Deck 12: Liabilities: Off-Balance Sheet Financing, Retirement Benefits, and Income Taxes

Question 1

The employer firm and the pension plan are legally separate entities, each with its own financial reports.

Answer 1

True

Question 2

Employer contributions to defined benefit pension plans are subject to several forms of government regulation.

Answer 2

True

Question 3

The accounting and reporting of health care, life insurance, and other postretirement plans follow the concepts and procedures for defined benefit pension plans.

Answer 3

True

Question 4

The accounting for transfers of receivables has come under the scrutiny of standard setters, as has the accounting for transfers involving inventories and research and development

Question 5

The total amount of cash that the employer contributes to the firm's pension plan over time is the total amount of pension expense that the employer must recognize in measuring net income.

Question 6

The assets in a defined benefit pension plan will usually not equal the liabilities of the plan, resulting in an overfunded or underfunded plan.

Question 7

The balance sheet of a defined benefit pension plan includes the assets in the pension plan measured at fair value and the projected benefit obligation measured using a current interest rate on high-quality fixed-income investments.The difference between the assets and the liabilities indicates the extent to which a pension plan is overfunded or underfunded.

Question 8

Under both U.S.GAAP and IFRS, the following formula calculates the Net Pension Expense (or Credit) for a defined benefit pension plan:
Interest Cost (the increase in the obligation because of the passage of time)
+ Service Cost (the increase in the obligation because of an additional year of employee service)
- Expected Return on Pension Investments
+/- Amortization of Performance and Actuarial Gains and Losses
+/- Amortization of Prior Service Cost

Question 9

Under current accounting guidance, the employer consolidates the assets and liabilities of the firm's pension plan with its own assets and liabilities.

Question 10

Many off-balance-sheet financings fall into one of two categories that accounting typically does not recognize as liabilities: executory contracts and contingent obligations.

Question 11

U.S.GAAP and IFRS provide guidance for deciding whether a given financing arrangement appears as a liability on the balance sheet or is disclosed in the notes.

Question 12

U.S.GAAP and IFRS require firms to recognize the cost of pension plans as an expense during the years as the employees receive the retirement benefits.

Question 13

Many entries in Other Comprehensive Income represent changes in fair value of the pension plan(s) that receives delayed recognition in net income.

Question 14

The pension expense for a particular period for a firm's defined benefit pension plans rarely equals the cash contribution.

Question 15

U.S.GAAP defines the primary measurement of the pension liability of the pension plan as the projected benefit obligation (PBO)-the future value of the amount the pension plan expects to pay to employees during retirement based on accumulated service but using the level of salary expected to serve as a basis for computing pension benefits.

Question 16

Pension expense for a defined contribution plan always exceeds the employer's contribution to the plan.

Question 17

For many firms, the liability for the underfunded health care obligation exceeds the liability for underfunded pensions.

Question 18

In a defined benefit plan, the employer is ultimately responsible for either contributing cash or obtaining a return on pension investments sufficient to pay promised amounts to retired employees.

Question 19

The pension expense for a particular period is the amount of the cash contribution for defined contribution pension plans.

Question 20

U.S.GAAP and IFRS require firms to report pension plan assets at the estimated future value.

Question 21

Income tax rates change over time, so the deferred tax liability need not represent the amount of taxes that the firm must pay later.

Question 22

Firms currently apply the fair value option to retirement plan obligations and report unamortized items in net income as they arise.

Question 23

U.S.GAAP and IFRS requires the recognition of changes in the plan assets or benefit obligations in measuring pension or other benefits expense as those changes occur.

Question 24

Robo Corporation Robo Corporation entered into noncancelable, long-term material contracts with suppliers for the purchase of raw materials beginning in the calendar Year 4.These contracts amounted to $500,000 at December 31, Year 4, relating to raw materials with a market price of $575,000.This amount was considered material for Robo.
(CMA adapted, Dec 95 #16) Refer to the Robo Corporation example.Robo Corporation's financial statements at December 31, Year 4,

A)include a contingent liability of $500,000.
B)disclose the purchase commitment.
C)include a liability of $575,000.
D)do not mention this commitment.
E)none of the above.

Question 25

Which of the following is/are not true concerning pension plans?

A)The plan administrator serves in a fiduciary capacity for the benefit of employees.
B)The employer cannot access assets in the pension plan except under specific conditions that vary, as a matter of pension law, by jurisdiction.
C)The employer does not consolidate the assets and liabilities of the pension plan with its own assets and liabilities.
D)The total amount of cash that the employer contributes to the pension plan over time is never the total amount of pension expense that the employer must recognize in measuring net income.
E)none of the above

Question 26

When firms have obligations that do not meet the formal definition of a liability, U.S.GAAP require that firms

A)disclose information about such obligations in notes to the financial statements.
B)highlight such arrangements in the Management Discussion and Analysis section.
C)have the auditor address such matters in a separate paragraph in the independent auditor's report accompanying the financial statements.
D)do not mention the obligation because they are not valid liabilities and to do otherwise would mislead the readers of the financial statements.
E)none of the above.

Question 27

Managers frequently cite which of the following reason(s) for using off-balance sheet financing?

A)Some managers believe that it might lower the cost of borrowing.
B)Lower borrowing costs might result if lenders ignore off-balance-sheet financing.
C)Lower borrowing costs might result if lenders are unaware of off-balance sheet financing: because borrowers do not disclose it.
D)Off-balance-sheet financing might lead lenders to set interest rates for loans lower than the underlying risk levels warrant.
E)all of the above

Question 28

U.S.international companies always have an effective tax rate equal to the 35% statutory tax rate.

Question 29

Sprinter Airlines (Sprinter) needs additional aircraft to expand internationally, and it could borrow the needed funds and purchase the aircraft.This arrangement places additional debt on the balance sheet.Instead, Sprinter signs an lease agreement in which it agrees to pay the owner of the aircraft certain amounts each year for 12 years.The aircraft has an estimated service life of 18 years.Sprinter paints its name on the aircraft, uses the aircraft in operations, and makes the required lease payments.Which of the following is not true?

A)Sprinter receives benefits when it uses the aircraft, not when it initially signs the lease.
B)Sprinter has future benefits, not past or current benefits.
C)Sprinter obtains financing for its flight equipment without showing a liability on the balance sheet.
D)Sprinter has entered into an operating lease that is an executory contract.
E)Sprinter has entered into an financing lease that is recorded as an asset purchase and financing transaction.

Question 30

Total lifetime depreciation amounts on equipment for both financial reporting and tax reporting are the same, only the timing may differ.

Question 31

The computation of the pension liability for a defined benefit plan uses actuarial estimates or actuarial assumptions of

A)estimated interest rates.
B)estimated employee mortality, only.
C)estimated employee turnover, only.
D)estimated employee turnover, mortality, and interest rates.
E)actual employee turnover, mortality, and interest rates.

Question 32

The temporary difference associated with accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes means that a firm will pay lower income taxes in the early years of the asset's life, but this temporary difference will reverse over the entire asset life, resulting in higher taxes in later years.

Question 33

The notes to the financial statements provide information on the components of book income before taxes, the current and deferred portions of income tax expense, a reconciliation between income taxes at the statutory rate and the effective rate, and the components of deferred tax assets and deferred tax liabilities.

Question 34

Firms frequently sign contracts promising to pay defined amounts in the future in return for future benefits.If the firm has not received past or current benefits, but will receive the benefits in the future, accounting treats the obligation as a(n) _____ contract and typically _____.

A)contingent; does recognize a liability
B)executory; does not recognize a liability
C)executory; does recognize a liability
D)contingent; does not recognize a liability
E)future; does recognize a liability

Question 35

Sprinter Airlines (Sprinter) needs additional aircraft to expand internationally, and it could borrow the needed funds and purchase the aircraft.This arrangement places additional debt on the balance sheet.Instead, Sprinter signs an lease agreement in which it agrees to pay the owner of the aircraft certain amounts each year for 12 years.The aircraft has an estimated service life of 18 years.Sprinter paints its name on the aircraft, uses the aircraft in operations, and makes the required lease payments.Which of the following is/are true?

A)Sprinter receives benefits when it uses the aircraft, not when it initially signs the lease.
B)Sprinter has future benefits, not past or current benefits.
C)Sprinter obtains financing for its flight equipment without showing a liability on the balance sheet.
D)Sprinter has entered into an operating lease that is an executory contract.
E)all of the above

Question 36

Universal Airlines (Universal) needs additional aircraft to expand internationally, and it could borrow the needed funds and purchase the aircraft.This arrangement places additional debt on the balance sheet.Instead, Universal signs an lease agreement in which it agrees to pay the owner of the aircraft certain amounts each year for 18 years.The aircraft has an estimated service life of 18 years.Universal paints its name on the aircraft, uses the aircraft in operations, and makes the required minimum lease payments that compensates the lessor for the cost of the aircraft and provides a reasonable return for the risk involved. Which of the following is true?

A)Universal has entered into a contingent lease and does not show a liability on the balance sheet.
B)Universal recognizes lease expense on a straight-line basis during the 18 year period.
C)Universal obtains financing for its flight equipment without showing a liability on the balance sheet.
D)Universal has entered into an operating lease and recognizes a lease liability on its balance sheet.
E)Universal has entered into a capital lease and recognizes a lease liability on its balance sheet.

Question 37

The actual earnings from pension plan investments include

A)interest, only.
B)interest and dividends, only.
C)interest, dividends, and realized changes in the fair value of plan investments, only.
D)interest, dividends, realized and unrealized changes in the fair value of plan investments.
E)interest, dividends, and unrealized changes in the fair value of plan investments, only.

Question 38

Robo Corporation Robo Corporation entered into noncancelable, long-term material contracts with suppliers for the purchase of raw materials beginning in the calendar Year 4.These contracts amounted to $500,000 at December 31, Year 4, relating to raw materials with a market price of $575,000.This amount was considered material for Robo.
(CMA adapted, Dec 95 #17) Refer to the Robo Corporation example.Assume the goods were received and the market price of the raw materials amounts to $450,000.Robo Corporation's financial statements at December 31.Year 4, for this transaction should

A)not mention this commitment.
B)reflect a liability of $500,000.
C)reflect a liability of $50,000.
D)reflect a liability of $450,000.
E)reflect a liability of $400,000.

Question 39

Permanent differences between pretax book income and taxable income arise from tax-exempt interest revenue and certain fines.

Question 40

Acquired in-process research and development (IPR&D) is never deductible for tax purposes and results in an increased effective tax rate.

Question 41

U.S.GAAP treatment of a defined benefit pension plan requires employers to recognize the funded status as

A)an asset, if the pension plan(s) is/are overfunded.
B)a liability, if the pension plan(s) is/are underfunded.
C)both an asset [for the net overfunded plan(s)] and a liability [for the net underfunded plan(s)].
D)an adjustment to Other Comprehensive Income, a shareholders' equity account that is not part of net income, for the offsetting amount.
E)all of the above

Question 42

Flake Corporation sets up a pension plan that is legally separate from Flake.The pension plan specifies the eligibility of employees, the types of promises to employees, the method of funding, and the pension plan administrator. Flake Corporation specifies the benefit that employees will receive during retirement.Employer contributions plus earnings from investments made with those contributions pay the specified benefit.Common terminology refers to such plans as ____________. The assets in the plan will usually not equal the liabilities of the plan, resulting in an overfunded or underfunded plan.

A)defined benefit pension plans.
B)defined contribution pension plans.
C)accumulated benefit pension plans.
D)accumulated contribution pension plans.
E)unqualified pension plans.

Question 43

The computation of the pension liability for a defined benefit plan uses actuarial estimates or actuarial assumptions of

A)actual interest rates.
B)estimated employee mortality, only.
C)actual employee turnover, only.
D)estimated employee turnover, mortality, and interest rates.
E)actual employee turnover, mortality, and interest rates.

Question 44

In more complicated financing arrangements, firms sell batches of receivables to a legally separate entity whose sole purpose is to hold the receivables and issue claims on their cash flows. The entity holding the receivables issues securities to investors in return for cash and transfers the cash to the transferor in payment for the receivables.The investors in securities issued by the entity receive payments out of the cash flow from the transferred receivables.Common terminology refers to such an entity as a

A)special purpose entity.
B)pass-through entity.
C)tax shelter.
D)subsidiary entity.
E)securitized entity.

Question 45

Forman Corporation extends credit to its customers to purchase appliances, furniture, and other goods.Forman Corporation could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet.Forman Corporation would then use the cash collections from the receivables to repay the bank loan with interest.Instead, Forman Corporation sells the accounts receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased.The amount takes account of expected defaults, which would reduce the cash generated by the receivables.This difference between the amount paid to Forman Corporation by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return. Which of the following is/are true?

A)Forman Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet and recognizing bad debt expense on the income statement.
B)Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing bad debt expense on the income statement.
C)Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet.
D)Forman Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet.
E)Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet and recognizing bad debt expense on the income statement.

Question 46

Cutter Company, a distiller of liquors, ages its whiskeys for approximately 10 years.The firm must pay the costs to produce the whiskey and to store it during the aging process.Using the whiskey as collateral, Cutter could borrow to finance the costs incurred during the aging process; doing so would, however, lead to Cutter reporting increased liabilities.Instead, Cutter sells the whiskey to a bank and agrees to oversee the aging process on the bank's behalf.At the completion of the aging, Cutter assists the bank in finding a buyer but is not responsible for ensuring that a sale occurs at a specific price, or at all.Under this arrangement, the bank bears the risk of changes in selling prices for the whiskey.Cutter will probably treat this transaction as a(n)

A)executory contract, with no incremental debt on the balance sheet.
B)financing arrangement, with incremental debt on the balance sheet.
C)financing arrangement, with no incremental debt on the balance sheet.
D)sale, with no incremental debt on the balance sheet.
E)sale, with incremental debt on the balance sheet.

Question 47

The discount rate that firms use in measuring the pension plan liability is the rate of return on

A)high-quality equity investments.
B)low-quality fixed-income investments with a maturity approximately equal to the period to maturity of the pension benefits.
C)average-quality fixed-income investments with a maturity approximately equal to the period to maturity of the pension benefits.
D)high-quality fixed-income investments with a maturity approximately equal to the period to maturity of the pension benefits.
E)certificates of deposit with a maturity approximately equal to the period to maturity of the pension benefits.

Question 48

U.S.GAAP treatment of a defined benefit pension plan requires employers to recognize the funded status as _____, if the pension plan(s) is/are overfunded and _____, if the pension plan(s) is/are underfunded, and an adjustment to Other Comprehensive Income, a shareholders' equity account that is _____, for the offsetting amount.

A)an asset; a liability; not part of net income
B)an asset; a liability; part of net income
C)a liability; an asset; not part of net income
D)a liability; an asset; part of net income
E)none of the above

Question 49

Zoom Company, a distiller of liquors, ages its whiskeys for approximately 10 years.The firm must pay the costs to produce the whiskey and to store it during the aging process.Using the whiskey as collateral, Zoom could borrow to finance the costs incurred during the aging process; doing so would, however, lead to Zoom reporting increased liabilities.Instead, Zoom sells the whiskey to a bank and agrees to oversee the aging process on the bank's behalf.At the completion of the aging, Zoom Company guarantees an ultimate selling price that pays the lender both the original purchase price and a reasonable return over that amount.Zoom

A)bears the economic risks and must show a liability on its balance sheet.
B)bears the economic risks and but does not show a liability on its balance sheet.
C)does not bear the economic risks and must show a liability on its balance sheet.
D)does not bear the economic risks and does not show a liability on its balance sheet.
E)will likely record the transaction as a sale and not a loan.

Question 50

The liability of the pension plan equals the

A)future value of the expected amounts payable to employees.
B)present value of the expected amounts payable to employees.
C)expected future amounts payable to employees.
D)current amounts payable to employees during the next year or operating cycle.
E)employees' current benefits.

Question 51

Often cited reasons for using off-balance-sheet financing include that this accounting technique

A)lowers the cost of borrowing and is inexpensive.
B)lowers the cost of borrowing because borrowers already provide the correct information for reporting purposes.
C)lowers the cost of borrowing and avoids violation of debt covenants.
D)simplifies contracts and improves cash flows.
E)simplifies contracts and lowers the cost of borrowing.

Question 52

Which of the following is/are true concerning pension plans?

A)The plan administrator serves in a fiduciary capacity for the benefit of employees.
B)The employer cannot access assets in the pension plan except under specific conditions that vary, as a matter of pension law, by jurisdiction.
C)The employer does not consolidate the assets and liabilities of the pension plan with its own assets and liabilities.
D)The total amount of cash that the employer contributes to the pension plan over time is the total amount of pension expense that the employer must recognize in measuring net income.
E)all of the above

Question 53

A complicated financing arrangement, whereby firms sell batches of receivables to a legally separate entity whose sole purpose is to hold the receivables and issue claims on their cash flows.The process is referred to as _____ of the receivables.

A)consolidation
B)transformation
C)hypothecation
D)securitization
E)credit enhancement

Question 54

Walnut Queen Corporation and Pine King Company (forest products companies) need additional pulp-processing capacity.Each firm could borrow the needed funds and build its own manufacturing plant.Instead, they form a joint venture to build a pulp-processing plant.Each firm agrees to use half of the new plant's capacity each year for 20 years and to pay half of all operating and debt service costs.The joint venture uses the purchase commitments of Walnut Queen Corporation and Pine King Company to obtain a loan to build the facility.The firms structure the arrangement so that neither firm controls the joint venture.Which of the following is not true?

A)Accounting views the purchase commitments as executory contracts.
B)Neither firm will recognize a liability for its portion of the loan.
C)The loan will appear as a liability on the balance sheet of the joint venture.
D)Each firm obtains financing for the services of the plant without showing a liability on its balance sheet.
E)The loan will appear as a liability on the balance sheet of Walnut Queen Corporation and Pine King Company, half of the loan amount allocated to each.

Question 55

Electro Corporation extends credit to its customers to purchase appliances, furniture, and other goods.Electro Corporation could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet.Electro Corporation would then use the cash collections from the receivables to repay the bank loan with interest.Instead, Electro Corporation sells the accounts receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased.The amount takes account of expected defaults, which would reduce the cash generated by the receivables.This difference between the amount paid to Electro Corporation by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return. Electro Corporation must transfer additional uncollected receivables to the lender/purchaser bank under either of two conditions: (1) if any receivables become uncollectible, and (2) if interest rates rise above a specified level.Which of the following is/are true?

A)Electro Corporation bears both credit risk and interest rate risk and should treat the transfer of receivables as a loan, with debt appearing on its balance sheet.
B)Electro Corporation bears both credit risk and interest rate risk and should not treat the transfer of receivables as a loan, with no debt appearing on its balance sheet.
C)Electro Corporation does not bear credit risk or interest rate risk and should not treat the transfer of receivables as a loan, with no debt appearing on its balance sheet.
D)Electro Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet.
E)Electro Corporation bears credit risk but no interest rate risk and should treat the transfer of receivables as a loan, with debt appearing on its balance sheet.

Question 56

Target Corporation and Bark Company (forest products companies) need additional pulp-processing capacity.Each firm could borrow the needed funds and build its own manufacturing plant.Instead, they form a joint venture to build a pulp-processing plant.Each firm agrees to use half of the new plant's capacity each year for 20 years and to pay half of all operating and debt service costs.The joint venture uses the purchase commitments of Target Corporation and Bark Company to obtain a loan to build the facility.The firms structure the arrangement so that neither firm controls the joint venture.Which of the following is/are true?

A)Accounting views the purchase commitments as executory contracts.
B)Neither firm will recognize a liability for its portion of the loan.
C)The loan will appear as a liability on the balance sheet of the joint venture.
D)Each firm obtains financing for the services of the plant without showing a liability on its balance sheet.
E)all of the above

Question 57

The typical benefit formula for a defined benefit plan takes into account the employee's

A)length of service, only.
B)salary, only.
C)length of service and salary.
D)marital status, only.
E)length of service, salary, and marital status.

Question 58

Target Corporation and Bark Company (forest products companies) need additional pulp-processing capacity.Each firm could borrow the needed funds and build its own manufacturing plant.Instead, they form a joint venture to build a pulp-processing plant.Each firm agrees to use half of the new plant's capacity each year for 20 years and to pay half of all operating and debt service costs.The joint venture uses the purchase commitments of Target Corporation and Bark Company to obtain a loan to build the facility.The firms structure the arrangement so that neither firm controls the joint venture.The lender requires both firms to guarantee payment of the loan in case the joint venture defaults, Which of the following is/are true?

A)Under both U.S.GAAP and IFRS, the guarantors would recognize the fair value of the guarantee when they signed the loan.
B)If it becomes probable that the joint venture will default, then the guarantor would apply loss contingency accounting (U.S.GAAP) and recognize a liability.
C)If it becomes probable that the joint venture will default, then the guarantor would apply provision accounting (IFRS) and recognize a liability.
D)all of the above
E)none of the above

Question 59

Pension plans are usually organized as a

A)trust.
B)corporation.
C)partnership.
D)limited liability company.
E)chartered company.

Question 60

U.S.GAAP defines the primary measurement of the pension liability of the pension plan as the _____the _____ of the amount the pension plan expects to pay to employees during retirement based on accumulated service but using the level of salary expected to serve as a basis for computing pension benefits.

A)projected benefit obligation; future value
B)projected benefit obligation; present value
C)actual benefit obligation; present value
D)actual benefit obligation; future value
E)actual benefit obligation; expected value

Question 61

Which of the following is/are not true regarding U.S.GAAP and IFRS requirements for income tax accounting for financial reporting purposes?

A)Income taxes expense equals income taxes currently payable.
B)A temporary difference that implies a future tax deduction gives rise to a deferred tax asset.
C)A temporary difference that implies a future increase in income tax payable gives rise to a deferred tax liability.
D)The accountant computes income tax expense using pretax amounts for financial reporting.
E)A permanent difference never affects income tax expense for any period.

Question 62

What equals the income tax expense divided by financial reporting income before income taxes?

A)marginal tax rate
B)effective tax rate
C)tax burden rate
D)statutory rate
E)average tax rate

Question 63

Downy Airlines discloses the funded status of pension plans and the health and life insurance plans for two recent years.Both the pension plan and other benefit plans are underfunded.The amounts that Downy includes in _____, _____, represent unamortized prior service costs and net actuarial losses.

A)Other Comprehensive Income; a revenue account
B)Accumulated Other Comprehensive Income; a shareholders' equity account
C)Other Comprehensive Income; an asset account
D)Accumulated Other Comprehensive Income; a liability account
E)Other Comprehensive Income; a shareholders' equity account

Question 64

Firms compute income tax payable for a period using _____ as the base.

A)book income
B)total income
C)permanent income
D)taxable income
E)gross income

Question 65

Permanent differences between pretax book income and taxable income arises from

A)tax-exempt interest revenue, only.
B)certain fines, only.
C)depreciation on long-lived assets, only.
D)bad debt expense, only.
E)tax-exempt interest revenue and certain fines.

Question 66

The temporary difference associated with accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes means that a firm will pay _____ income taxes in the early years of the asset's life, but this temporary difference will reverse over the entire asset life, resulting in _____ taxes in later years.

A)higher; higher
B)lower; higher
C)higher; lower
D)lower; lower
E)average; average

Question 67

Which of the following is/are true regarding the accounting for defined contribution plans?

A)When pension assets equal pension liabilities and the expected rate of return on pension investments equals the discount rate used to compute the projected benefit obligation, the amounts offset each other.
B)When the interest cost exceeds the expected return on pension investments, either employer contributions or future earnings on pension plan investments must make up the difference.
C)Computing pension expense (or credit) using the expected return (not the actual return) rests on the view that pension plans should take a long-term perspective and generate earnings from investments based on a long-term expected rate of return.
D)Annual deviations from the long-term expected rate of return should not flow through to net income as they occur.
E)all of the above

Question 68

Using U.S.GAAP and IFRS requirements for income tax accounting for financial reporting purposes, the accountant computes income tax expense using

A)pretax amounts for financial reporting.
B)the amounts on income tax returns.
C)the cash outflows for income taxes.
D)permanent differences.
E)temporary and permanent differences.

Question 69

Temporary differences between pretax book income and taxable income arises from

A)tax-exempt interest revenue, only.
B)certain fines, only.
C)depreciation on long-lived assets, only.
D)bad debt expense, only.
E)depreciation on long-lived assets and bad debt expense.

Question 70

The basis for both U.S.GAAP and IFRS requirements for income tax accounting for financial reporting purposes focuses on which of the following financial reporting objectives?

A)recognizing the amount of taxes payable in the current year, only.
B)recognizing deferred tax assets and deferred tax liabilities for the future income tax consequences of temporary differences, only.
C)recognizing the amount of taxes payable in the current year, and recognizing deferred tax assets and deferred tax liabilities for the future income tax consequences of temporary differences.
D)recognizing deferred tax assets and deferred tax liabilities for the future income tax consequences of permanent differences, only.
E)recognizing the amount of taxes payable in the current year, and recognizing deferred tax assets and deferred tax liabilities for the future income tax consequences of permanent differences.

Question 71

Using U.S.GAAP and IFRS requirements for income tax accounting for financial reporting purposes, permanent differences

A)reverse, affect cash outflows for income taxes, and therefore affect income tax expense.
B)reverse, affect cash outflows for income taxes, and therefore never affect income tax expense for any period.
C)reverse, never affect cash outflows for income taxes, and therefore never affect income tax expense for any period.
D)never reverse, affect cash outflows for income taxes, and therefore never affect income tax expense for any period.
E)never reverse, never affect cash outflows for income taxes, and therefore never affect income tax expense for any period.

Question 72

Some employers specify the benefit that employees will receive during retirement.The employer must contribute sufficient amounts to the pension plan so that those contributions plus earnings from investments made with those contributions will be sufficient to pay the specified benefit.Such plans are referred to as

A)defined benefit pension plans.
B)defined contribution pension plans.
C)deferred compensation plans.
D)529 Plans.
E)individual retirement accounts.

Question 73

Downy Airlines discloses the funded status of pension plans and the health and life insurance plans for two recent years.Both the pension plan and other benefit plans are underfunded.The underfunded amounts for these plans appear in

A)current assets and noncurrent assets on the balance sheet.
B)current liabilities and noncurrent liabilities on the balance sheet.
C)shareholders' equity on the balance sheet.
D)revenue on the income statement.
E)expenses on the income statement.

Question 74

Which of the following is/are true regarding U.S.GAAP and IFRS requirements for income tax accounting for financial reporting purposes?

A)A permanent difference never affects income tax expense for any period.
B)A temporary difference that implies a future tax deduction gives rise to a deferred tax asset.
C)A temporary difference that implies a future increase in income tax payable gives rise to a deferred tax liability.
D)The accountant computes income tax expense using pretax amounts for financial reporting.
E)all of the above

Question 75

Some employers promise to contribute a certain amount to the pension plan each period for each employee, usually based on an employee's salary, without specifying the benefits the employee will receive during retirement.The amounts employees eventually receive depend on the investment performance of the pension plan.Such plans are referred to as

A)defined benefit pension plans.
B)defined contribution pension plans.
C)deferred compensation plans.
D)529 Plans.
E)individual retirement accounts.

Question 76

U.S.GAAP and IFRS require complex procedures in accounting for income taxes.Complexities in the accounting for income taxes include(s)

A)income tax rates change over time, so the deferred tax liability need not represent the amount of taxes that the firm must pay later.
B)some temporary differences create deferred tax assets.
C)some temporary differences create deferred tax liabilities.
D)firms recognize deferred tax assets only to the extent that they expect to generate sufficient taxable income to realize the assets in the form of tax savings in the future.
E)all of the above

Question 77

Both the regulatory treatment and the tax treatment of employer contributions

A)to postretirement benefit arrangements, including pensions, are jurisdiction-specific.
B)differ substantially between postretirement health plans and defined benefit pension plans.
C)create stronger incentives to contribute to the defined benefit pension plans than to postretirement health plans.
D)all of the above
E)none of the above

Question 78

Taxable income excludes _____ and uses the accounting methods that the _____ either require or permit firms to use for tax reporting.

A)temporary differences; income tax law and regulations
B)permanent differences; income tax law and regulations
C)temporary differences; U.S.GAAP or IFRS
D)permanent differences; U.S.GAAP or IFRS
E)temporary and permanent differences; U.S.GAAP or IFRS

Question 79

Income tax expense affects assessments of profitability as much as any other expense.A common ratio for analyzing the effect of income taxes on profitability is the _____ rate, equal to income tax expense divided by financial reporting income before income taxes:

A)marginal tax
B)effective tax
C)tax burden
D)statutory
E)average

Question 80

Which of the following is not true regarding the accounting for defined contribution plans?

A)When pension assets equal pension liabilities and the expected rate of return on pension investments equals the discount rate used to compute the projected benefit obligation, the amounts offset each other.
B)When the interest cost exceeds the expected return on pension investments, either employer contributions or future earnings on pension plan investments must make up the difference.
C)Computing pension expense (or credit) using the expected return (not the actual return) rests on the view that pension plans should take a long-term perspective and generate earnings from investments based on a long-term expected rate of return.
D)Annual deviations from the long-term expected rate of return should flow through to net income as they occur.
E)Recognizing service cost as an increase in the pension expense parallels inclusion of wage and salary costs as an expense.