Deck 16: Corporate Income Tax

Question 1

KER commenced operations in 2013.The company had recorded an accrual for warranty in its books during the year ended December 31, 2014 amounting to $100,000.During the year 2014, customers required service from goods sold in 2013 amounting to $60,000.No similar expenditures were made during 2013.KER accrued warranty expenses totalling $100,000 for 2013 and 2014.As a result of the information above, what is the amount of deferred taxes that will appear on the 2014 statement of financial position? KER adheres to ASPE and has elected to use the Taxes Payable Method.
Assume a 20% tax rate for both years.

A)A Deferred tax asset of $8,000
B)Nil.
C)A Deferred tax liability of $8,000
D)A Deferred tax asset of $40,000

Answer 1

B

Question 2

The following data of ABC Ltd.relates to the current year: Compute taxable income for the year.

A)$13,000
B)$17,000
C)$19,000
D)$11,000
E)$15,000

Answer 2

E

Question 3

Kate Corporation sold a truck resulting in a capital gain of $7,600.The amount to be reported for tax purposes is:

A)$0
B)$3,800
C)$7,600
D)$5,700

Answer 3

B

Question 4

All of the following are all justifications for the use of the comprehensive allocation method except for:

A)The matching principle is best served by using the comprehensive allocation method.
B)Proponents say that this provides a more accurate figure than does the comprehensive allocation method.
C)Income tax is an aggregate measure, applied to the overall operations of the company.
D)Proponents say that a future cash flow impact arises from all temporary differences.

Question 5

Temporary differences can be dealt with in a number of different ways.The method recommended for public companies is the:

A)Comprehensive Allocation Method.
B)Flow-through method
C)Partial Allocation Method.
D)Taxes Payable Method.

Question 6

JMR Corporation has one asset worth $350,000.Depreciation accumulated to date is $230,000 and accumulated CCA is $200,000.Assuming the effective tax rate is constant at 40%, this will result in:

A)A Deferred income tax liability of $12,000
B)A Deferred income tax asset of $30,000
C)A Deferred income tax asset of $12,000
D)A Deferred income tax liability of $30,000

Question 7

The Harry Company reported for pre-tax income of $500,000 for Year 2.Its pre-tax income included $40,000 of meals and entertainment expenses and CCA in excess of depreciation of $70,000.Harry's tax rate for Year 2 was 20%.The tax rate in effect for Year 3 and beyond was 25%.The Year 3 tax rate was enacted during Year 2.At the start of Year 2, Harry's capital assets had a book value of $100,000 and a UCC of $200,000. Based on the information provided above, Harry's total reported income tax expense for Year 2 would have been:

A)$102,500.
B)$126,500.
C)$104,000.
D)$125,000.

Question 8

Amanda Corporation incurred $10,000 of meals and entertainment expenses for the year ended December 31.The amount that is deductible for tax purposes is:

A)$7,500
B)$5,000
C)$10,000
D)$0

Question 9

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.Based on this information and a constant tax rate of 45%, which of the following would appear on the statement of financial position as a result of the information given above?

A)An income tax liability of $45,000.
B)A deferred tax asset of $3,510.
C)A deferred tax liability of $18,135.
D)A deferred tax liability of $3,510.
E)A deferred tax asset of $18,135.

Question 10

Which of the following is an example of a temporary difference, which could result in a deferred tax asset?

A)Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
B)Prepayments of expenses in year of payment; recognition of expense for accounting purposes occurs in a later year.
C)Gain on disposal of an asset when included in taxable income before it is included in pre-tax accounting income
D)Gross margin on instalment sales is recognized for accounting purposes before it is included in taxable income in the income tax return

Question 11

KER commenced operations in 2013.The company has recorded an accrual for warranty in its books during the year ended December 31, 2014 amounting to $100,000.During the year 2014, customers required service from goods sold in 2013 amounting to $60,000.No similar expenditures were made during 2013.KER accrued warranty expenses totalling $100,000 for 2013 and 2014.As a result of the information above, what is the amount of deferred taxes that will appear on the 2014 statement of financial position? Assume a 20% tax rate for both years.

A)A Deferred tax liability of $8,000
B)A Deferred tax asset of $40,000
C)Nil.
D)A Deferred tax asset of $8,000

Question 12

During 2013, MJB has pre-tax accounting income of $8,400.There were no permanent differences.MJB's only temporary difference for 2013 was rent revenue collected in advance of $2,400.None of this amount is recognized for book purposes.MJB's taxable income for 2013 would be:

A)$8,400
B)$9,600
C)$6,000
D)$10,800

Question 13

A firm reported the following in its income statement for the current year: depreciation expense, $4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000.The tax rate is 40%.For tax purposes, the CCA deduction was $9,000.What amount of deferred income tax (benefit)expense will be recognized for this year? Assume no beginning deferred tax amounts and a constant tax rate of 40%.

A)A $2,000 deferred tax benefit.
B)A $2,000 deferred tax expense.
C)A $6,800 deferred tax expense.
D)A $6,800 deferred tax benefit.

Question 14

MNO's taxable income was $900 during 2013.MNO had product warranty costs of $360 recognizable for tax purposes and $400 recognizable for financial accounting purposes.MNO had no other temporary differences.MNO's pre-tax accounting income for 2013 would be:

A)$900
B)$1,260
C)$940
D)$860

Question 15

A firm reported the following in its income statement for the current year: depreciation expense, $4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000.The tax rate is 40%.For tax purposes, the CCA deduction was $9,000.What amount of CURRENT income tax expense will be recognized for this year?

A)$8,800
B)$400
C)$7,800
D)$4,000
E)$6,800

Question 16

Which of the following could never be subject to inter-period tax allocation?

A)Depreciation expense on operational assets
B)Estimated warranty expense
C)Rent revenue
D)Proceeds from life insurance

Question 17

On January 1, Year 2, GHI Inc.had depreciable assets with a book value of $920,000 and a historical cost of $1,000,000.CCA totalling $100,000 had been taken on these assets.During Year 2, depreciation of $80,000 and CCA of $20,000 had been taken on these assets.The tax rate in effect is 35%.For Year 2, the temporary differences arising from the above would result in:

A)a decrease to income tax expense of $14,000.
B)a decrease to income tax expense of $21,000.
C)an increase to income tax expense of $7,000.
D)a decrease to income tax expense of $7,000.

Question 18

Company A had depreciation of $14,000 and CCA of $12,500 during its first year of operations.The tax rates for Years 1 and 2 were 25% and 20% respectively.The Year 2 tax rate was enacted in Year 1.At the end of year 1, this will result in:

A)a deferred income tax asset of $375.
B)a deferred income tax liability of $375.
C)a deferred income tax liability of $300.
D)a deferred income tax asset of $300.

Question 19

GFH had pre-tax accounting income of $1,400 during 2015.GFH used accelerated depreciation for tax purposes ($1,000)and straight-line depreciation for financial accounting purposes ($200).During 2015 GFH accrued warranty expenses of $900 and paid cash to honour warranties of $500.GFH's taxable income for 2015 would be:

A)$1,800
B)$200
C)$1,000
D)$2,600

Question 20

A temporary difference that is deductible in future years is called:

A)A deferred tax asset
B)A permanent tax liability
C)A permanent tax asset
D)A deferred tax liability

Question 21

KER commenced operations in 2013.The company had recorded an accrual for warranty expenses in its books during the year ended December 31, 2013, its first year of operations, amounting to $100,000.During the year 2014, customers required service from goods sold in 2014 amounting to $60,000.There were no similar expenditures made during 2013.KER recorded an amount for possible warranty costs for goods sold during the year in the amount of $95,000.Accounting income amounted to $80,000 and the tax rate is 40%.Assuming that KER has no other differences between accounting and tax what are the current and deferred income tax amounts that will appear on the 2014 statement of financial position?

A)Income Taxes Payable (Current): $46,000; deferred tax asset: $54,000
B)Income Taxes Payable (Current): $22,000; deferred tax liability: 14,000
C)Income Taxes Payable (Current): $22,000; deferred tax asset: $14,000
D)Income Taxes Payable (Current): $46,000; deferred tax liability: $54,000

Question 22

At the end of 2014, the only expected future temporary difference is implied by the following account found in the balance sheet: Prepaid rent = $22,000
The footnotes reveal that the prepaid rent applies only to 2015.You would also expect to find which of the following in the balance sheet:

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

Question 23

Which of the following is an example of a temporary difference, which would result in a deferred tax asset?

A)Investment losses recognized later for accounting purposes than for tax purposes
B)Rent revenue collected in advance when included in taxable income before it is included in pre-tax accounting income
C)Use of a shorter depreciation period for accounting purposes than is used for income tax purposes
D)Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes

Question 24

Ryan Company paid golf dues on behalf of their two top employees.This is an example of a:

A)Temporary difference
B)Permanent difference
C)Reversing difference
D)Fully deductible for income tax purposes

Question 25

A characteristic of the taxes payable method is that:

A)It is mandatory for private companies.
B)Tax owed for the period will equal accounting income tax expense.
C)The matching principle is respected.
D)Inter-period income tax allocation is applied to some types of temporary differences but not all.

Question 26

Golf dues paid for by a company are:

A)a timing difference
B)a reversing difference
C)a temporary difference
D)a permanent difference

Question 27

An example of a "deductible amount" occurs when:

A)Expenses are recognized more quickly for taxes than for accounting purposes.
B)Product warranty costs recognized for tax purposes as the warranty conditions are met but recognized for accounting purposes earlier on the accrual basis.
C)Accelerated depreciation is used for tax purposes but straight-line depreciation is used for accounting purposes.
D)A gain on instalment sales is recognized for tax purposes as the receivable is collected, but was earlier recognized for accounting purposes when the sale was made.

Question 28

On January 1, Year 2, GHI Inc.had spent $100,000 in capital development costs to date, 50% of which had been capitalized.During Year 2, the company had incurred additional capital development costs of $200,000, 60% of which was capitalized.The income tax rate for Years 2 and prior was 20%.The tax rate for future years was expected to be 25%.This rate was enacted during Year 2.For Year 2, the temporary differences arising from the above would result in:

A)a decrease to income tax expense of $40,000.A corresponding DTA of $60,000 would also be recorded as the end of Year 2.
B)a decrease to income tax expense of $55,000.A corresponding DTA of $75,000 would also be recorded as the end of Year 2.
C)an increase to income tax expense of $40,000.A corresponding DTL of $60,000 would also be recorded as the end of Year 2.
D)an increase to income tax expense of $55,000.A corresponding DTL of $75,000 would also be recorded as the end of Year 2.

Question 29

EGR Corporation has one asset worth $450,000.Accumulated Depreciation to date is $190,000 and accumulated CCA is $220,000.The Corporation also recorded warranty expense of $30,000.To date no customers have required warranty service, so no warranty expenditures have been made.Assuming the tax rate is constant at 40%, this will result in:

A)A net deferred income tax asset of $12,000
B)A net deferred income tax liability of $12,000
C)A net deferred income tax asset of $30,000
D)No temporary difference.

Question 30

STR provided the following data related to income tax allocation: The deferred tax account showed a zero balance at the start of 2009.There was only one temporary difference, a revenue amount, which was taxable in 2009, but was recorded for accounting purposes in 2010.There are no carry backs or carry forwards.The journal entry to record the income tax consequences for 2009 would include a:

A)Credit of $400 to STR's deferred tax account.
B)Debit of $400 to STR's deferred tax account.
C)Credit of $136 to STR's deferred tax account.
D)Debit of $136 to STR's deferred tax account.

Question 31

ABC Inc.owns a single capital asset.At the end of its first year, the asset`s UCC is higher than its book value due to the company`s choice of depreciation methods.What will be the effect of this difference over the life of the asset, assuming that this trend continues?

A)This will result in a reduction of the initial Deferred Tax Liability, and a corresponding Deferred Income Tax Expense amount on the Statement of Comprehensive Income in each year.
B)This will result in a reduction of the initial Deferred Tax Asset, and a corresponding Deferred Income Tax Benefit amount on the Statement of Comprehensive Income in each year.
C)This will result in a reduction of the initial Deferred Tax Asset, and a corresponding Deferred Income Tax Expense amount on the Statement of Comprehensive Income in each year.
D)This will result in a reduction of the initial Deferred Tax Liability, and a corresponding Deferred Income Tax Benefit amount on the Statement of Comprehensive Income in each year.

Question 32

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.From the information provided above, what is the total amount of expenses that will never have an effect on taxable income (and thus never trigger any DTA/DTL amounts)?

A)$11,000
B)$17,000
C)$6,000
D)$5,000

Question 33

KAR Company sold a building resulting in a capital gain of $15,000.Choose the statement below that best describes what the impact of this is:

A)Accounting income will be reduced by $7,500.
B)There will be a temporary difference of $3,750.
C)There will be a permanent difference of $7,500.
D)There will be a permanent difference of $11,250.
E)There will be a temporary difference of $7,500.

Question 34

Which of the following would result in a deferred tax asset?

A)Warranty provision.
B)Point of sale revenue recognition for the books, and cost recovery method of revenue recognition for tax.
C)Rent received in advance.
D)Using straight-line depreciation for the books and accelerated depreciation for tax.

Question 35

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.Based on this information and a tax rate of 45%, what is taxable income?

A)$34,000
B)$46,000
C)$35,000
D)$51,000
E)$41,000

Question 36

A firm reported the following in its income statement for the current year: depreciation expense, $4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000.The tax rate is 40% for the current year, and no changes to this rate are foreseen in the near term.For tax purposes, the CCA deduction was $9,000.What amount of deferred income tax (benefit)expense will be recognized for this year? Assume a beginning Deferred Tax asset balance of $4,000.

A)A $2,000 deferred tax benefit.
B)A $6,000 deferred tax benefit.
C)A $6,000 deferred tax expense.
D)A $2,000 deferred tax expense.

Question 37

ABC Co.in its first year of business has taxable income of $2,000, book depreciation of $3,000 and CCA of $4,600, and recognized $800 of warranty expense but performed no warranty service.ABC's pre-tax accounting income would be:

A)$2,000
B)$1,200
C)$3,600
D)$2,800

Question 38

Which of the following does not help in explaining why (1)and (2)are different: (1)Income tax expense
(2)The product of pre-tax income and the current tax rate.

A)Permanent differences
B)A change in the effective tax rate
C)The fact that future and current tax rates are different
D)Temporary differences

Question 39

The following information is available for Ryan Corporation: Assets at cost-$260,000; Accumulated depreciation-$80,000; Accumulated CCA-$90,000; meals and entertainment recorded in the books-$12,000; golf dues paid-$5,000.Based on this information and a tax rate of 45%, what is the amount of the temporary difference?

A)$0
B)$4,000
C)$10,000
D)$1,000

Question 40

At most, how many deferred tax accounts will a firm report in its balance sheet?

A)2
B)4
C)3
D)1

Question 41

On January 1, Year 2, GHI Inc.had expensed $100,000 more of warranty expenses than it had deducted for income tax purposes to date.During Year 2, the company had deducted $150,000 more in warranty costs on its Year 2 tax return than it had accrued for that year.The income tax rate for Years 2 and prior was 20%.The tax rate for future years was expected to be 25%.This rate was enacted during Year 2.For Year 2, the temporary differences arising from the above would result in:

A)an increase to income tax expense of $30,000.A corresponding DTL of $10,000 would also be recorded as the end of Year 2.
B)a decrease to income tax expense of $32,500.A corresponding DTA of $12,500 would also be recorded as the end of Year 2.
C)a decrease to income tax expense of $30,000.A corresponding DTA of $10,000 would also be recorded as the end of Year 2.
D)an increase to income tax expense of $32,500.A corresponding DTL of $12,500 would also be recorded as the end of Year 2.

Question 42

Financial analysts tend to ignore deferred taxes when computing the effective tax rate.

Question 43

All temporary differences are related to differences in the timing of accounting recognition compared with income tax recognition.

Question 44

JMR Corporation sold a truck resulting in a capital gain of $11,000.$5,500 represents a:

A)Timing difference
B)Permanent difference
C)Temporary difference
D)None of these

Question 45

A taxable amount is exemplified by:

A)Gain that is included in the tax return before it is included in pre-tax accounting income.
B)Expense that is included in the tax return after it is included in pre-tax accounting income.
C)Expense that is included in the tax return before it is included in pre-tax accounting income.
D)Revenue that is included in the tax return before it is included in pre-tax accounting income.

Question 46

Company A had depreciation of $14,000 and CCA of $12,500 during its first year of operations.The tax rates for Years 1 and 2 were 25% and 20% respectively.The Year 2 tax rate was enacted in Year 2.At the end of year 1, this will result in:

A)a deferred income tax asset of $375.
B)a deferred income tax asset of $300.
C)a deferred income tax liability of $300.
D)a deferred income tax liability of $375.

Question 47

Temporary differences very seldom reverse (i.e., turnaround)in one or more future reporting periods.

Question 48

Which of the following is an example of a temporary difference which would not result in a deferred tax asset?

A)Unrealized loss on short term investment is recognized for accounting purposes during the holding period while the actual loss on date of disposal is used for tax purposes.
B)Use of sales method of revenue recognition for accounting purposes, and instalment method of revenue recognition for tax purposes.
C)Estimated loss on disposal of a segment of a business recognized for accounting purposes but reported on the income tax return later on the basis of the actual loss.
D)Allowance method for doubtful accounts is used for accounting purposes while direct write-off is required for tax purposes.

Question 49

EGR Corporation has one asset worth $650,000.Accumulated Depreciation to date is $230,000 and accumulated CCA is $200,000.The Corporation also recorded warranty expense of $35,000.To date no customers have required warranty service, so no warranty expenditures have been made.Assuming the tax rate is constant at 40%, this will result in a:

A)A Deferred income tax liability of $26,000
B)A Deferred income tax asset of $26,000
C)A Deferred income tax liability of $2,000
D)A Deferred income tax asset of $2,000

Question 50

Under the liability approach, deferred taxes on the balance sheet are valued at the tax rate in that will be in effect when the temporary differences reverse.

Question 51

JMR Corporation has one asset worth $350,000.Depreciation accumulated to date is $200,000 and accumulated CCA is $230,000.Assuming the tax rate is 40% what is the income tax implication?

A)A Deferred income tax liability of $12,000
B)A Deferred income tax asset of $30,000
C)A Deferred income tax asset of $12,000
D)A Deferred income tax liability of $30,000

Question 52

Deferred Tax balances are discounted when their underlying temporary differences are material or are expected to reverse out many years into the future.

Question 53

On January 1, Year 2, GHI Inc.had accrued $100,000 more sales revenue than it had declared for income tax purposes to date.During Year 2, the company had declared $150,000 more in sales revenues on its Year 2 tax return than it had accrued for that year.The income tax rate for Years 2 and prior was 20%.The tax rate for future years was expected to be 25%.This rate was enacted during Year 2.For Year 2, the temporary differences arising from the above would result in:

A)an increase to income tax expense of $30,000.A corresponding DTL of $10,000 would also be recorded as the end of Year 2.
B)an increase to income tax expense of $32,500.A corresponding DTL of $12,500 would also be recorded as the end of Year 2.
C)a decrease to income tax expense of $30,000.A corresponding DTA of $10,000 would also be recorded as the end of Year 2.
D)a decrease to income tax expense of $32,500.A corresponding DTA of $12,500 would also be recorded as the end of Year 2.

Question 54

Temporary differences relate only to items that will be recognized on both the income statement and the tax return, but in different reporting periods.

Question 55

The general terminology used to describe income tax expense when shown on the statement of comprehensive income is:

A)Tax expense
B)Income tax benefit
C)Provision for income tax expense
D)Income tax expense

Question 56

The taxes payable method results in better matching than does the comprehensive allocation method.

Question 57

A deductible amount is exemplified by all of the following except:

A)Revenue that is included in the tax return before it is included in pre-tax accounting income.
B)Gain that is included in the tax return before it is included in pre-tax accounting income.
C)Loss that is included in the tax return after it is included in pre-tax accounting income.
D)Expense that is included in the tax return after it is included in pre-tax accounting income.
E)Expense that is included in the tax return before it is included in pre-tax accounting income.

Question 58

Recommended disclosures for the provision for income tax expense include all of the following except:

A)Income tax expense should not be grouped with other expenses
B)Public companies should disclose the nature of temporary differences
C)Income tax expense or benefit should be reported separately on the financial statements
D)Income taxes relating to discontinued items must be disclosed separately on the financial statements

Question 59

The term "taxable amount" includes:

A)Revenues that are included in the tax return BEFORE they are recognized for accounting purposes.
B)Warranty deductions for accounting purposes.
C)Gains that are included in the tax return AFTER they are recognized for accounting purposes.
D)Losses that are included in the tax return AFTER they are recognized for accounting purposes.

Question 60

EGR just completed its first year end.During the year, EGR recorded $12,000 in depreciation ($18,500 CCA).In addition there was a deduction in the accounting records for meals and entertainment amounting to $6,000.As a result taxable income will:

A)be lower than accounting income by $5,500.
B)be higher than accounting income by $500.
C)be equal to accounting income.
D)be higher than accounting income by $5,500.
E)be lower than accounting income by $500.

Question 61

Netting of deferred income tax assets and liabilities is always forbidden under IFRS and ASPE.

Question 62

"Taxable amounts" include revenues and gains that are included in the tax return BEFORE they are recognized for accounting purposes.

Question 63

Under the deferral approach, deferred taxes on the balance sheet are valued at the tax rate in that will be in effect when the temporary differences reverse.

Question 64

Income tax expense for continuing operations and discontinued operations must be disclosed separately on the income statement.

Question 65

When a temporary difference causes cumulative taxable income to rise faster than accounting income reported to date, a Deferred Tax Asset (DTA)will be recognized (Assume that the Taxes Payable Method)is NOT used.

Question 66

All temporary differences originate, then reverse, and eventually end with a zero net effect.

Question 67

Permanent differences are those that factor into the computation of both net income and taxable income.

Question 68

Amanda Company sold an asset and as a result had a capital gain of $15,000.Fifty percent of this amount represents a permanent difference.

Question 69

The existence of deferred tax assets on the balance sheet is dependent on a company's going concern status.

Question 70

Comprehensive allocation recognizes the amount of taxes assessed in each year as the income tax expense for that year.

Question 71

Deferred income tax liabilities are amounts owed to the government.

Question 72

Under IFRS, the amount of taxes paid must be disclosed on the face of the cash flow statement.

Question 73

Prepayments of Deferred income tax expense may be viewed as a deferred tax asset.

Question 74

In Canada, tax rates are usually enacted in the year to which they pertain.

Question 75

Under the indirect method of preparing cash flows from operating activities, deferred income tax expense must be added back to net income.

Question 76

The phrase "provision for income taxes" encompasses both income tax expenses and liabilities.

Question 77

Under the comprehensive allocation method, deferred tax assets and liabilities are valued at the tax rates that are expected to be substantially enacted in the year of reversal.

Question 78

Deferred taxes appear on a company's balance sheet as a result of inter-period tax allocation.

Question 79

Income tax expense generally equals the product of the current period income tax rate and pre-tax accounting income.

Question 80

If a company incurs $1,500 of expenditures for meals and entertainment, this amount represents a permanent difference.