ACC 305 WEEK 4 QUIZ 3

ACC 305 WEEK 4 QUIZ 3

ACC 305 Week 4 Quiz 3 – STR NEW

TRUE-FALSE—Conceptual

1. Taxable income is a tax accounting term and is also referred to as income before taxes.

2. Pretax financial income is the amount used to compute income tax payable.

3. Taxable amounts increase taxable income in future years.

4. A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

5. Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.

6. A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.

7. A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.

8. Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.

9. A company should add a decrease in a deferred tax liability to income tax payable in computing income tax expense.

10. Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered.

11. Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.

12. Permanent differences do not give rise to future taxable or deductible amounts.

13. Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.

14. When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.

15. Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.

16. The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.

17. A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.

18. An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.

19. Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities.

20. The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

MULTIPLE CHOICE—Conceptual

21. Taxable income of a corporation

a. differs from accounting income due to differences inintraperiod allocation between the two methods of income determination.

b. differs from accounting income due to differences ininterperiod allocation and permanent differences between the two methods of income determination.

c. is based on generally accepted accounting principles.

d. is reported on the corporation’s income statement.

22 Taxable income of a corporation differs from pretax financial income because of

Permanent Temporary

Differences Differences

a. No No

b. No Yes

c. Yes Yes

d. Yes No

23. The deferred tax expense is the

a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.

b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.

c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.

d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

24. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in

Future Future

Taxable Amounts Deductible Amounts

a. Yes Yes

b. Yes No

c. No Yes

d. No No

P25. A temporary difference arises when a revenue item is reported for tax purposes in a period

After it is reported Before it is reported

in financial income in financial income

a. Yes Yes

b. Yes No

c. No Yes

d. No No

S26. At the December 31, 2012 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2013, a future taxable amount will occur and

a. pretax financial income will exceed taxable income in 2013.

b. Unruh will record a decrease in a deferred tax liability in 2013.

c. total income tax expense for 2011 will exceed current tax expense for 2013.

d. Unruh will record an increase in a deferred tax asset in 2013.

P27. Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?

I. A revenue is deferred for financial reporting purposes but not for tax purposes.

II. A revenue is deferred for tax purposes but not for financial reporting purposes.

III. An expense is deferred for financial reporting purposes but not for tax purposes.

IV. An expense is deferred for tax purposes but not for financial reporting purposes.

a. item II only

b. items I and II only

c. items II and III only

d. items I and IV only

S28. A major distinction between temporary and permanent differences is

a. permanent differences are not representative of acceptable accounting practice.

b. temporary differences occur frequently, whereas permanent differences occur only once.

c. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.

d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

S29. Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

a. Advance rental receipts.

b. Product warranty liabilities.

c. Depreciable property.

d. Fines and expenses resulting from a violation of law.

S30. Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

a. Subscriptions received in advance.

b. Prepaid royalty received in advance.

c. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.

d. Interest received on a municipal obligation.

S31. Which of the following differences would result in future taxable amounts?

a. Expenses or losses that are tax deductible after they are recognized in financial income.

b. Revenues or gains that are taxable before they are recognized in financial income.

c. Revenues or gains that are recognized in financial income but are never included in taxable income.

d. Expenses or losses that are tax deductible before they are recognized in financial income.

32. Stuart Corporation’s taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be

a. a balance in the Unearned Rent account at year end.

b. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.

c. a fine resulting from violations of OSHA regulations.

d. making installment sales during the year.

33. An example of a permanent difference is

a. proceeds from life insurance on officers.

b. interest expense on money borrowed to invest in municipal bonds.

c. insurance expense for a life insurance policy on officers.

d. all of these.

34. Which of the following will not result in a temporary difference?

a. Product warranty liabilities

b. Advance rental receipts

c. Installment sales

d. All of these will result in a temporary difference.

35. A company uses the equity method to account for an investment. This would result in what type of difference and in what type of deferred income tax?

Type of Difference Deferred Tax

a. Permanent Asset

b. Permanent Liability

c. Temporary Asset

d. Temporary Liability

36. A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?

Type of Difference Deferred Tax

a. Temporary Liability

b. Temporary Asset

c. Permanent Liability

d. Permanent Asset

37. Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?

I. Accrual for product warranty liability.

II. Subscriptions received in advance.

III. Prepaid insurance expense.

a. I and II only.

b. II only.

c. III only.

d. I and III only.

38. Which of the following is not considered a permanent difference?

a. Interest received on municipal bonds.

b. Fines resulting from violating the law.

c. Premiums paid for life insurance on a company’s CEO when the company is the beneficiary.

d. Stock-based compensation expense.

S39. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

a. handled retroactively in accordance with the guidance related to changes in accounting principles.

b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.

c. reported as an adjustment to tax expense in the period of change.

d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

40. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

a. it is probable that a future tax rate change will occur.

b. it appears likely that a future tax rate will be greater than the current tax rate.

c. the future tax rates have been enacted into law.

d. it appears likely that a future tax rate will be less than the current tax rate.

41. Recognition of tax benefits in the loss year due to a loss carryforward requires

a. the establishment of a deferred tax liability.

b. the establishment of a deferred tax asset.

c. the establishment of an income tax refund receivable.

d. only a note to the financial statements.

42. Recognizing a valuation allowance for a deferred tax asset requires that a company

a. consider all positive and negative information in determining the need for a valuation allowance.

b. consider only the positive information in determining the need for a valuation allowance.

c. take an aggressive approach in its tax planning.

d. pass a recognition threshold, after assuming that it will be audited by taxing authorities.

43. Uncertain tax positions

I. Are positions for which the tax authorities may disallow a deduction in whole or

in part.

II. Include instances in which the tax law is clear and in which the company believes

an audit is likely.

III. Give rise to tax expense by increasing payables or increasing a deferred

tax liability.

a. I, II, and III.

b. I and III only.

c. II only.

d. I only.

44. With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

a. it is probable and can be reasonably estimated.

b. there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities.

c. it is more likely than not that the tax position will be sustained upon audit.

d. Any of the above exist.

45. Major reasons for disclosure of deferred income tax information is (are)

a. better assessment of quality of earnings.

b. better predictions of future cash flows.

c. that it may be helpful in setting government policy.

d. all of these.

46. Accounting for income taxes can result in the reporting of deferred taxes as any of the following except

a. a current or long-term asset.

b. a current or long-term liability.

c. a contra-asset account.

d. All of these are acceptable methods of reporting deferred taxes.

47. Deferred taxes should be presented on the balance sheet

a. as one net debit or credit amount.

b. in two amounts: one for the net current amount and one for the net noncurrent amount.

c. in two amounts: one for the net debit amount and one for the net credit amount.

d. as reductions of the related asset or liability accounts.

48. Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

a. their expected reversal dates.

b. their debit or credit balance.

c. the length of time the deferred tax amounts will generate future tax deferral benefits.

d. the classification of the related asset or liability.

49. Tanner, Inc. incurred a financial and taxable loss for 2013. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2013 financial statements?

a. The reduction of the loss should be reported as a prior period adjustment.

b. The refund claimed should be reported as a deferred charge and amortized over five years.

c. The refund claimed should be reported as revenue in the current year.

d. The refund claimed should be shown as a reduction of the loss in 2013.

S50. A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

a. the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.

b. totally eliminated from the financial statements if the amount is related to a noncurrent asset.

c. based on the classification of the related asset or liability for financial reporting purposes.

d. the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

51. All of the following are procedures for the computation of deferred income taxes except to

a. identify the types and amounts of existing temporary differences.

b. measure the total deferred tax liability for taxable temporary differences.

c. measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks.

d. All of these are procedures in computing deferred income taxes.