F5

Question 1

Effective tax rate =

Answer 1

Income tax expense / Pretax income (taxble income with adjustments)

Question 2

When two or more purchases of stock cause ownership in an investee to go from less than 20% to more than 20%,

Answer 2

the cost of acquiring the additional interest in the investee is added to the carrying value of the investment and the equity method is adopted as of the date that significant influence is acquired and going forward.

Question 3

A carryback results

Answer 3

in a claim for refund of past taxes, which is shown on the balance sheet as a tax refund receivable, an item separate from deferred taxes.

Question 4

In a carryforward

Answer 4

the tax benefit equals the carryforward times the appropriate tax rate.

Question 5

All deferred tax assets and deferred tax liabilities are reported as

Answer 5

non-current.

Question 6

In a consolidated balance sheet, the difference between the bond carrying amounts would be included as

Answer 6

a decrease to retained earnings because a premium was paid to “retire” the bonds.

or increase to RE because a discount was paid to retire the debt.

When members of a consolidated group have intercompany bond holdings, the bonds are eliminated in consolidation and the difference (gain or loss) between the discounted issue price and the premium on reacquisition would be included in retained earnings.

Question 7

If a company records a deferred tax asset, financial income must be

Answer 7

less than taxable income. (In the future, taxable income will be less than financial statement income.)

Pretax amount = Tax amount / tax rate

Question 8

Pretax amount =

Answer 8

Tax amount / tax rate

Question 9

A permanent tax difference means

Answer 9

the income or expense is either never taxable or never deductible for tax purposes — hence, there is no timing issue to resolve in future periods.

Question 10

A temporary difference is

Answer 10

the difference between the tax base of an asset or liability and its carrying amount in the financial statements, which will reverse in future periods.

These differences result in future taxable or deductible amounts when the carrying amount of the asset or liability is recovered or settled.

Question 11

Taxable Temporary Difference

Answer 11

Will increase taxable income in future periods = Deferred Tax Liability (DTL)

Question 12

Deductible Temporary Difference

Answer 12

Will decrease taxable income in future periods = Deferred Tax Asset (DTA)

Question 13

Examples of temporary difference and treatment.

Answer 13

(GAAP) Depreciation-Straight-line - (Tax) Accelerated (MACRS) - Taxable - DTL

(GAAP) Warranty expense - Expensed when estimated - (Tax) Deducted when paid - Deductible - DTA

(GAAP) Unearned revenue - Recognized when earned - (Tax) Taxed when received- Deductible - DTA

(GAAP)Installment sales - Revenue when earned - (Tax) Taxed when cash received - Taxable - DTL

Question 14

exact method (partnership) is calculated by

Answer 14

partner A + partner B = total divided by % ownership

partner C = % difference

eg. A 20,000 + B 20,000 = 40,000 / 60% = 66,667

66,667 - 40,000 = 26,667

partner C = 40% ownership @ 26,667

Question 15

bonus method (partnership) is calculated by

Answer 15

A + B + C (admit) / 3

difference paid by C allocated to A and B by profit/loss ratio

10,000 + 20,000 + 25,000 (c) = 55,000

55,000 / 3 = 18,333

25,000 - 18,333 = 6,667 overage

A B P/L = 60:40

A = 6,667 * 60% = 4,000.2
B = 6,667 * 40% = 2666.8

Question 16

goodwill method (partnership) is calculated by

Answer 16

amount paid by new partner for %
amount * % split = implied value
total capital - implied value
difference allocated to other partners by P/L ratio

C paid 35,000
35,000 * 3 = 105,000
total partners = 35,000 + 30,000 + 10,000 = 75,000
105,000 - 75,000 = 30,000

A B P/L = 60:40
A = 30,000 * 60% = 18,000
B = 30,000 * 40% = 12,000

DR GOODWILL
CR Allocated to A Capital
CR Allocated to B Capital
CR Partner C Capital

Question 17

Total tax expense for financial statements is

Answer 17

combination of current tax expense and deferred tax expense

Question 18

Marketable debt securities, both “long” and “short” term, are reported at

Answer 18

carrying amount (amortized cost) unless there is a permanent decline in market value.

Question 19

If a company records a deferred tax asset, financial income must be

Answer 19

less than taxable income.

Question 20

If financial income exceeds taxable income

Answer 20

a deferred tax liability will be recorded

Question 21

Assets contributed by a partnership (or sole proprietorship) to a corporation in its formation are valued at

Answer 21

the assets fair market value, less any related liabilities assumed by the corporation (e.g., mortgage note on real property).

Stock issued is credited at par value and any difference is credited to additional paid-in capital.

Question 22

The purchase by the member of a consolidated group of stock of another member of the consolidated group is treated as

Answer 22

a treasury stock transaction.

This follows the theory of consolidated financial statements presenting one economic entity. (You cannot make money selling stock to yourself.)

Question 23

Installment sales, Contractors: % vs completed contract and equity method: undistributed dividends with respect to tax accounting are:

Answer 23

DTL

Book income first, tax income later
tax income later = future tax liability

Question 24

Bad debt expense, estimated liability/warranty expense and start-up expenses with respect to tax accounting are:

Answer 24

DTA

book expense first, tax expense later
tax deduction later = future tax benefit

Question 25

Prepaid rent, prepaid interest and prepaid royalties with respect to tax accounting are

Answer 25

DTA Tax income first, book income later tax income first = future tax benefit

Question 26

Depreciation expense, amortization and prepaid expenses(cash basis tax) with respect to tax accounting are

Answer 26

DTL tax expense first, book expense later tax deduct first = future tax liability

Question 27

Permanent Differences in calculating taxable Income that decrease taxable income would be

Answer 27

- Interest Income on Municipal Bonds -Dividends Received Deduction (DRD) (partial) - 50% Meals and Entertainment - (partial) -Proceeds from life insurance on key employees

Question 28

Permanent Differences in calculating taxable Income that increase taxable income would be

Answer 28

-Fines and Penalties -Life insurance premiums for key employees -Certain meals and entertainment expenses -Interest expense incurred to carry tax-exempt investments. -Donations to political campaigns or lobbying efforts. -Federal income tax expense is not deductible for tax purposes. -Impairment of goodwill recorded in financial statements but not deductible for tax purposes.

Question 29

When calculating total tax expense, the increase in deferred tax asset

Answer 29

reduces deferred tax expense because it represents future tax savings

Question 30

When calculating total tax expense, the increase in deferred tax liabilities

Answer 30

increase deferred tax expense because it represents future tax obligations

Question 31

When determining impairment of debt securities (ECL):

Answer 31

HTM - PV of interest payments remaining + principle amount ECL = PV - amortized cost = CL AFS - Amortized cost vs FV if gain no ECL if loss = calculate PV - amortized cost vs FV loss. ECL up to FV loss if greater FV loss = ECL total and difference in FV to OCI

Question 32

To calculate investee income (equity method), must consider (remove)

Answer 32

the impact of dividends paid to preferred stock shareholders to calculate the share of earnings available to common shareholders.

Question 33

In performing eliminating entries be sure to eliminate COGS from

Answer 33

parent company - good sold to sub COGS Sub - profit from parent sales to sub

Question 34

Payment of interest, although related to a financing activity, is not reported in the financing section under U.S.GAAP.

Answer 34

It is reported as an operating cash outflow.