Question 1

ASC 740 is the sole source of rules related to accounting for income taxes.
Other pronouncements also provide rules related to accounting for income taxes.

Accepted Answer

ASC 740 is the primary source for accounting for income taxes, but other pronouncements and guidance may also impact tax accounting, such as SEC regulations and international standards.

Question 2

In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet.

Accepted Answer

A temporary difference occurs when there is a difference between the financial reporting income and the taxable income, resulting in differences in the balance sheet. This difference is expected to be resolved in the future, such as when the asset is sold or the liability is settled, resulting in the financial reporting income and the taxable income becoming the same.

Question 3

The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements.

Accepted Answer

The statement is true, the Emerging Issues Task Force does assist the FASB with guidance on the implementation of ASC 740 and other accounting pronouncements.

Question 4

Tax-exempt interest from municipal bonds is an example of a permanent book to tax difference.

Accepted Answer

Tax-exempt interest from municipal bonds is not included in taxable income for federal tax purposes, but is included in book income. This creates a permanent book to tax difference.

Question 5

A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future.

Accepted Answer

This statement is correct. When evaluating the need for a valuation allowance, a corporation considers both positive and negative evidence about whether it will realize a deferred tax asset in the future. Positive evidence might include things like recent profitable operations or expected future increases in taxable income, while negative evidence might include things like a history of losses or uncertainty about future profitability. By considering both types of evidence, the corporation can determine whether a valuation allowance is needed to offset some or all of the deferred tax asset.

Question 6

The tax effects of permanent differences are always reported solely in a company's computation of its effective tax rate.
Some permanent differences (excess windfall benefits from NQO deductions) show up in shareholders' equity.

Accepted Answer

Permanent differences do not affect the effective tax rate as they do not reverse over time. Some permanent differences, like excess tax benefits from stock options, can be reported in shareholders' equity.

Question 7

Temporary differences create either a deferred tax asset or a deferred tax liability.

Accepted Answer

This statement is true. Temporary differences between the carrying amount of an asset or liability and its tax basis can result in either a deferred tax asset or a deferred tax liability. A deferred tax asset arises when the tax basis of an asset or liability exceeds its carrying amount, resulting in a future tax benefit. Conversely, a deferred tax liability arises when the carrying amount of an asset or liability exceeds its tax basis, resulting in a future tax expense.

Question 8

A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet.
Valuation allowances relate to the likelihood of realization of a deferred tax asset.

Accepted Answer

The answer of A corporation undertakes a valuation allowance analysis...

Question 9

ASC 740 governs how a company accounts for all taxes it incurs.
ASC 740 applies only to income taxes.

Accepted Answer

ASC 740 specifically addresses the accounting for income taxes, not all types of taxes a company may incur.

Question 10

Publicly-traded companies usually file their financial statements before they file their federal income tax returns.

Accepted Answer

Publicly-traded companies are required by the Securities and Exchange Commission (SEC) to file their financial statements, such as their annual and quarterly reports, in a timely manner. These filings are available to the public on the SEC's database, EDGAR. On the other hand, federal income tax returns are filed with the Internal Revenue Service (IRS) and are generally confidential. While it is true that both financial statements and tax returns provide important information about a company's financial performance, they serve different purposes and have different filing requirements.

Question 11

Assume Congress reduces the corporate tax rate from 35 percent to 25 percent effective in 2016. The tax rate change will affect only deferred tax assets and liabilities that arise in 2016 and thereafter.
A corporation must adjust its existing deferred tax accounts as well.

Accepted Answer

The answer of Assume Congress reduces the corporate tax rate...

Question 12

A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.
Only deferred tax assets require the determination of whether a valuation allowance is needed.

Accepted Answer

A valuation allowance is only applied to deferred tax assets, not deferred tax liabilities, to account for the possibility that the asset may not be fully realized.

Question 13

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized.
Recognition and measurement are the two steps.

Accepted Answer

ASC 740 requires a two-step process for recognizing and measuring uncertain tax benefits. The first step involves recognition, where the entity evaluates the tax position in question and determines whether it is more likely than not to be sustained upon examination by relevant tax authorities. The second step involves measurement, where the entity determines the amount of the benefit that should be recognized based on the best estimate of the amount that is ultimately expected to be realized.

Question 14

Temporary differences that are cumulatively "favorable" are defined as taxable temporary differences.

Accepted Answer

Taxable temporary differences are temporary differences that will result in taxable amounts in future periods when the related asset is recovered or liability is settled. If these temporary differences are cumulatively "favorable," it means that the taxable amounts will exceed the deductible amounts, resulting in higher taxable income in the future.

Question 15

Brown Corporation reports $100,000 of gain from the sale of land on its income statement. For tax purposes, Brown uses the installment method and reports gain of $10,000. The $90,000 difference in the gain reported is a deductible temporary difference.
Taxable temporary difference because when the difference reverses in a future period, it will increase taxable income relative to book income.

Accepted Answer

The $90,000 difference is a taxable temporary difference, not a deductible one, because it will increase taxable income in the future when the installment payments are received.

Question 16

The focus of ASC 740 is the income statement.
The focus of ASC 740 is the balance sheet.

Accepted Answer

The focus of ASC 740 is on the balance sheet and how income taxes affect a company's financial position. It provides guidance on accounting for income taxes, including the recognition, measurement, and disclosure of deferred tax assets and liabilities. The income statement is impacted by the recognition of current and deferred tax expense, but it is not the primary focus of ASC 740.

Question 17

The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year.
The current income tax expense also includes additions and subtractions to the company's uncertain tax benefits and adjustments for prior year returns.

Accepted Answer

The statement is incorrect. The current income tax expense or benefit includes not only the taxes paid or refunded in the current year but also adjustments for prior year returns and changes in the company's uncertain tax benefits.

Question 18

ASC 740 deals with accounting for uncertain tax positions.

Accepted Answer

ASC 740, or Accounting Standards Codification 740, also known as FIN 48, deals with the accounting for uncertain tax positions. It requires companies to recognize and measure the potential impact of uncertain tax positions in their financial statements.

Question 19

ASC 740 applies to accounting for state and local and international income taxes as well as federal income taxes.

Accepted Answer

ASC 740 provides guidance for accounting for income taxes at all levels, including federal, state and local, and international income taxes.

Question 20

A cumulative financial accounting (book) loss over three years likely would be considered significant negative evidence in a valuation allowance analysis.

Accepted Answer

A cumulative financial accounting loss over three years would indicate a decrease in the company's ability to generate taxable income in the future and would be significant negative evidence in a valuation allowance analysis.

Quiz 6: Accounting for Income Taxes

ASC 740 is the sole source of rules related to accounting for income taxes. Other pronouncements also provide rules related to accounting for income taxes.

In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet.

The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements.

Tax-exempt interest from municipal bonds is an example of a permanent book to tax difference.

A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future.

The tax effects of permanent differences are always reported solely in a company's computation of its effective tax rate. Some permanent differences (excess windfall benefits from NQO deductions) show up in shareholders' equity.

Temporary differences create either a deferred tax asset or a deferred tax liability.

A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet. Valuation allowances relate to the likelihood of realization of a deferred tax asset.

ASC 740 governs how a company accounts for all taxes it incurs. ASC 740 applies only to income taxes.

Publicly-traded companies usually file their financial statements before they file their federal income tax returns.

Assume Congress reduces the corporate tax rate from 35 percent to 25 percent effective in 2016. The tax rate change will affect only deferred tax assets and liabilities that arise in 2016 and thereafter. A corporation must adjust its existing deferred tax accounts as well.

A valuation allowance can reduce both a deferred tax asset and a deferred tax liability. Only deferred tax assets require the determination of whether a valuation allowance is needed.

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized. Recognition and measurement are the two steps.

Temporary differences that are cumulatively "favorable" are defined as taxable temporary differences.

The focus of ASC 740 is the income statement. The focus of ASC 740 is the balance sheet.

The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year. The current income tax expense also includes additions and subtractions to the company's uncertain tax benefits and adjustments for prior year returns.

ASC 740 deals with accounting for uncertain tax positions.

ASC 740 applies to accounting for state and local and international income taxes as well as federal income taxes.

A cumulative financial accounting (book) loss over three years likely would be considered significant negative evidence in a valuation allowance analysis.