Question 1

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

Accepted Answer

The answer of Income tax expense for continuing operations and...

Question 2

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:

Accepted Answer

The temporary difference is the difference between the book value and the tax value of the depreciable assets. The book value is $920,000 and the tax value is $1,000,000 - $100,000 - $20,000 = $880,000. The temporary difference is therefore $40,000.The tax rate is 35%, so the tax effect of the temporary difference is $40,000 x 35% = $14,000. This will result in a decrease to income tax expense of $14,000.

Question 3

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:

Accepted Answer

The answer of Company A had depreciation of $14,000 and...

Question 4

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.

Accepted Answer

Permanent differences are differences between taxable income and accounting income that will never be equalized, meaning they will have an impact on future tax liabilities. In this case, 50% of the capital gain is a permanent difference, meaning it will have no impact on future tax liabilities.

Question 5

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:

Accepted Answer

The answer of ABC Co.in its first year of business...

Question 6

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:

Accepted Answer

The deferred income tax asset is calculated as the difference between the depreciation expense and the CCA expense, multiplied by the tax rate. In this case, the deferred income tax asset is $14,000 - $12,500 = $1,500. However, since the tax rate decreased from 25% to 20% in Year 2, the deferred income tax asset is reduced by $1,500 x (25% - 20%) = $300. Therefore, the deferred income tax asset at the end of Year 1 is $1,500 - $300 = $300.

Question 7

All individual temporary differences are expected to fully reverse over time.

Accepted Answer

Some temporary differences may not reverse if, for example, they relate to assets that are not expected to be sold or liabilities that are not expected to be settled.

Question 8

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.

Accepted Answer

Under the liability approach, deferred taxes are valued using the tax rate that will be in effect when the temporary differences reverse, which is in line with the statement provided in the question. Therefore, the answer is A.

Question 9

For inter-period tax allocation,the total income tax expense must be allocated to ongoing operations,discontinued operations and extraordinary items on the income statement.

Accepted Answer

The answer of For inter-period tax allocation,the total income tax...

Question 10

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.

Accepted Answer

Under the deferral approach, deferred taxes on the balance sheet are valued at the tax rates that were in effect in the years the temporary differences originated, not at the rates expected to be in effect when they reverse.

Question 11

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

Accepted Answer

Financial analysts often exclude deferred taxes from the effective tax rate calculation due to their complex and variable nature.

Question 12

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.

Accepted Answer

This statement is true. 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 13

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

Accepted Answer

Expenditures for meals and entertainment are generally only 50% deductible for tax purposes, so they represent a temporary difference that will affect the timing of tax payments but not the total amount of taxes paid over the long term.

Question 14

OCI elements are shown on the statement of comprehensive income on a pre-tax basis.

Accepted Answer

OCI elements are shown on a net-of-tax basis, meaning the tax effects related to items of other comprehensive income are also presented.

Question 15

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

Accepted Answer

Comprehensive allocation refers to the process of recognizing both the current and deferred tax consequences of transactions and other events in the periods in which those tax consequences occur, not just the taxes assessed in the current year.

Question 16

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

Accepted Answer

This statement is true. Temporary differences refer to differences in the timing of recognition of income and expenses for accounting and tax purposes, and they will eventually reverse and result in zero net effect once the related asset or liability is fully recovered or settled.

Question 17

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

Accepted Answer

Deferred tax assets are tax credits or deductions that a company has earned but not yet used for tax purposes. They can arise from temporary differences between accounting and tax rules, such as depreciation or inventory valuation. However, if a company is not expected to generate taxable income in the future, the deferred tax assets may not be realized and could become impaired. Therefore, the existence of deferred tax assets is closely tied to a company's ability to continue operating as a going concern.

Question 18

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

Accepted Answer

Tax rates in Canada are usually announced in the budget of the year preceding the implementation year. For example, the tax rates for 2021 were announced in the budget of 2020. However, they officially come into effect in the year to which they pertain.

Question 19

If the enacted tax rate is changed for the current and future years,the earnings effect of the change in the beginning balances of the deferred tax assets is recognized in the current year.

Accepted Answer

The earnings effect of a change in tax rates on the beginning balances of deferred tax assets and liabilities is recognized in the period in which the tax rate change is enacted, but it affects the income tax expense in the financial statements of the current period, not by adjusting beginning balances of deferred tax assets or liabilities.

Question 20

Ryan Company paid the golf dues of one of its employees.This represents a temporary difference.

Accepted Answer

Paying golf dues for an employee is considered a non-deductible expense for tax purposes and does not create a temporary difference but rather a permanent difference between accounting and taxable income.

Quiz 5: The Statement of Cash Flows