Question 1

A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.

Accepted Answer

A deferred tax liability represents a future tax payment a company expects to make to tax authorities in future years, due to temporary differences between its taxable income and its accounting earnings before taxes as reported in its financial statements.

Question 2

Only U.S. corporations are included in a combined GAAP financial statement.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) is a set of accounting rules and standards that are used to prepare financial statements. GAAP is not limited to U.S. corporations, it is a globally recognized set of accounting standards that are used by companies worldwide.

Question 3

If a corporation has no operations outside the U.S., its GAAP book and taxable income are identical.

Accepted Answer

False

Question 4

An example of a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

Accepted Answer

The answer of An example of a deferred tax asset...

Question 5

A partnership owned at least 80% by a corporation is included in a consolidated group's U.S. income tax return.

Accepted Answer

A partnership cannot be included in a consolidated group's U.S. income tax return because consolidated tax returns are limited to corporations, and partnerships are treated as separate entities for tax purposes.

Question 6

The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.

Accepted Answer

The valuation allowance is specifically used to reduce a deferred tax asset to the amount that is more likely than not to be realized. It does not apply to deferred tax liabilities.

Question 7

In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the taxes payable by a business entity to state, local, Federal, and foreign governments, for the current year and all future years.

Accepted Answer

ASC 740 (SFAS 109) is specifically focused on accounting for income taxes, including both current and deferred tax liabilities and assets. Therefore, the purpose of ASC 740 is to calculate and disclose the income tax expense or benefit associated with a company's financial statements, not necessarily the actual taxes payable to various governments. However, the calculations and disclosures required by ASC 740 are important for understanding a business entity's tax obligations and potential liabilities in the future.

Question 8

If a valuation allowance is decreased (released) in the current year, the corporation's effective tax rate is lower than if the valuation allowance had not decreased.

Accepted Answer

When a valuation allowance is released in the current year, it means that the corporation is recognizing a tax benefit that it previously deemed uncertain or unlikely to be realized. As a result, the corporation's taxable income for the current year is reduced, which leads to a lower tax liability and a lower effective tax rate. This is because when the valuation allowance is released, the previously unrecognized tax benefit is now deemed likely to be realized, and the corporation can reduce its overall tax liability by applying the benefit to its current year tax return.

Question 9

Under GAAP, a corporation can defer reporting the U.S. tax expense related to the earnings of foreign subsidiaries, by taking into account its repatriation plans for these earnings.

Accepted Answer

This is referred to as the "indefinitely reinvested" exception and is allowed under GAAP. The U.S. tax expense related to the foreign earnings is only recognized when the earnings are repatriated, or if there is a change in the company's intention to indefinitely reinvest the earnings.

Question 10

Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation's taxable income.

Accepted Answer

Schedule UTP (Uncertain Tax Position Statement) is used by certain corporations to report uncertain tax positions, not to reconcile financial statement net income after tax with taxable income. That reconciliation is generally part of Schedule M-1 or Schedule M-3 of the Form 1120.

Question 11

The IRS decides upon audit whether the taxpayer can claim the tax deferral benefits of ASC 740-30 (APB 23).

Accepted Answer

The answer of The IRS decides upon audit whether the...

Question 12

"Temporary differences" are book-tax differences that appear in both the GAAP financial statements and the Federal income tax return, but not in the same reporting period.

Accepted Answer

Temporary differences arise when an item is recognized differently for tax purposes and financial accounting purposes, but the difference is expected to reverse in a future reporting period. This creates a temporary difference that must be accounted for on both the GAAP financial statements and the tax return. For example, if a company has deferred revenue for tax purposes but recognizes the revenue immediately for financial accounting purposes, there is a temporary difference that will reverse in a future reporting period.

Question 13

The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation's consolidated tax return, if a proper election is made.

Accepted Answer

This is true according to the Internal Revenue Service regulations.

Question 14

Giant uses the "equity method" to account for the operations of its 40% owned subsidiary Little. A portion of Little's profits for the year are included in Giant's GAAP book income.

Accepted Answer

When using the equity method, a portion of the profits from the subsidiary is included in the parent company's GAAP book income. Therefore, the statement is true.

Question 15

The current tax expense reported on the GAAP financial statements generally represents the taxes actually payable to domestic or foreign governmental authorities.

Accepted Answer

The current tax expense reported on the GAAP financial statements represents the actual taxes payable, which is determined based on applicable tax laws and regulations.

Question 16

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23) benefits were previously adopted will decrease a corporation's current year effective tax rate.

Accepted Answer

Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23) benefits were previously adopted may result in a significant tax liability and could increase the corporation's current year effective tax rate. This is because the corporation may need to pay a higher tax rate on the repatriated earnings due to the loss of tax benefits previously enjoyed under APB 23.

Question 17

"Permanent differences" include items that appear in the Federal income tax return as income or deduction, and in the GAAP financial statements as revenue or expense, but in different reporting periods.

Accepted Answer

Permanent differences are items that are included in the calculation of taxable income or financial income but never both. They do not reverse over time, unlike temporary differences which may appear in different periods for tax and financial reporting.

Question 18

A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current year GAAP financial statements.

Accepted Answer

A deferred tax asset represents future tax savings that will result from temporary differences between book and tax accounting, which are recognized in the current year's financial statements under GAAP.

Question 19

Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. Yahr's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.

Accepted Answer

The answer of Yahr, Inc., is a domestic corporation with...

Question 20

A valuation allowance expresses on the GAAP balance sheet that there exists uncertainty that the taxpayer will be able to recover a deferred tax asset.

Accepted Answer

This is a correct statement about the purpose of a valuation allowance on the GAAP balance sheet.

Quiz 3: Tax Determination; Personal and Dependency Exemptions; an Overview of Property Transactions