Question 1

Under ASPE, when pretax accounting income exceeds taxable income:

Accepted Answer

When pretax accounting income exceeds taxable income, it indicates that taxes will be payable in the future, leading to the recognition of a future tax liability.

Question 2

Challenger 605 Corporation, whose income tax rate is 35%, has pretax accounting income of $4,850,000 and taxable income of $4,075,000. Under ASPE, the entry to record the income tax includes a:

Accepted Answer

Under ASPE, the difference between pretax accounting income and taxable income creates either a future tax asset (when pretax accounting income exceeds taxable income) or a future tax liability (when taxable income exceeds pretax accounting income). In this case, the taxable income of Challenger 605 Corporation is higher than its pretax accounting income, which creates a future tax liability. The amount of the future tax liability can be calculated as:
Taxable income - accounting income = $4,075,000 - $4,850,000 = -$775,000
Since the company has not yet paid taxes on this amount, it records a credit to Future Tax Liability for the same amount. Therefore, the correct answer is C.

Question 3

Mitrac Corporation, whose income tax rate is 35%, has pretax accounting income of $636,000 and taxable income of $748,000. Under IFRS, the entry to record the income tax includes a:

Accepted Answer

C

Question 4

Over the past two decades, research has shown half of financial statement fraud has involved improper revenue recognition. What are the more common revenue recognition schemes?

Accepted Answer

The answer of Over the past two decades, research has...

Question 5

Mechatronic Bogie Ltd., whose income tax rate is 35%, has taxable income of $482,000 and pretax accounting income of $566,000. The entry to record the income tax includes a:

Accepted Answer

The answer of Mechatronic Bogie Ltd., whose income tax rate...

Question 6

Taxable income is found on the:

Accepted Answer

Taxable income is the amount of income that is subject to taxation by the government. It is reported on an individual or company's tax return.

Question 7

Pretax accounting income is found on the:

Accepted Answer

Pretax accounting income is an accounting measure, which means it is found on the income statement. It represents a company's earnings before any taxes are deducted.

Question 8

Channel stuffing is a common fraud technique used to increase revenue.

Accepted Answer

Channel stuffing involves a company sending its distributors or retailers excessive amounts of products or inventory in order to artificially boost its sales revenue. This allows a company to report higher sales figures, which can be misleading to investors and analysts. It is considered a form of fraud because it creates the appearance of increased demand for a company's products when in reality, the products are not actually being purchased by end consumers.

Question 9

Under IFRS, when income tax payable exceeds income tax expense:

Accepted Answer

When income tax payable exceeds income tax expense, it indicates that the company has paid more taxes than it has expensed, leading to a deferred tax asset being recognized.

Question 10

Flexity Corporation, whose income tax rate is 35%, has taxable income of $592,600 and pretax accounting income of $494,000. The entry to record the income tax includes a:

Accepted Answer

The entry to record income tax expense includes a credit to Income Tax Payable for the amount due to the government. In this case, the amount of income tax payable is calculated as taxable income multiplied by the tax rate: 
$592,600 x 35% = $207,410 
Therefore, the correct entry is a credit to Income Tax Payable for $207,410.

Question 11

Which of the following is not an indicator of a high earnings quality?

Accepted Answer

Gain on the disposition of a discontinued operation is a one-time event and not a recurring source of earnings, therefore, it does not necessarily indicate a high earnings quality. The other options (B, C, and D) all suggest proper financial reporting and sustainable profitability, which are indicators of high earnings quality.

Question 12

Income tax expense is based on ________ from the income statement while income tax payable is based on ________ from the income tax return.

Accepted Answer

Income tax expense is calculated based on pretax accounting income from the income statement, while income tax payable is calculated based on taxable income from the income tax return.

Question 13

Net income is considered by many users to be a more reliable indicator of future earnings than earnings from continuing operations.

Accepted Answer

Earnings from continuing operations are often considered more reliable for predicting future earnings because they exclude one-time items and discontinued operations, providing a clearer picture of ongoing business performance.

Question 14

A company that switches from straight-line amortization to double-declining-balance amortization during an accounting period must report this change on the financial statements as:

Accepted Answer

The change from straight-line to double-declining-balance amortization represents a change in accounting principle, which is required to be reported as a cumulative effect adjustment on the financial statements. This change should be disclosed explicitly and the effect on prior periods should be presented retrospectively.

Question 15

Under IFRS a deferred tax liability is classified as a ________ and income tax payable is classified as a ________ on the balance sheet.

Accepted Answer

Under IFRS, a deferred tax liability should be classified as a non-current liability on the balance sheet because it is expected to be settled after more than 12 months. On the other hand, income tax payable is recognized as a current liability since it will be settled within the next 12 months. Therefore, the correct option is C.

Question 16

Outline the criteria required for revenue recognition.

Accepted Answer

The answer of Outline the criteria required for revenue recognition....

Question 17

Automatic Train Company, whose income tax rate is 40%, has taxable income of $856,000 and pretax accounting income of $813,000. Under IFRS the entry to record the income tax includes a:

Accepted Answer

The answer of Automatic Train Company, whose income tax rate...

Question 18

Explain what is meant by the phrase "the quality of earnings."

Accepted Answer

The answer of Explain what is meant by the phrase...

Question 19

When a company sells a segment of its business, the gain or loss on the disposal of the segment is shown as:

Accepted Answer

When a company sells a segment of its business, the gain or loss on the disposal of the segment is shown as part of the discontinued operations section on the income statement. This section reports the income and expenses of the discontinued segment separately from the continuing operations of the company. It is presented net of tax as a separate line item on the income statement. The purpose of this reporting is to provide investors and analysts with information about the impact of the divestiture on the company's financial performance.

Question 20

Under the accrual method of accounting, revenues and gains are recorded when they occur, regardless of when the company receives or pays cash.

Accepted Answer

Under the accrual method of accounting, revenues and gains are recorded when they are earned, regardless of when the company receives or pays cash. This means that revenue is recognized when the product or service is delivered, rather than when the payment is received, and expenses are recognized when they are incurred, rather than when they are paid.

Quiz 11: The Income Statement, the Statement of Comprehensive Income, and the Statement of Shareholders Equity