Deferred Taxes TOA PDF

Preview

Summary

Practical Problems for Deferred Taxes...

Description

EJM

DEFERRED TAXES

1. Justification for the method of determining periodic deferred tax expense is based on the concept of a. Matching of periodic expense to periodic revenue b. Objectivity in the calculation of periodic expense c. Recognition of assets and liabilities d. Consistency of tax expense measurements with actual tax planning strategies 4. Temporary differences arise when revenues are taxable After they are recognized in financial income a. Yes b. Yes c. No d. No

Before they are recognized in financial income Yes No No Yes

5. Which of the following differences would result in future taxable amounts? a. Expenses or losses that are deductive after they are recognized in financial income b. Revenues or gains that are taxable before they are recognized in financial income c. Expenses or losses that are deductible before they are recognized in financial income d. Revenues or gains that are recognized in financial income but are never included in taxable income 43. Which of the following is true regarding reporting deferred taxes in financial statements prepared in accordance with IFRS? a. Deferred tax assets and liabilities are classified as current and noncurrent based on their expiration dates. b. Deferred tax assets and liabilities may only be classified as noncurrent c. Deferred Tax assets are always netted with deferred tax liabilities to arrive at one amount presented on the balance sheet d. Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process 44. Toller Corp. reports in accordance with IFRS. The controller of the company is attempting to prepare the presentation of deferred taxes on Toller’s financial statements, Which of the following is correct about the presentation of deferred tax assets and liabilities under IFRS? a. Current deferred tax assets are netted against current deferred tax liabilities b. All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities c. Deferred tax assets are never netted against deferred tax liabilities d. Deferred tax assets are netted against deferred tax liabilities if they relate to the same taxing authority 41. Which of the following statements is correct regarding the provision for income taxes in the

financial statements of a sole proprietorship? a. The provision for income taxes should be based on business income using individual tax rates. b. The provision for income taxes should be based on business income using corporate tax rates. c. The provision for income taxes should be based on the proprietor’s total taxable income, allocated to the proprietorship at the percentage that business income bears to the proprietor’s total income d. No provision for income taxes is required 40. No net deferred tax asset (i.e., deferred tax asset net of related valuation allowance) was recognized in the financial statements by the Chaise Company when a loss from discontinued operations was carried forward for tax purposes because it was more likely than not than none of this deferred tax asset would be realized. Chaise had no temporary differences. The tax benefit of the loss carried forward reduced current taxes payable on year 2 continuing operations. The year 2 income statement would include the tax benefit from the loss brought forward in a. Income from continuing operations b. Gain or loss from discontinued operations c. Extraordinary gains d. Cumulative effect of accounting changes 27. Under current generally accepted accounting principles, which approach is used to determine income tax expense? a. Asset and liability approach b. A “with and without” approach c. Net of tax approach d. Periodic expense approach 16. A temporary difference that would result in a deferred tax liability is a. Interest revenue on municipal bonds. b. Accrual of warranty expense c. Excess of tax depreciation over financial accounting depreciation d. Subscriptions received in advance 17.Orleans Co. a cash-basis taxpayer, prepares accrual basis financial statements. In its year 2 balance sheet, Orleans deferred income tax liabilities increased compared to year 1. Which of the following changes would cause this increase in deferred income tax liabilities? I. II. III.

An increase in prepaid insurance An increase in rent receivable An increase in warranty obligations a. I only b. I and II

c. II and III d. III only 18. At the end of year one, Cody co. reported a profit on a partially completed construction contract by applying the percentage of completion method. By the end of year two, the total estimated profit on the contract at completion in year three had been drastically reduced from the amount estimated at the end of year one. Consequently, in year two, a loss equal to one-half of the year one profit was recognized. Cody used the completed contract method for income tax purposes and had no other contracts. The year two balance sheet should include a deferred tax

a. b. c. d.

Asset Yes No Yes No

Liability Yes Yes No No

19. A deferred tax liability is computed using a. The current tax laws, regardless of expected or enacted future tax laws. b. Expected future tax laws, regardless of whether those expected laws have been enacted c. Current tax laws, unless enacted future tax laws are different d. Either current or expected future tax laws, regardless of whether those expected laws have been enacted. 25. Rein Inc. reported deferred tax assets and deferred tax liabilities at the end of year 1 and at the end of year 2. For the year ended 12/31/Y@, Rein should report deferred income tax expense or benefit equal to the a. Decrease in the deferred tax assets b. Increase in the deferred tax liabilities c. Amount of the current tax liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities d. Sum of the net changes in deferred tax assets and deferred tax liabilities 36. Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes. Jab has temporary differences that will reverse during the next year and add to taxable income. Deferred income taxes that are based on these temporary differences should be classified in Jab’s balance sheet as a a. Contra account to current assets b. Contra account to noncurrent assets c. Current liability d. Noncurrent liability 37. At the most recent year-end, a company had a deferred income tax liability arising from accelerated depreciation that exceeded a deferred income tax asset relating to rent received in advance which is expected to reverse in the next year. Which of the following should be reported in the company’s most recent year-end balance sheet?

a. The excess of the deferred income tax liability over the deferred income tax asset as a noncurrent liability b. The excess of the deferred income tax liability over the deferred income tax asset as a current liability c. The deferred income tax liability as a noncurrent liability d. The deferred income tax liability as a current liability 38. On December 31, year 5, Oak Co. recognized a receivable for taxes paid in prior years and refundable through the carryback of all of its year 5 operating loss. Also Oak had a year 5 deferred tax liability derived from the temporary difference between tax and financial statement depreciation, which reverses over the period year 6-year 10. The amount of this tax liability is less than the amount of the tax asset. Which of the following year 5 balance sheet sections should report tax-related items? I. II. III.

Current assets Current liabilities Noncurrent liabilities.

a. I only b. I and III c. I, II, and III d. II and III 39. The amount of income tax applicable to transactions that are not reported in the continuing operations section of the income statement is computed a. By multiplying the item by the effective income tax rate b. As the difference between the tax computed based on taxable income without including the item and the tax computed based on taxable income including the item c. As the difference between the tax computed on the item based on the amount used for financial reporting and the amount used in computing taxable income. d. By multiplying the item by the difference between the effective income tax rate and the statutory tax rate 23. Shear, Inc. began operations in year 1. Included in Shear’s year 1 financial statements were bad debt expenses of $1,400 and profit from an installment sale of $2,600. For tax purposes the bad debts will be deducted and the profit from the installment sale will be recognized in year 2. The enacted tax rates are 30% in year 1 and 25% in year 2. In its year 1 income statement, what amount should shear report as deferred income tax expense? a. $300 b. $360 c. $650 d. $780 24. Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, year 1 balance sheet. For year 2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for year 2. At December 31,

year 2, Quinn’s effective income tax rate is 30%. In its December 31, year 2, income statement, what should Quinn report as deferred income tax expense? a. $12,000 b. $21,000 c. $30,000 d. $60,000 20. For the year ended December 31, year 1, Grim Co.’s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following: Interest on municipal bonds Premium expense on keyman life insurance Total

$70,000 (20,000) $50,000

Grim’s enacted income tax rate is 30% In its year 1 income statement, what amount should grim report as current provision for income tax expense? a. $45,000 b. $51,000 c. $60,000 d. $66,000 Numbers 12 and 13: Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, year 1, its first year of operations: Pretax financial income $160,000 Nontaxable interest received on municipal securities (5,000) Long-term loss accrual in excess of deductible amount 10,000 Depreciation in excess of financial statement amount (25,000) Taxable income $140,000 Zeff’s tax rate for year 1 is 40% 12. In its year 1 income statement, what amount should Zeff report as income tax expensecurrent portion? a. $52,000 b. $56,000 c. $62,000 d. $64,000 13.In its December 31, year 1 balance sheet, what should Zeff report as deferred income tax liability? a. $2,000 b. $3,000 c. $6,000 d. $8,000

Numbers 21 and 22 Venus Corp’s worksheet for calculating current and deferred income taxes for year 1 follows: (amounts at $) Year 1 Year 2 Year 3 Pretax income 1,400 Temporary difference Depreciation (800) (1,200) 2,000 Warranty Cost 400 (100) (300) Taxable income 1,000 Enacted rate 30% 30% 25% Deferred tax accounts Current Noncurrent (before netting)

Asset (30)* (75)**

Liability 140***

*100 x 30% **300 x 25% ***[1,200 x 30%]+[2,000 x 25%] Venus had no prior deferred tax balances. In its year 1 income statement, what amount should venus report as 21. Current income tax expense? $ a. 420 b. 350 c. 300 d. 0 22. Deferred income tax expense? $ a. 350 b. 300 c. 120 d. 35 10. On june 30, year 1, Ank corp. Prepaid a 19,999 premium on an annual insurance policy. The premium payment was a tax deductible expense in Ank’s year 1 cash basis tax return. The accrual basis income statement will report a 9,500 insurance expense in year 1 and year 2. Ank income tax rate is 30% in year 1 and 25% thereafter. In Ank’s December 31, year 1 balance sheet, what amount related to the insurance should be reported as a deferred income tax liability? a. 5,700 b. 4,750

c. 2,850 d. 2,375 14. West Corp. leased a building and received the $36,000 annual rental payment on June 15, year 1. The beginning of the lease was July 1, year 1. Rental income is taxable when received. West’s tax rates are 30% for year 1 and 40% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should west report in its December 31, year 1 balance sheet? a. b. c. d.

5,400 7,200 10,800 14,400

15. Black Co., organized on January 2, year 1, had pretax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, year 1. The only temporary difference is accrued product warranty costs that are expected to be paid as follows: Year 2 Year 3 Year 4 Year 5

$100,000 50,000 50,000 100,000

Black has never had any net operating losses (book or tax) and does not expect any in the future. There were o temporary differences in prior years. The enacted income tax rates are 35% for year 1, 30% for year 2 through year 4, and 25% for year 5. In Black’s December 31, year 1 balance sheet, the deferred income tax asset should be a. b. c. d.

60,000 70,000 85,000 105,000

9. Tower Corp. began operations on january 1, year 1. For financial reporting, Tower recognizes revenues from all sales under the accrual method. However, in its income tax returns, Tower reports qualifying sales under the installment method. Tower’s gross profit on these installment sales under each method was as follows: Year Year 1 Year 2

Accrual method 1,600,000 2,600,000

Installment Method 600,000 1,400,000

The income tax rate is 30% for year 1 and future years. There are no other temporary or permanent differences. In its December 31, year 2 balance sheet, what amount should Tower

report as a liability for deferred income taxes? a. 840,000 b. 660,000 c. 600,000 d. 360,000 11. Mill, which began operations on January 1, year 1, recognizes income from long-term construction contracts under the percentage of completion method in its financial statements and under the completed-contract method for income tax reporting. Income under each method follows: Year Year 1 Year 2 Year 3

Completed Contract 400,000 700,000

Percentage of completion 300,000 600,000 850,000

The income tax rate was 30% for year 1 through year 3. For years after year 3, the enacted tax rate is 25%. There are no other temporary differences. Mill should report in its December 31, year 3 balance sheet a deferred income tax liability of a. b. c. d.

87,500 105,000 162,500 195,000

30. Dix Inc., a calendar-year corporation reported the following operating income (loss) for financial and income tax reporting purposes. When filing its year 2 tax return, Dix did not elect to forego the carryback of its loss for year 2. Assume a 40% tax rate for all years. What amount should Dix report as its income tax liability at December 31, year 3? a. 160,000 b. 120,000 c. 80,000 d. 60,000 33. Mobe Co. reported the following operating income (loss) for its first three years of operations: Year 1 300,000 Year 2 (700,000) Year 3 1,200,000 For each year, there were no deferred income taxes, and Mobe’s effective income tax rate was 30%. In its year 2 income tax return, Mobe elected to carry back the maximum amount of loss possible. Additionally, there was more negative evidence than positive evidence concerning profitability for Mobe in year 3. In its year 3 income statement, what amount should Mobe report as total income tax expense? a. 120,000

b. 150,000 c. 240,000 d. 360,000 34. In year 1, Rand, Inc. reported for financial statement purposes the following items, which were not included in taxable income: Installment gain to be collected equally in year 2 through year 4 Estimated future warranty costs to be paid equally in year 2 through year 4

1,500,000 2,100,000

There were no temporary differences in prior years. Rand’s enacted tax rates are 30% for year 1 and 25% for year 2 through year 4. In Rand’s December 31, year 1 balance sheet, what amounts of the deferred tax asset should be classified as current and noncurrent?

A. B. C. D.

Current 60,000 60,000 50,000 50,000

Noncurrent 100,000 120,000 100,000 120,000...