Ch18 Wiley Test Bank PDF

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CHAPTER 18INCOME TAXESCHAPTER STUDY OBJECTIVES Understand the importance of income taxes from a business perspective. When a company decides where to set up its operations, a major consideration is the tax rate that it will face on its profits. The fact that corporate taxes can slow growth may help ...

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

CHAPTER 18 INCOME TAXES CHAPTER STUDY OBJECTIVES 1. Understand the importance of income taxes from a business perspective. When a company decides where to set up its operations, a major consideration is the tax rate that it will face on its profits. The fact that corporate taxes can slow growth may help to explain why governments in Canada have steadily reduced corporate tax rates over time. For example, the combined federal and provincial tax rate declined from an average of approximately 43% to approximately 28% between 2000 and 2015 and has remained relatively stable into mid-2021.

2. Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Accounting income is calculated in accordance with generally accepted accounting principles. Taxable income is calculated in accordance with prescribed tax legislation and regulations. Because tax legislation and GAAP have different objectives, accounting income and taxable income often differ. To calculate taxable income, companies start with their accounting income and then add and deduct items to adjust the GAAP measure of income to what is actually taxable and tax deductible in the period. Current tax expense and income taxes payable are determined by applying the current tax rate to taxable income. 3. Explain what a taxable temporary difference is, determine its amount, and calculate deferred tax liabilities and deferred tax assets. A taxable temporary difference is the difference between the carrying amount of an asset or liability and its tax base with the consequence that, when the asset is recovered or the liability is settled in the future for an amount equal to its carrying value, the taxable income of that future period will be increased. Because taxes increase in the future as a result of temporary differences that exist at the SFP date, the future tax consequences of these taxable amounts are recognized in the current period as a deferred tax liability. A deductible temporary difference is the difference between the carrying amount of an asset or liability and its tax base with the consequence that, when the asset is recovered or the liability is settled in the able income of that future period will be reduced. Because taxes are reduced in the future as a result of temporary differences that exist at the SFP date, the future tax consequences of these deductible amounts are recognized in the current period as a deferred tax asset.

4. Prepare analyses of deferred tax balances and record deferred tax expense. The following steps are taken: (1) identify all temporary differences 18-1 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibite

Test Bank for Intermediate Accounting, Twelfth Canadian Edition

between the carrying amounts and tax bases of assets and liabilities at the SFP date; (2) calculate the correct net deferred tax asset or liability balance at the end of the period; (3) compare the balance in the deferred tax asset or liability before the adjustment with the correct balance at the SFP date—the difference is the deferred tax expense/benefit; and (4) make the journal entry, which is based on the change in the amount of the net deferred tax asset or liability. 5. Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Tax rates other than the existing rates can be used only when the future tax rates have been enacted into legislation or substantively enacted. Deferred tax assets and liabilities are measured at the tax rate that applies to the specific future years in which the temporary difference is expected to reverse. When there is a change in the future tax rate, its effect on the future tax accounts is recognized immediately. The effects are reported as an adjustment to deferred tax expense in the period of the change. 6. Account for tax loss carryover benefits, including any note disclosures. A company may carry a taxable loss back three years and receive refunds to a maximum of the income taxes paid in those years. Because the economic benefits related to the losses carried back are certain, they are recognized in the period of the loss as a tax benefit on the income statement and as an asset (income tax receivable) on the balance sheet. A post-2009 tax loss can be carried forward and applied against the taxable incomes of the next 20 years. If the economic benefits related to the tax loss are more likely than not to be realized during the carryforward period, they are recognized in the period of the loss as a deferred tax benefit in the income statement and as a deferred tax asset on the SFP. Otherwise, they are not recognized in the financial statements. Alternatively, ASPE also allows the use of a contra valuation allowance account, but this approach is not used under IFRS. Disclosure is required of the amounts of tax loss carry forwards and their expiry dates. If previously unrecorded tax losses are subsequently used to benefit a future period, the benefit is recognized in that future period. 7. Explain why the Deferred Tax Asset account is reassessed at the SFP date, and account for the deferred tax asset with and without a valuation allowance account. Every asset must be assessed to ensure that it is not reported at an amount higher than the economic benefits that are expected to be received from the use or sale of the asset. The economic benefit to be received from the deferred tax asset is a reduction in deferred taxes payable. If it is unlikely that sufficient taxable income will be generated in the future to allow the future deductions, the income tax asset may have to be written down. If previously unrecognized amounts are now expected to be realizable, a deferred tax asset is recognized. These entries may be made directly to the Deferred Tax Asset account.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

8. Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation. Under all methods, current income taxes payable or receivable are reported separately as a current liability or current asset. Under IFRS, the deferred tax accounts are all classified as non-current. Current and deferred tax expense is reported separately with income before discontinued operations, discontinued operations, items in OCI, retained earnings, and other capital. Separate disclosure is required of the amounts and expiry dates of unused tax losses, and the amount of deductible temporary differences for which no deferred tax asset has been recognized. Under ASPE and assuming a single tax authority, future income tax assets and liabilities are classified as one net current amount and one net noncurrent amount based on the classification of the asset or liability to which the temporary difference relates. Other future tax accounts are classified according to when the temporary differences are expected to reverse. ASPE calls for limited disclosures, but under IFRS, additional disclosures are required about temporary differences and unused tax losses, the major components of income tax expense, and the reasons for the difference between the statutory tax rate and the effective rate indicated on the income statement.

9. Identify the major differences between ASPE and IFRS for income taxes. ASPE allows an accounting policy choice—either the taxes payable method or the future income taxes method—while IFRS requires use of the temporary difference approach (a method consistent with the future income taxes method). The main differences relate to terminology, the SFP classification of deferred/future tax assets and liabilities, use of a valuation allowance, and the extent of disclosure. 10. Apply the temporary difference approach (future income taxes method) of accounting for income taxes in a comprehensive situation. In a comprehensive situation, take the following steps. (1) Calculate the current tax expense and payable; (2) Determine the taxable and deductible temporary differences as the difference between the carrying amounts and tax bases of the assets and liabilities; calculate the correct balance of the deferred tax asset or liability account; (3) Determine the deferred tax expense as the adjustment needed to the existing SFP balance; (4) Make an adjusting entry to restate the deferred tax asset or liability amounts if a change in the future tax rates has been substantively enacted; and (5) Classify the net deferred/future tax asset or liability according to the accounting standards being applied.  

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

MULTIPLE CHOICES Answer c c b c d c d a b c b d b a a d b c a d a c a d a b c c a d a a a c d d c b d a a b b a c b d

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47.

Description Impact of corporate income taxes Year end income adjustments for income tax purposes IFRS terminology Differences between taxable and accounting income ASPE income tax methods allowed IFRS income tax methods allowed Identify reversible difference Definition of the tax base of a liability Definition of a temporary difference Identify a permanent difference Identify incorrect statement Calculate CCA claimed. Calculate current income tax payable for the year. Calculate instalment accounts receivable. Calculate current income tax liability. Calculate current income tax liability. Calculate current income tax expense. Calculate deferred tax liability and current income taxes payable. Deferred tax liability from instalment sales Deferred tax liability from depreciation/CCA differences Deferred tax liability from depreciation and warranty differences Deferred tax asset from warranty expenses Depreciation and temporary differences Definition of deferred tax liability Composition of total income tax expense Difference due to unrealized loss on short-term securities Definition of deferred tax asset AJE to credit deferred tax asset account Calculate deferred tax liability. Calculate deferred tax liability with changing tax rates. Calculate deferred tax liability. Calculate income tax expense for the year. Calculate deferred tax liability. Deferred tax liability from reversible and permanent differences Deferred tax liability when using equity method of accounting Calculate deferred tax asset. Calculate deferred tax asset. Calculate deferred tax asset or liability. Calculate deferred tax asset or liability. Objective of interperiod tax allocation Result of interperiod tax allocation Calculation of effective tax rate Differences between taxable and accounting income Definition of intraperiod tax allocation Appropriate tax rate for deferred income tax amounts Recognition of tax benefits of a loss carryforward Financial statement presentation of a tax benefit from loss

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

carryforward c 48. d 49. b 50. c 51. d 52. b 53. b 54. a 55.

Deferred Tax Asset account under IFRS and ASPE Appropriate use of the Deferred Tax Asset account Calculate loss to be reported after loss carryback. Calculate loss to be reported after loss carryback. Calculate income tax refund following a loss carryback. Calculate loss to be reported after loss carryforward. IFRS SFP presentation of deferred tax assets and liabilities IFRS and IAS 12

EXERCISES Item E18-56 E18-57 E18-58 E18-59 E18-60 E18-61 E18-62 E18-63 E18-64 E18-65 E18-66 E18-67 E18-68 E18-69 E18-70 E18-71

Description Taxes payable under IFRS and ASPE Temporary differences Permanent and reversible differences Permanent and reversible differences Reversible differences Calculation of taxable income Future income taxes Permanent and reversible differences and disclosure Deferred income taxes Deferred tax asset Change in tax rates and disclosure Taxable loss carryforward without valuation allowance (IFRS) Taxable loss carryforward with valuation allowance (ASPE) Deferred Tax Assets and Liabilities Taxes payable method and disclosure Comparing IFRS and ASPE for income tax purposes

PROBLEMS Item Description P18-72 Taxable income and accounting income P18-73 Taxable temporary difference P18-74 Differences between accounting and taxable income and effect on future income taxes P18-75 Multiple reversible differences P18-76 Interperiod tax allocation with change in enacted tax rates P18-77 Comprehensive income tax situation with multiple differences (ASPE) P18-78 Deferred tax asset P18-79 Loss carryover benefits P18-80 Deferred tax asset and tax law P18-81 Intraperiod tax allocation and disclosure

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

NOTE TO INSTRUCTOR: Except where ASPE is specifically noted, it is assumed that all questions are to be solved using current IFRS pronouncements. MULTIPLE CHOICE 1. Of the various taxation options available to OECD countries, those that had the most negative impact on gross domestic product were a) property taxes. b) consumption taxes. c) corporate taxes. d) personal income taxes. Answer: c Difficulty: Easy Learning Objective: Understand the importance of income taxes from a business perspective. Section Reference: Income Taxes from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 2. Under IFRS, end of the period adjustments may need to be made to income for all of the following reasons EXCEPT a) income taxes must be filed in accordance with the Income Tax Act. b) IFRS does not provide guidance on allowable deductions for CRA. c) IFRS does allow for the taxes payable approach. d) income taxes preparation may also be subject to provincial legislation. Answer: c Difficulty: Medium Learning Objective: Understand the importance of income taxes from a business perspective. Section Reference: Income Taxes from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 3. Under IFRS, accounting income and taxable income are referred to as Accounting Income Taxable Income a) Accounting profit Income for tax purposes b) Accounting profit Taxable profit c) Income before taxes Taxable profit 18-6 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Twelfth Canadian Edition

d)

Pre-tax profit

Taxable income

Answer: b Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 4. When calculating income tax expense, taxable income of a corporation differs from pre-tax accounting income because of Permanent Reversible Differences Differences a) no no b) no yes c) yes yes d) yes no Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 5. For calculating income tax expense, ASPE allows the use of a) any method as long as the CRA approves it. b) the taxes payable method only. c) the future income taxes method only. d) either the taxes payable method or the future income taxes method. Answer: d Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

6. For calculating income tax expense, IFRS requires the use of a) any method as long as the CRA approves it. b) the taxes payable method only. c) the temporary difference approach only. d) either the taxes payable method or the temporary difference approach. Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 7. Which of the following will NOT result in a reversible difference? a) product warranty liabilities b) unrealized holding losses c) instalment sales d) fines and penalties Answer: d Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 8. The tax base of a liability is its carrying amount on the SFP a) reduced by any amount that will be deductible for tax purposes in future periods. b) increased by any amount that will be deductible for tax purposes in future periods. c) less any amount that will not be taxable in the future. d) plus any amount that will not be taxable in the future. Answer: a Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 18-8 Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Twelfth Canadian Edition

9. The difference between the tax base of an asset or liability and its reported amount on the SFP is called a a) permanent difference. b) temporary difference. c) current difference. d) future income tax expense. Answer: b Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. Alabama Corp.'s taxable income differed from its accounting income for 2020. An item that would create a permanent difference in accounting and taxable incomes for the corporation would be a) a balance in the Unearned Rent account at year end. b) using CCA for tax purposes and straight-line depreciation for book purposes. c) a payment of the golf club dues for the president’s membership. d) making instalment sales during the year. Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 11. In regard to reconciling income reported on the financial statements to taxable income, which of the following statements is INCORRECT? a) All differences between accoun...