1
Q
Gulfport 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 Gulfport would be
making installment sales during the year.
a fine resulting from violations of OSHA regulations.
a balance in the Unearned Rent account at year end.
using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
A
a fine resulting from violations of OSHA regulations.
2
Q
Permanent differences result in deferred tax consequences.
True
False
A
False
3
Q
In computing deferred income taxes for which graduated tax rates are a significant factor, companies are required to use the:
actual rates.
graduated rates.
incremental rates.
average rates.
A
average rates.
4
Q
All of the following are examples of temporary differences that result in taxable amounts in future years except:
installment sales.
subscriptions received in advance.
investments accounted for under the equity method.
long-term construction contracts.
A
subscriptions received in advance.
5
Q
The FASB believes that the most consistent method for accounting for income taxes is the
temporary-permanent method.
asset-liability method.
benefit-obligation method.
carryback-carryforward method.
A
asset-liability method.
6
Q
Under the asset-liability method, the measurement of current and deferred tax liabilities and assets is based on provisions of the anticipated future tax law.
True
False
A
False
7
Q
The last step (procedure) in the computation of deferred income taxes is to
measure deferred tax assets for each type of tax credit carryforward.
reduce deferred tax assets by a valuation allowance if necessary.
identify the types and amounts of existing temporary differences.
measure the total deferred tax asset (liability) using the appropriate tax rate.
A
reduce deferred tax assets by a valuation allowance if necessary.
8
Q
The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.
True
False
A
False
The FASB believes that the most consistent method for accounting for income taxes is asset-liability method.
9
Q
Under GAAP, companies should classify all deferred taxes as noncurrent.
True
False
A
False
Under GAAP, companies should classify the balances in the deferred tax accounts on the balance sheet as current and noncurrent based on the classification of related assets and liabilities.
10
Q
Nondeductible fines and penalties result in deferred tax assets.
True
False
A
False
Nondeductible fines and penalties do not result in deferred taxes as they are not deductible in any period.
11
Q
Taxable income of a corporation
is based on generally accepted accounting principles.
differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.
differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.
is reported on the corporation’s income statement.
A
differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.
12
Q
IFRS on income taxes is based on the different principles than U.S. GAAP.
True
False
A
False
IFRS on income taxes is based on the same principles as U.S. GAAP—comprehensive recognition of deferred tax assets and liabilities.
13
Q
When accounting for income taxes, the differences between IFRS and U.S. GAAP involve:
some minor differences in the recognition, measurement, and disclosure criteria.
differences in implementation guidance.
all of these answer choices are correct.
a few exceptions to the asset-liability approach.
A
all of these answer choices are correct.
14
Q
Under both GAAP and IFRS, the balances in the deferred tax accounts on the balance sheet are always classified as noncurrent.
True
False
A
False
IFRS classifies all deferred tax assets and liabilities as noncurrent
15
Q
Which of the following is false regarding accounting for deferred taxes under IFRS?
A deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates.
The rate used to compute deferred taxes is either the enacted tax rate, or a substantially enacted tax rate (virtually certain).
A deferred tax asset is recognized up to the amount that is probable to be realized.
Tax effects of certain items are recognized in equity.
A
A deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates.
IFRS uses an affirmative judgment approach for recognizing all or a portion of deferred tax asset that will not be realized
16
Q
With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when
it is more likely than not that the tax position will be sustained upon audit.
any of the above exist.
it is probable and can be reasonably estimated.
there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities.
A
it is more likely than not that the tax position will be sustained upon audit.
17
Q
Recognition of tax benefits in the loss year due to a loss carryforward requires
only a note to the financial statements.
the establishment of an income tax refund receivable.
the establishment of a deferred tax liability.
the establishment of a deferred tax asset.
A
the establishment of a deferred tax asset
18
Q
When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be
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.
handled retroactively in accordance with the guidance related to changes in accounting principles.
considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.
reported as an adjustment to income tax expense in the period of change.
A
reported as an adjustment to income tax expense in the period of change.
19
Q
Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if
the future tax rates have been enacted into law.
it appears likely that a future tax rate will be less than the current tax rate.
it appears likely that a future tax rate will be greater than the current tax rate.
it is probable that a future tax rate change will occur.
A
the future tax rates have been enacted into law.
20
Q
A major distinction between temporary and permanent differences is
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.
temporary differences occur frequently, whereas permanent differences occur only once.
temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.
permanent differences are not representative of acceptable accounting practice.
A
temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.
21
Q
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?
Fines and expenses resulting from a violation of law.
Product warranty liabilities.
Depreciable property.
Prepaid expenses that are deducted on the tax return in the period paid
A
Product warranty liabilities.
22
Q
Horner Corporation has a deferred tax asset at December 31, 2015 of $160,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2012–2014; 35% for 2015; and 30% for 2016 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of:
$28,000
$24,000
$80,000
$32,000
A
$80,000
$160,000 × .50 = $80,000.
23
Q
On December 31, 2013, Winston Inc. has determined that it is more likely than not that $240,000 of a $600,000 deferred tax asset will not be realized. The journal entry to record this reduction in asset value will include a
credit to Income Tax Expense for $360,000.
debit to Income Tax Expense for $360,000.
credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000.
debit to Income Tax Payable of $240,000.
A
credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000.
24
Q
The deferred tax expense is the
decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.
increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
A
increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
25
Q
Taxable amounts are temporary differences that:
decrease taxable income in future years.
require the recording of a deferred tax liability.
increase pretax financial income in future years.
require the recording of a deferred tax asset.
A
require the recording of a deferred tax liability.
