Chapter 19 Accounting FOR Income Taxes t PDF

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CHAPTER 19 ACCOUNTING FOR INCOME TAXES IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual Answer F F T T F T F T F T F T T F F T T T F F

No.

Description

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Taxable income. Use of pretax financial income. Taxable amounts. Deferred tax liability. Deductible amounts. Deferred tax asset. Need for valuation allowance account. Positive and negative evidence. Computation of income tax expense. Taxable temporary differences. Taxable temporary difference examples. Permanent differences. Applying tax rates to temporary differences. Change in tax rates. Accounting for a loss carryback. Tax effect of a loss carryforward. Possible source of taxable income. Classification of deferred tax assets and liabilities. Classification of deferred tax accounts. Method used for accounting for income taxes.

MULTIPLE CHOICE—Conceptual Answer b c b a a b c d b c d c d d d b a d

No. 21. 22. 23. 24. P25. S26. P27. S28. S29. S30. S31. 32. 33. 34. 35. 36. 37. 38.

Description Differences between taxable and accounting income. Differences between taxable and accounting income. Determination of deferred tax expense. Differences arising from depreciation methods. Temporary difference and a revenue item. Effect of future taxable amount. Causes of a deferred tax liability. Distinction between temporary and permanent differences. Identification of deductible temporary difference. Identification of taxable temporary difference. Identification of future taxable amounts. Identify a permanent difference. Identification of permanent differences. Identification of temporary differences. Difference due to the equity method of investment accounting. Difference due to unrealized loss on marketable securities. Identification of deductible temporary differences. Identification of temporary difference.

19 - 2 ! Test Bank for Intermediate Accounting, Thirteenth Edition

MULTIPLE CHOICE—Conceptual (cont.) Answer c c b a d c d c b d d c c

No. S39.

40. 41. 42. 43. 44. 45. 46. 47. 48. 49. S50. 51.

Description Accounting for change in tax rate. Appropriate tax rate for deferred tax amounts. Recognition of tax benefit of a loss carryforward. Recognition of valuation account for deferred tax asset. Definition of uncertain tax positions. Recognition of tax benefit with uncertain tax position. Reasons for disclosure of deferred income tax information. Classification of deferred income tax on the balance sheet. Classification of deferred income tax on the balance sheet. Basis for classification as current or noncurrent. Income statement presentation of a tax benefit from NOL carryforward. Classification of a deferred tax liability. Procedures for computing deferred income taxes.

P

These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter. S

MULTIPLE CHOICE—Computational Answer c b a a d c b d c d b d a a a c a b a a d b c d b d b b

No.

Description

52 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

Calculate book basis and tax basis of an asset. Calculate deferred tax liability balance. Calculate current/noncurrent portions of deferred tax liability. Calculate income tax expense for the year. Calculate amount of deferred tax asset to be recognized. Calculate current deferred tax liability. Determine income taxes payable for the year. Calculate amount of deferred tax asset to be recognized. Calculate current/noncurrent portions of deferred tax liability. Calculate amount deducted for depreciation on the tax return. Calculate amount of deferred tax asset to be recognized. Calculate deferred tax asset with temporary and permanent differences. Calculate amount of DTA valuation account. Calculate current portion of provision for income taxes. Calculate deferred portion of income tax expense. Computation of total income tax expense. Calculate installment accounts receivable. Computation of pretax financial income. Calculate deferred tax liability amount. Calculate income tax expense for the year. Calculate income tax expense for the year. Computation of income tax expense. Computation of income tax expense. Computation of warranty claims paid. Calculate taxable income for the year. Calculate deferred tax asset amount. Calculate deferred tax liability balance. Calculate income taxes payable amount.

MULTIPLE CHOICE—Computational (cont.)

Accounting for Income Taxes

Answer a b b a c d b b d d b a a d c

No.

Description

80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94.

Calculate deferred tax asset amount. Calculate taxable income for the year. Calculate pretax financial income. Calculate deferred tax liability with changing tax rates. Calculate deferred tax liability amount. Calculate income tax expense with changing tax rates. Determine change in deferred tax liability. Calculate deferred tax liability with changing tax rates. Calculate loss to be reported after NOL carryback. Calculate loss to be reported after NOL carryback. Calculate loss to be reported after NOL carryforward. Determine income tax refund following an NOL carryback. Calculate income tax benefit from an NOL carryback. Calculate income tax payable after NOL carryforward. Calculate deferred tax asset after NOL carryforward.

19 - 3 !

MULTIPLE CHOICE—CPA Adapted Answer a a c d d b a a c c

No. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

Description Determine current income tax liability. Determine current income tax liability. Deferred tax liability arising from depreciation methods. Deferred tax liability when using equity method of investment accounting. Calculate deferred tax liability and income taxes currently payable. Determine current income tax expense. Deferred income tax liability from temporary and permanent differences. Deferred tax liability arising from installment method. Differences arising from depreciation and warranty expenses. Deferred tax asset arising from warranty expenses.

EXERCISES Item E19-105 E19-106 E19-107 E19-108 E19-109 E19-110 E19-111 E19-112 E19-113

Description Computation of taxable income. Future taxable and deductible amounts (essay). Deferred income taxes. Deferred income taxes. Recognition of deferred tax asset. Permanent and temporary differences. Permanent and temporary differences. Temporary differences. Operating loss carryforward.

19 - 4 ! Test Bank for Intermediate Accounting, Thirteenth Edition

PROBLEMS Item P19-114 P19-115 P19-116 P19-117

Description Differences between accounting and taxable income and the effect on deferred taxes. Multiple temporary differences. Deferred tax asset. Interperiod tax allocation with change in enacted tax rates.

CHAPTER LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. *11.

Identify differences between pretax financial income and taxable income. Describe a temporary difference that results in future taxable amounts. Describe a temporary difference that results in future deductible amounts. Explain the purpose of a deferred tax asset valuation allowance. Describe the presentation of income tax expense in the income statement. Describe various temporary and permanent differences. Explain the effect of various tax rates and tax rate changes on deferred income taxes. Apply accounting procedures for a loss carryback and a loss carryforward. Describe the presentation of deferred income taxes in financial statements. Indicate the basic principles of the asset-liability method. Understand and apply the concepts and procedures of interperiod tax allocation.

Accounting for Income Taxes

19 - 5 !

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Learning Objective 1 1.

TF

21.

MC

23.

MC

96.

2.

TF

22.

MC

95.

MC

105.

MC

114.

P

E

115.

P

116.

P

Learning Objective 2 3.

TF

P25.

MC

54.

MC

97.

MC

107.

E

115.

P

4.

TF

52.

MC

55.

MC

98.

MC

108.

E

116.

P

24.

MC

53.

MC

58.

MC

106.

E

114.

P

Learning Objective 3 5.

TF

59.

MC

63.

MC

108.

E

114.

P

6.

TF

61.

MC

106.

E

109.

E

115.

P

56.

MC

62.

MC

107.

E

113.

E

116.

P

Learning Objective 4 7.

TF

8.

TF

64.

MC Learning Objective 5

9. S26.

TF

65.

MC

67.

MC

100.

MC

MC

66.

MC

99.

MC

113.

E

Learning Objective 6 10.

TF

S29.

MC

34.

MC

68.

MC

73.

MC

78.

MC

110.

E

11.

TF

S30.

MC

35.

MC

69.

MC

74.

MC

79.

MC

111.

E

12.

TF

S31.

MC

36.

MC

70.

MC

75.

MC

80.

MC

112.

E

P27.

MC

32.

MC

37.

MC

71.

MC

76.

MC

81.

MC

114.

P

S28.

MC

33.

MC

38.

MC

72.

MC

77.

MC

82.

MC

116.

P

113.

E

Learning Objective 7 13.

TF

S39.

MC

83.

MC

85.

MC

87.

MC

14.

TF

40.

MC

84.

MC

86.

MC

117.

P

Learning Objective 8 15.

TF

17.

TF

42.

MC

89.

MC

91.

MC

93.

MC

16.

TF

41.

MC

88.

MC

90.

MC

92.

MC

94.

MC

Learning Objective 9

19 - 6 ! Test Bank for Intermediate Accounting, Thirteenth Edition 18.

TF

44.

MC

47.

MC

S50.

MC

100.

MC

103.

MC

19.

TF

45.

MC

48.

MC

57.

MC

101.

MC

104.

MC

43.

MC

46.

MC

49.

MC

60.

MC

102.

MC

116.

P

Learning Objective 10 20. Note:

TF

51.

MC

TF = True-False MC = Multiple Choice E = Exercise P = Problem

Accounting for Income Taxes

19 - 7 !

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

19.

19 - 8 ! Test Bank for Intermediate Accounting, Thirteenth Edition 20.

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

True-False Answers—Conceptual Item

Ans.

1.

F

2.

Item

Ans.

Item

Ans.

Item

Ans.

6.

T

11.

F

16.

T

F

7.

F

12.

T

17.

T

3.

T

8.

T

13.

T

18.

T

4.

T

9.

F

14.

F

19.

F

5.

F

10.

T

15.

F

20.

F

MULTIPLE CHOICE—Conceptual 21.

Taxable income of a corporation a. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. b. differs from accounting income due to differences in interperiod 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

a. b. c. d. 23.

Permanent Differences No No Yes Yes

Temporary Differences No Yes Yes No

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.

Accounting for Income Taxes 24.

19 - 9 !

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Taxable Amounts Yes Yes No No

a. b. c. d.

Future Deductible Amounts Yes No Yes 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, 2010 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2011, a future taxable amount will occur and a. pretax financial income will exceed taxable income in 2011. b. Unruh will record a decrease in a deferred tax liability in 2011. c. total income tax expense for 2011 will exceed current tax expense for 2011. d. Unruh will record an increase in a deferred tax asset in 2011.

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. II. III. IV. a. b. c. d.

S28.

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

item II only items I and II only items II and III only items I and IV only

A major distinction between temporary and permanent differences is a. permanent differences are not representative of acceptable accounting practice. b. temporary differences oc...