cost (benefit) across various components of book income within a given period is called

Both IFRS and U.S.GAAP require that a valuation allowance when it is deemed more likely than not (greater than 50% likelihood)that the deferred tax asset will not be realized.

A temporary difference that causes book income to be greater than or less than taxable income when it is initially recorded is a/an

The accounting principle violated if temporary differences are not taken into account is the

When depreciable assets are sold,the change in the deferred tax liability balance for depreciation reflects only current period book-versus-tax depreciation differences.

Under IFRS deferred tax assets are recognized only to the extent it is deemed probable that they will be realized.

The allocation of income tax expense across periods when book and tax income differ is called

When tax expense equals current taxes payable to the IRS plus (minus) the increase (decrease) in deferred tax liabilities,tax expense is properly matched for the

A temporary difference created this year causes book income to be greater than taxable income;in future years book income will be less than taxable income.The temporary difference in the future years' incomes is referred to as

Which one of the following is a permanent difference between book and taxable income?

The GAAP solution for avoiding distortions that would result from setting income tax expense equal to taxes owed is called

Both IFRS and U.S.GAAP require firms to classify deferred tax assets and liabilities as current or noncurrent depending on the classification of the asset or liability giving rise to the temporary difference.

Temporary differences that will cause taxable income in future periods to be lower than book income in future periods give rise to

Which of the following transactions would not create a temporary difference?

The two broad categories of differences that result from determining financial income and taxable income are

Temporary differences that will cause taxable income in future periods to be higher than book income in future periods give rise to

Both IFRS and U.S.GAAP require a numerical reconciliation that explains the differences between statutory and effective tax rates.