Deck 13: Income Tax Reporting

Question 1

Statutory depletion in excess of cost depletion is an example of a permanent difference.

Answer 1

True

Question 2

A revenue included in the determination of book income this year but never included in taxable income is an example of a temporary difference.

Answer 2

False

Question 3

A revenue included in the determination of book income this year but not included in taxable income until next year is an example of a temporary difference.

Answer 3

True

Question 4

The allocation of the tax provision across various components of book income within a given period is called interperiod tax allocation.

Question 5

The payment of life insurance premiums on company executives is an example of a permanent difference.

Question 6

Temporary differences this year that will cause taxable income to be higher than book income give rise to a deferred tax asset.

Question 7

Income tax expense when interperiod tax allocation is used creates a more stable effective tax rate over time relative to using tax payments as income tax expense.

Question 8

Treating the taxes paid each year as an expense in the income statement could result in an inappropriate matching between pre-tax book income and income tax expense.

Question 9

Book income tax expense could equal current taxes payable to the IRS plus the increase in deferred tax liabilities minus the increase in deferred tax assets.

Question 10

A revenue item that causes book income to be more (less)than taxable income when it is initially recorded,is called a temporary difference.

Question 11

An accrual of warranty expense for book income calculations this year creates a deferred tax liability in the balance sheet.

Question 12

A cash payment received from a customer recorded as unearned revenue for book purposes creates a deferred tax liability.

Question 13

The accrual of wages expense for book purposes at year-end creates a deferred tax asset on the year-end balance sheet.

Question 14

Interperiod tax allocation refers to the allocation of income tax expense across periods when book and taxable income differ.

Question 15

Book income tax expense could equal current taxes payable to the IRS plus the increase in deferred tax liabilities plus the increase in deferred tax assets.

Question 16

An expense included in the determination of taxable income this year but not included in book income until next year is an example of a temporary difference.

Question 17

An expense that enters into the determination of book income but never affects taxable income is referred to as a permanent difference.

Question 18

Book income does not correspond with taxable income because of different underlying objectives with respect to income measurement.

Question 19

Taxable income is governed by the doctrine of constructive receipt or ability to pay.

Question 20

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

Question 21

The income tax benefit associated with a loss carryback or carryforward is recorded as an adjustment to income tax expense in the year of the loss.

Question 22

When the income tax rate changes,the full change in the amount of future liability for income taxes is recognized as a change to income tax expense in the year that the change is enacted.

Question 23

Creation of the deferred tax asset valuation allowance account is subjective and therefore provides management the opportunity to manipulate income.

Question 24

A company reported income taxes payable of $199,200,a decrease in deferred tax assets of $19,900,and a decrease in deferred tax liabilities of $12,450;therefore book income tax expense equals $191,750.

Question 25

The determination of whether or not a valuation allowance is necessary is based on subjective assessment.

Question 26

A company reported income taxes payable of $79,500,an increase in deferred tax assets of $7,900,and an increase in deferred tax liabilities of $19,750;therefore book income tax expense equals $91,350.

Question 27

A deferred tax asset can be fully recognized without adjustment if management believes that the probability of future taxable income sufficient to fully realize the deferred tax asset is greater than 50%.

Question 28

The disclosures with respect to deferred income taxes can be used to analyze the differences in financial reporting choices across firms and therefore enhance interfirm comparisons.

Question 29

A company reported income taxes payable of $99,700,an increase in deferred tax assets of $19,900,and a decrease in deferred tax liabilities of $9,550;therefore book income tax expense equals $70,250.

Question 30

When financial statement notes regarding deferred taxes reveal a sudden decrease in deferred tax assets,it can be a potential sign of deteriorating earnings quality.

Question 31

Companies are required to disclose details about individual temporary differences that give rise to the deferred tax asset and deferred tax liability balances on the balance sheet.

Question 32

Book income tax expense when using interperiod tax allocation results in a proper matching of revenues and expenses in the income statement.

Question 33

When future income tax rates change,the effect of the change on net income will be consistent across most companies regardless of their deferred tax balances.

Question 34

Once a deferred tax asset valuation allowance is established,it can be either increased or decreased in future years.

Question 35

If a deferred tax asset may not be fully realized in future periods,a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized.

Question 36

Financial statement disclosures concerning income taxes provides financial analysts with information regarding the transactions that had an impact on the year-end deferred income taxes balance.

Question 37

A corporation that incurs a net operating loss must carry the loss back to earlier years before it can carry the loss forward.

Question 38

Analyzing the disclosures pertaining to deferred income taxes can provide relevant insights into the actions that a company's management has taken to manipulate net income.

Question 39

A significant decrease in the deferred tax asset account is relevant with respect to assessing earnings quality.

Question 40

GAAP requires a disclosure that reconciles a company's effective income tax rate and the U.S.statutory income tax rate.

Question 41

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

A)A sale recorded using the installment method for book purposes.
B)The cash collection from a life insurance policy on a company executive.
C)A cash collection for services to be provided during the next period.
D)The use of the percentage-of-completion method for book purposes.

Question 42

Which of the following statements is not correct?

A)Temporary differences causing taxable income in future periods to be higher than book income in future periods create deferred tax liabilities.
B)Temporary differences causing taxable income in future periods to be lower than book income in future periods create deferred tax assets.
C)A permanent difference results when a revenue enters into the determination of book income in one period but affects taxable income in a different period.
D)A temporary difference causing book income to be less than taxable income when initially recorded is described as an originating difference.

Question 43

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

Question 44

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

A)interperiod tax allocation.
B)intraperiod tax allocation.
C)current income tax allocation.
D)constructive receipt allocation.

Question 45

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.

Question 46

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

A)reversing temporary difference.
B)originating temporary difference.
C)permanent difference.
D)minor difference.

Question 47

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

A)historical cost principle.
B)matching principle.
C)conservatism principle.
D)cost/benefit principle.

Question 48

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

Question 49

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

Question 50

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

A)interperiod tax allocation.
B)intraperiod tax allocation.
C)current income tax allocation.
D)constructive receipt allocation.

Question 51

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)current period.
B)previous period.
C)future period.
D)tax return.

Question 52

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

A)reversing temporary difference.
B)originating temporary difference.
C)permanent difference.
D)minor difference.

Question 53

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

A)Interest received on municipal bonds
B)Installment sales
C)Bad debts expense
D)Warranty expense

Question 54

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

A)intraperiod tax allocation.
B)interperiod tax allocation.
C)book income allocation.
D)intraperiod book allocation of income.

Question 55

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.

Question 56

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

A)deferred tax assets.
B)deferred tax liabilities.
C)permanent differences.
D)expense.

Question 57

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

A)The cash payment to acquire a three-year insurance policy.
B)The accrual of warranty expense.
C)The accrual of bad debts expense.
D)The cash collection of interest earned on a municipal bonD.

Question 58

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

A)temporary differences and originating differences.
B)temporary differences and reversing differences.
C)temporary differences and permanent differences.
D)permanent differences and deferred differences.

Question 59

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

A)deferred tax assets.
B)deferred tax liabilities.
C)permanent differences.
D)tax refund receivable.

Question 60

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

Question 61

What amount of deferred income tax liability should Stone report in its December 31,2015,balance sheet?

A)$5,000
B)$9,000
C)$20,000
D)$27,000

Question 62

Income tax expense reported on the income statement for the year ending December 31,2015 would be

A)$100,000.
B)$120,000.
C)$183,000.
D)$210,000.

Question 63

If Smith paid no estimated taxes,what amount of income taxes payable should Smith report in its December 31,2015,balance sheet?

A)$100,000
B)$120,000
C)$128,000
D)$140,000

Question 64

Income tax expense reported on the income statement for the year ending December 31,2015 would be

A)$100,000.
B)$120,000.
C)$128,000.
D)$140,000.

Question 65

What amount of deferred income tax liability should Smith report in its December 31,2015,balance sheet?

A)$8,000
B)$9,000
C)$10,000
D)$12,000

Question 66

During 2015,a company reported an increase in the deferred tax liability account of $77,990,an increase in the deferred tax asset account of $35,325,and an income tax liability as per the 2015 income tax return of $398,555.What is the income tax expense to be reported on the income statement for the year ending December 31,2015?

A)$398,555
B)$441,220
C)$511,870
D)$285,555

Question 67

The journal entry to record the taxes for Sand Company at December 31,2015 would be

A) $\begin{array}{lr}\text { DR Income tax expense } & 170,000 \\~~~~\text { CR Deferred tax liability } && 10,000 \\~~~~\text { CR Income tax payable } && 160,000\end{array}$
B) DR Income tax expense $\quad$ 150,000
CR Cash $\quad$$\quad$ 150,000
C) DR Income tax expense $\quad$ 160,000
CR Cash $\quad$$\quad$ 160,000
D) $\begin{array}{lr}\text { DR Income tax expense } & 160,000 \\~~~~~\text { CR Deferred tax liability } && 10,000 \\~~~~~\text { CR Income tax payable } && 150,000\end{array}$

Question 68

What is the total tax expense for Sand for 2015?

A)$100,000
B)$150,000
C)$160,000
D)$175,000

Question 69

During its first year of operations a company recorded accrued expenses totaling $250,000 for book purposes.For tax purposes,$100,000 of the expenses are deductible during the first year of operations and $150,000 are deductible during the second year of operations.The income tax rate for both years is 45%.The balance sheet at the end of the first year of operations will report a deferred tax

A)asset of $67,500.
B)liability of $67,500.
C)liability of $45,000.
D)asset of $100,00.

Question 70

What is the deferred tax liability for Sand at December 31,2015?

A)$10,000
B)$15,000
C)$20,000
D)$40,000

Question 71

What is the current portion of the tax expense for Sand for 2015?

A)$100,000
B)$150,000
C)$160,000
D)$165,000

Question 72

During its first year of operations a company recorded accrued expenses totaling $375,000 for book purposes.For tax purposes,$175,000 of the expenses are deductible during the first year of operations and $200,000 are deductible during the second year of operations.The enacted income tax rate was 40% during the first year of operations and 45% during the second year of operations.The balance sheet at the end of the first year of operations will report a deferred tax

A)asset of $80,000.
B)liability of $80,000.
C)liability of $90,000.
D)asset of $90,000.

Question 73

During 2015,a company reported an increase in the deferred tax liability account of $47,790,a decrease in the deferred tax asset account of $17,225,and an income tax liability as per the 2015 income tax return of $198,375.What is the income tax expense to be reported on the income statement for the year ending December 31,2015?

A)$263,390
B)$228,940
C)$167,810
D)$198,375

Question 74

During its first year of operations a company recorded revenues totaling $6,000,000 for book purposes.For tax purposes,$2,400,000 of the revenue is taxable during the first year of operations and $3,600,000 is taxable during the second year of operations.The income tax rate for both years is 40%.The balance sheet at the end of the first year of operations will report a deferred tax liability of

A)$2,400,000.
B)$1,440,000.
C)$960,000.
D)$480,000.

Question 75

During its first year of operations a company recorded accrued warranty expense totaling $75,000 for book purposes.For tax purposes,$25,000 of the expenses are deductible during the first year of operations and $50,000 are deductible during the second year of operations.Book income from operations during the first year was $750,000.The enacted income tax rate was 40% during the first year of operations and 45% during the second year of operations.The income tax expense to be reported in the income statement for the first year of operations is

A)$297,500.
B)$300,000.
C)$277,500.
D)$280,000.

Question 76

If Stone paid no estimated taxes,what amount of income taxes payable should Stone report in its December 31,2015,balance sheet?

A)$150,000
B)$160,000
C)$183,000
D)$210,000

Question 77

If Sand paid no estimated taxes,what is the amount of income tax payable for Sand at the end of 2015?

A)$40,000
B)$45,000
C)$100,000
D)$150,000

Question 78

For the year ending December 31,2015,the RJ Corporation reported book income before taxes of $579,000.During 2015: RJ's book depreciation expense was $25,000 greater than what was allowed for tax purposes due to a reversing difference;RJ accrued $17,750 of warranty expense which is not deductible for tax purposes until 2016;RJ recognized a $29,000 unrealized loss on an investment which is not deductible for tax purposes until the investment is sold;and RJ's book income included municipal bond interest of $19,500.What was RJ Corporation's 2015 income tax expense assuming a tax rate of 40%?

A)$252,500
B)$215,100
C)$243,800
D)$232,500

Question 79

Taylor Company began manufacturing operations on January 2, 2015. During 2015 Taylor earned pre-tax book income of $150,000 and had taxable income of $200,000. Taylor had a temporary difference relating to accrued product warranty costs that are expected to be paid as follows:
$$\begin{array} { l r } 2016 & \$ 30,000 \\2017 & \$ 15,000 \\2018 & \$ 5,000\end{array}$$

-The enacted tax rates are 30% for 2015 and 2016;and 40% for 2017 and 2018.The deferred tax asset at the end of 2015 is

A)$9,000.
B)$12,000.
C)$17,000.
D)$20,000.

Question 80

During 2015,its first year of operations,a company recorded depreciation expense of $50,000 for book purposes.For tax purposes during 2015,$100,000 of depreciation expense was deducted.The temporary difference created during 2015 will reverse equally during 2016 and 2017.Book income from operations during the first year was $570,000.The income tax rate is 40%.The income tax expense to be reported in the income statement for the first year of operations is

A)$228,000.
B)$208,000.
C)$248,000.
D)$188,000.