F6 - M5 - Income Taxes: Part 1

Question 1

GAAP and tax accounting rules differ considerably. Some of the differences are _______ because they never reverse. Other differences are ______ because they involve mere timing differences between the financial and tax accounting rules.

Answer 1

permanent ; temporary

Question 2

When a temporary difference is income and the Tax income is greater than the book income, the entity will report a

Answer 2

Deferred Tax Asset

Question 3

When a temporary difference is income and the Tax income is less than the book income, the entity will report a

Answer 3

Deferred Tax Liability

Question 4

Only __________ cause deferred tax consequences.

Answer 4

Temporary differences

Question 5

Tax expense is subdivided into two components:

Answer 5

current tax expense (CTE) and deferred tax

expense (DTE).

Question 6

_________ is merely the result of multiplying taxable income from the tax return by the tax rate.

Answer 6

Current tax expense (CTE)

Question 7

The _______ account(s) in the balance sheet must be adjusted at the end of each year to reflect the appropriate amount of _______ and/or the appropriate amount of a ________________.

Answer 7

deferred tax ; deferred tax liability (DTL); deferred tax asset (DTA)

Question 8

__________, such as tax-exempt interest on municipal bonds, or life insurance premiums when the corporation is beneficiary, are embedded in tax law and will not reverse in the future; therefore they only affect ____________ and not the deferred tax accounts.

Answer 8

Permanent differences; current tax paid

Question 9

Temporary differences will ________ in the future and are part of the deferred tax calculations. GAAP requires accrual accounting, and tax law treats some items on a cash basis: e.g., estimated liabilities or bad debt expense.

Answer 9

“turn around” (reverse)

Question 10

When an item is recognized for book purposes before it is deductible for tax purposes, a _________will result

Answer 10

deferred tax asset

Question 11

Using straight-line depreciation for the books and MACRS for tax purposes will result in lower taxable income in the early years of the asset life and a ___________.

Answer 11

deferred tax liability (DTL)

Question 12

DRAs and DTLs must be recalculated each year based on ______ tax rates in the year(s) in which the taxable item is expected to be realized_____ or ______.

Answer 12

enacted, (DTA) or paid (DTL)

Question 13

Under U.S. GAAP, if it is more likely than not that all or part of a deferred tax asset will not be realized, a ____________ must be set up to reduce the asset.

Answer 13

valuation allowance

Question 14

_____ prohibits the use of a valuation allowance.

Answer 14

IFRS

Question 15

Under IFRS, _________ is recognized when it is probable that sufficient taxable profit will be available against which the temporary difference can be utilized.

Answer 15

a deferred tax asset