Question 1

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?

Accepted Answer

Product warranty liabilities are recognized as expenses for financial accounting purposes when the warranty is issued, but they are deductible for tax purposes when the warranty costs are actually incurred.

Question 2

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?

Accepted Answer

Comprehensive allocation of deferred taxes under the asset/liability method will result in the lowest net income for the current year. This method takes into account all temporary differences and will result in the largest deferred tax liability. Since the tax rate is expected to increase in future years, using the comprehensive allocation method will mean a higher deferred tax liability and a lower net income for the current year.

Question 3

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

Accepted Answer

The deferred income tax accounts arising from current assets and liabilities should be presented as net current amount on the balance sheet, while the deferred income tax accounts arising from noncurrent assets and liabilities should be presented as a net noncurrent amount on the balance sheet. This is in accordance with the classification of assets and liabilities as current or noncurrent. Therefore, the correct presentation of the deferred income tax accounts would be a net current and a net noncurrent amount.

Question 4

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

Accepted Answer

The answer of The accounting recognition of the benefit from...

Question 5

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

Accepted Answer

When a company exercises significant influence over another company but does not have a controlling interest, the tax effect of differences between taxable income and pretax accounting income attributable to undistributed earnings of the investee company should be accounted for as a timing difference rather than a permanent difference. This is because the investee company's earnings will eventually be distributed to the investor company, which will then be subject to taxation. Therefore, the tax effect should be deferred until the earnings are actually distributed. The fact that Smith Corporation holds only 25 percent of the voting stock of Jones Corporation is not relevant in this case.

Question 6

A major distinction between temporary and permanent differences is

Accepted Answer

The major distinction between temporary and permanent differences is that temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. This means that temporary differences are timing differences that arise from the different recognition and measurement rules applied for financial and tax purposes, whereas permanent differences are non-temporary differences that arise from items that are recognized or measured differently for financial and tax purposes and will not reverse in the future. Thus, option D is the correct answer.

Question 7

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

Accepted Answer

Advocates of nonallocation of deferred taxes argue that deferred taxes are accounting entries and not actual expenses that need to be recognized in financial statements. Option B argues that income taxes should be treated the same as other expenses of doing business, which contradicts the nonallocation position. The other options (A, C, and D) support the nonallocation of deferred taxes position.

Question 8

Which of the following would cause a deferred tax expense?

Accepted Answer

Deferred tax expense arises when there is a temporary difference between the book income and taxable income. In the case of the equity method, undistributed earnings of an investee create a temporary difference, as they are recognized in book income but not in taxable income until dividends are received.

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

Accepted Answer

Since the income tax law allows for accelerated depreciation, there will be a temporary difference between the amount of depreciation expense recognized for financial statement purposes and income tax purposes. This will result in deferred income taxes, which are classified as a noncurrent liability on the balance sheet.

Question 10

A deferred tax asset represents a

Accepted Answer

A deferred tax asset represents a future tax benefit, which arises when a company has overpaid its taxes or has incurred expenses that will reduce its taxable income in the future. It is recorded as an asset on the company's balance sheet and can be used to offset future tax liabilities or to reduce future tax expenses.

Question 11

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

Accepted Answer

The answer of Which of the following is an argument...

Question 12

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

Accepted Answer

Permanent differences are differences between taxable income and pretax accounting income that will never be offset in future periods. This can arise from transactions that are either not deductible or not taxable for tax purposes, or from items that are treated differently under tax and accounting rules. Timing differences, on the other hand, are temporary differences that arise from differences in the timing of when income and expenses are recognized for tax and accounting purposes. Intraperiod tax allocation refers to the process of allocating income tax expense between continuing operations, discontinued operations, and other comprehensive income within a single period. Interperiod tax allocation refers to the process of allocating income tax expense and income taxes payable or refundable between different periods.

Question 13

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

Accepted Answer

Deferred taxes should be presented on the balance sheet in two amounts: one for the net current amount and one for the net non-current amount. This presentation distinguishes temporary differences expected to reverse within one year from those expected to reverse after one year, as well as current from non-current amounts.

Question 14

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

Accepted Answer

Taxable income of a corporation differs from pretax financial income due to both permanent and temporary differences. Permanent differences are items that are included in tax income or financial income but never both, affecting the tax rate but not taxable income over time. Temporary differences are timing differences between when items are recognized in financial income and when they are included in taxable income, which do reverse over time.

Question 15

Intraperiod tax allocation arises because

Accepted Answer

The answer of Intraperiod tax allocation arises because
...

Question 16

Assuming no prior period adjustments, would the following affect net income? Interperiod Income tax Allocation Intraperiod Income tax Allocation

Accepted Answer

The answer of Assuming no prior period adjustments, would the...

Question 17

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

Accepted Answer

A net operating loss carryoverforward can be used to offset taxable income in the future, resulting in a tax benefit in the current period income statement.

Question 18

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

Accepted Answer

The answer of With respect to the difference between taxable...

Question 19

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

Accepted Answer

Under the comprehensive deferred interperiod method of tax allocation, deferred taxes are determined based on the tax rates expected to be in effect when the items giving rise to the timing differences reverse themselves. This approach is forward-looking and takes into account expected changes in tax rates.

Question 20

Which of the following is a permanent difference?

Accepted Answer

Interest received on state and municipal obligations is a permanent difference because it is tax-exempt at the federal level and therefore not included in taxable income. The other choices are temporary differences because they will eventually reverse and become the same for tax and accounting purposes.

Quiz 12: Accounting for Income Taxes