Deck 12: Accounting for Income Taxes

Question 1

Which of the following will result in a deferred tax asset?

A)Using the installment sales method for tax purposes,while using point of sale for financial reporting.
B)Reporting an unrealized gain for a trading security.
C)Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting.
D)Reporting an expected loss on from a lawsuit in the income statement,when it cannot be reported on the tax return until it is actually incurred.

Answer 1

D

Question 2

Income tax allocation procedures are not appropriate when

A)An extraordinary loss will cause the amount of income tax expense to be less than the tax on ordinary net income
B)An extraordinary gain will cause the amount of income tax expense to be greater than the tax on ordinary net income
C)Differences between net income for tax purposes and financial reporting occur because tax laws and financial accounting principles do not concur on the items to be recognized as revenue and expense
D)Differences between net income for tax purposes and financial reporting occur that will not reverse.

Answer 2

D

Question 3

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

A)Permanent differences
B)Timing differences
C)Intraperiod tax allocation
D)Interperiod tax allocation

Answer 3

A

Question 4

Which of the following approaches to interperiod tax allocation best represents an example of the matching principle?

A)The deferred method of interperiod income tax allocation
B)Discounting deferred income taxes
C)Nonallocation of income taxes
D)The asset/liability method of income tax allocation.

Question 5

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

A)May cause a company to report a tax benefit in the current period income statement.
B)Has no effect on income tax expense of the current period because no taxes are paid.
C)Causes a company to report a deferred income tax liability for taxes that are not paid currently.
D)Results in future taxable amounts.

Question 6

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

A)Tax rates in effect when the timing differences originate without adjustment for subsequent changes in tax rates
B)Tax rates expected to be in effect when the items giving rise to the timing differences reverse themselves
C)Net valuations of assets or liabilities
D)Averages determined on an industry-by-industry basis

Question 7

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

A)Income taxes result from taxable income.
B)Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
C)Nonallocation of income taxes hides an economic difference between a company that employs tax strategies that reduce current tax payments than one that does not.
D)Income taxes are not incurred in anticipation of future benefits,nor are they expirations of cost to provide facilities to generate revenues.

Question 8

The tax effect of a difference between taxable income and pretax accounting income attributable to losses of a subsidiary is normally recognized for

A)Neither carrybacks nor carryforwards
B)Both carrybacks and carryforwards
C)Carrybacks but not carryforwards
D)Carryforwards but not carrybacks

Question 9

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

A)Income taxes result only from taxable income.
B)Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
C)Income taxes are not levied on individual items of income or expense.
D)The current provision for income taxes is a better predictor of future cash flows than is income tax expense that includes deferred taxes.

Question 10

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

A)A reduction of the loss in the year of the loss with an appropriate valuation allowance
B)A prior period adjustment in whichever year the benefit is realized
C)An extraordinary item in the year in which the benefit is realized
D)An item on the retained earnings statement,not the income statement

Question 11

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

A)Current liability
B)Current asset
C)Noncurrent liability
D)Noncurrent asset

Question 12

Which of the following would cause a deferred tax expense?

A)Write-down of goodwill due to impairment
B)Use of equity method where undistributed earnings of a 30 percent owned investee are related to probable future dividends
C)Premiums paid on insurance carried by company beneficiary)on its officers or employees
D)Income is taxed at capital gains rates

Question 13

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

A)A single net amount
B)A net current and a net noncurrent amount
C)Four accounts with no netting permitted
D)Valuation adjustments of the related assets and liabilities that gave rise to the deferred tax

Question 14

Which of the following will result in a deferred tax liability?

A)A net operating loss carryover.
B)Reporting an unrealized gain for a trading security.
C)Reporting an unrealized gain for an available-for-sale security.
D)Reporting an expected loss on from a lawsuit in the income statement,when it cannot be reported on the tax return until it is actually incurred.

Question 15

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?

A)Nonallocation of deferred taxes.
B)Partial allocation of deferred taxes under the asset/liability method.
C)Comprehensive allocation of deferred taxes under the asset/liability method.
D)Comprehensive allocation of deferred taxes under the deferred method.

Question 16

Which of the following is not affected by tax allocation within a period?

A)Income before extraordinary items
B)Extraordinary events
C)Adjustments of prior periods
D)Operating revenues

Question 17

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

A)Accounted for as a timing difference
B)Accounted for as a permanent difference
C)Ignored because it must be based on estimates and assumptions
D)Ignored because it cannot be presumed that all undistributed earnings of a subsidiary will be transferred to the parent company

Question 18

Which of the following causes a permanent difference between taxable income and financial accounting income?

A)The useful life of an asset is 10 years.The asset is depreciated over 7 years for tax purposes.
B)Rent received in advance is taxable upon receipt.
C)A life insurance premium paid by the corporation on a policy that names the corporation as the beneficiary.
D)A penalty paid to a bank when a CD is cashed before its maturity date.

Question 19

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

A)Accounted for as a timing difference
B)Accounted for as a permanent difference
C)Ignored because it must be based on estimates and assumptions
D)Ignored because Smith holds less than 51 percent of the voting stock of Jones

Question 20

Intraperiod tax allocation arises because

A)Items included in the determination of taxable income may be presented in different sections of the financial statements
B)Income taxes must be allocated between current and future periods
C)Certain revenues and expenses appear in the financial statements either before or after they are included in taxable income
D)Certain revenues and expenses appear in the financial statements but are excluded from taxable income

Question 21

What are the objectives of accounting for income taxes?

Question 22

An increase in the deferred income tax asset valuation allowance

A)Occurs when there is an operating loss carryforward.
B)Has no effect on income tax expense.
C)Occurs when there is an expected increase in future taxable icnome.
D)Increases income tax expense.

Question 23

Discuss how SFAS No.109,now FASB ASC 740,changed the accounting for deferred tax assets.

Question 24

A company that has both short-term deferred tax assets of $22,000,long-term deferred tax liabilities of $36,000,short-term deferred tax liabilities of $51,000 and short-term deferred tax assets of $60,000 should report

A)A current asset for $22,000,a current liability for $36,000,a long-term asset for $60,000,and a long-term liability for $51,000.
B)A current liability for $14,000 and a long-term asset for $9,000.
C)A current asset for $5,000.
D)A current liability for $14,000,a long-term asset for $60,000,and a long-term liability for $51,000.

Question 25

Discuss the arguments for and against discounting deferred taxes.

Question 26

Describe the use of the valuation allowance for deferred tax assets.

Question 27

How is the earnings conservatism ratio calculated? Discuss the rationale behind the calculation of a company's earnings conservatism ratio.