Deck 12: Accounting for Income Taxes

Question 1

A company's only temporary difference results from using double declining balance depreciation for tax purposes and straight-line depreciation for financial reporting.The company purchases new plant assets each year.If currently enacted tax law will result in a higher tax rate for all future tax years,which accounting approach for deferred taxes will result in the lowest net income for this current year?

A)Nonallocation of deferred taxes.
B)Partial allocation of deferred taxes under the asset/liability method.
C)Comprehensive allocation of deferred taxes under the asset/liability method.
D)Comprehensive allocation of deferred taxes under the deferred method.

Answer 1

C

Question 2

With respect to the difference between taxable income and pretax accounting income,the tax effect of the undistributed earnings of a subsidiary included in consolidated income should normally be

A)Accounted for as a timing difference
B)Accounted for as a permanent difference
C)Ignored because it must be based on estimates and assumptions
D)Ignored because it cannot be presumed that all undistributed earnings of a subsidiary will be transferred to the parent company

Answer 2

A

Question 3

A major distinction between temporary and permanent differences is

A)Permanent differences are not representative of acceptable accounting practice
B)Temporary differences occur frequently,whereas permanent differences occur only once
C)Once an item is determined to be a temporary difference,it maintains that status;however,a permanent difference can change in status with the passage of time.
D)Temporary differences reverse themselves in subsequent accounting periods,whereas permanent differences do not reverse

Answer 3

D

Question 4

Smith Corporation owns only 25 percent of the voting stock of Jones Corporation,but exercises significant influence over its operating and financial policies.The tax effect of differences between taxable income and pretax accounting income attributable to undistributed earnings of Jones Corporation should be

A)Accounted for as a timing difference
B)Accounted for as a permanent difference
C)Ignored because it must be based on estimates and assumptions
D)Ignored because Smith holds less than 51 percent of the voting stock of Jones

Question 5

A deferred tax asset represents a

A)Future tax expense
B)Future tax liability.
C)Future tax benefit
D)Future taxable amount

Question 6

Differences between taxable income and pretax accounting income arising from transactions that,under applicable tax laws and regulations,will not be offset by corresponding differences or "turn around" in future periods is a definition of

A)Permanent differences
B)Timing differences
C)Intraperiod tax allocation
D)Interperiod tax allocation

Question 7

The tax effect of a difference between taxable income and pretax accounting income attributable to losses of a subsidiary is normally recognized for

A)Neither carrybacks nor carryforwards
B)Both carrybacks and carryforwards
C)Carrybacks but not carryforwards
D)Carryforwards but not carrybacks

Question 8

Which of the following are temporary differences that are normally classified as expenses or losses and are deductible for income tax purposes after they are recognized for financial accounting income?

A)Product warranty liabilities
B)Advance rental receipts
C)Depreciable property
D)Fines and expenses resulting from a violation of law

Question 9

A machine with a 10-year useful life is being depreciated on a straight-line basis for financial statement purposes,and over 5 years for income tax purposes under the accelerated recovery cost system.Assuming that the company is profitable and that there are and have been no other timing differences,the related deferred income taxes would be reported in the balance sheet at the end of the first year of the estimated useful life as a

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

Question 10

A company has four "deferred income tax" accounts arising from timing differences involving 1)current assets,2)noncurrent assets,3)current liabilities,and 4)noncurrent liabilities.The presentation of these four "deferred income tax" accounts in the statement of financial position should be shown as

A)A single net amount
B)A net current and a net noncurrent amount
C)Four accounts with no netting permitted
D)Valuation adjustments of the related assets and liabilities that gave rise to the deferred tax

Question 11

Which of the following would cause a deferred tax expense?

A)Write-down of goodwill due to impairment
B)Use of equity method where undistributed earnings of a 30 percent owned investee are related to probable future dividends
C)Premiums paid on insurance carried by company beneficiary)on its officers or employees
D)Income is taxed at capital gains rates

Question 12

Intraperiod tax allocation arises because

A)Items included in the determination of taxable income may be presented in different sections of the financial statements
B)Income taxes must be allocated between current and future periods
C)Certain revenues and expenses appear in the financial statements either before or after they are included in taxable income
D)Certain revenues and expenses appear in the financial statements but are excluded from taxable income

Question 13

Under the asset-liability method,deferred taxes should be presented on the balance sheet

A)As one net debit or credit amount
B)In two amounts: one for the net current amount and one for the net non-current amount
C)In two amounts: one for the net debit amount and one for the net credit amount
D)As reductions of the related asset or liability accounts

Question 14

Which of the following is not an argument that an advocate of nonallocation of deferred taxes might use to support his/her position?

A)Income taxes result only from taxable income.
B)Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
C)Income taxes are not levied on individual items of income or expense.
D)The current provision for income taxes is a better predictor of future cash flows than is income tax expense that includes deferred taxes.

Question 15

Which of the following is a permanent difference?

A)Product warranty liabilities
B)Installment sales accounted for on an accrual basis
C)Deductible pension funding exceeding expense
D)Interest received on state and municipal obligations

Question 16

A net operating loss carryover that occurs in a company's second year of operations

A)May cause a company to report a tax benefit in the current period income statement.
B)Has no effect on income tax expense of the current period because no taxes are paid.
C)Causes a company to report a deferred income tax liability for taxes that are not paid currently.
D)Results in future taxable amounts.

Question 17

The accounting recognition of the benefit from a tax loss carryforward in most situations should be reported as

A)A reduction of the loss in the year of the loss with an appropriate valuation allowance
B)A prior period adjustment in whichever year the benefit is realized
C)As a component of income from continuing operations in the year in which the benefit is realized
D)An item on the retained earnings statement,not the income statement

Question 18

Taxable income of a corporation differs from pretax financial income because of Permanent Differences Temporary Differences

A)No Yes
B)Yes Yes
C)No No
D)Yes No

Question 19

Under the comprehensive deferred interperiod method of tax allocation,deferred taxes are determined on the basis of

A)Tax rates in effect when the timing differences originate without adjustment for subsequent changes in tax rates
B)Tax rates expected to be in effect when the items giving rise to the timing differences reverse themselves
C)Net valuations of assets or liabilities
D)Averages determined on an industry-by-industry basis

Question 20

Which of the following is an argument that an advocate of interperiod income tax allocation might use to support his/her position?

A)Income taxes result from taxable income.
B)Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
C)Nonallocation of income taxes hides an economic difference between a company that employs tax strategies that reduce current tax payments than one that does not.
D)Income taxes are not incurred in anticipation of future benefits,nor are they expirations of cost to provide facilities to generate revenues.

Question 21

Which of the following causes a permanent difference between taxable income and financial accounting income?

A)The useful life of an asset is 10 years.The asset is depreciated over 7 years for tax purposes.
B)Rent received in advance is taxable upon receipt.
C)A life insurance premium paid by the corporation on a policy that names the corporation as the beneficiary.
D)A penalty paid to a bank when a CD is cashed before its maturity date.

Question 22

Which of the following approaches to interperiod tax allocation best represents an example of the matching principle?

A)The deferred method of interperiod income tax allocation
B)Discounting deferred income taxes
C)Nonallocation of income taxes
D)The asset/liability method of income tax allocation.

Question 23

A net operating loss:

A)Must always be carried back 2 years
B)Occurs when a company reports a net loss in their income statement
C)May be carried back 2 years or carried forward up to 20 years
D)Must always be carried forward 20 years

Question 24

An increase in the deferred income tax asset valuation allowance

A)Occurs when there is an operating loss carryforward.
B)Has no effect on income tax expense.
C)Occurs when there is an expected increase in future taxable income.
D)Increases income tax expense.

Question 25

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

A)Using the installment sales method for tax purposes,while using point of sale for financial reporting.
B)Reporting an unrealized gain for a trading security.
C)Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting.
D)Reporting an expected loss on from a lawsuit in the income statement,when it cannot be reported on the tax return until it is actually incurred.

Question 26

With regard to uncertain tax positions,the FASB requires that companies recognize a tax benefit when

A)It is probable and can be reasonably estimated
B)There is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities
C)It is more likely than not that the tax position will be sustained upon audit
D)All of the above

Question 27

Which of the following will result in a deferred tax liability?

A)A net operating loss carryover.
B)Reporting an unrealized gain for a trading security.
C)Reporting an unrealized gain for an available-for-sale security.
D)Reporting an expected loss on from a lawsuit in the income statement,when it cannot be reported on the tax return until it is actually incurred.

Question 28

A deferred tax liability represents the:

A)Increase in taxes payable in future years as a result of taxable temporary differences
B)Increase in taxes saved in future years as a result of deductible temporary differences
C)Decrease in taxes saved in future years as a result of deductible temporary differences
D)Decrease in taxes payable in future years as a result of taxable temporary differences

Question 29

A company that has both short-term deferred tax assets of $22,000,long-term deferred tax liabilities of $36,000,short-term deferred tax liabilities of $51,000 and short-term deferred tax assets of $60,000 should report

A)A current asset for $22,000,a current liability for $36,000,a long-term asset for $60,000,and a long-term liability for $51,000.
B)A current liability for $14,000 and a long-term asset for $9,000.
C)A current asset for $5,000.
D)A current liability for $14,000,a long-term asset for $60,000,and a long-term liability for $51,000.