FAR 35 - Income Taxes 1 - Interperiod/Perm/Temp Flashcards Preview

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Flashcards in FAR 35 - Income Taxes 1 - Interperiod/Perm/Temp Deck (46):
1

Nala Inc. reported deferred tax assets and deferred tax liabilities at the end of 2004 and at the end of 2005.

According to FASB 109, for the year ended 2005, Nala should report deferred income tax expense or benefit equal to the
A. Sum of the net changes in deferred tax assets and deferred tax liabilities.
B. Decrease in the deferred tax assets.
C. Increase in the deferred tax liabilities.
D. Amount of income tax liability, plus the sum of the net changes in deferred tax assets and deferred tax liabilities.

A. Total income tax expense is the sum of the current and deferred portions.
The current portion is the income tax liability for the year.
The deferred portion is the net sum of the changes in the deferred tax accounts.

2

According to FASB Statement No. 109, Accounting for Income Taxes, 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.

C. FAS 109 adopted the asset/liability approach. The deferred tax expense is the net change in the deferred tax accounts for the year. Deferred tax accounts are measured at the enacted tax rate for the period in which the future temporary differences reverse.

Rather than base income tax expense on accounting income adjusted for permanent differences, as was the case before 109, income tax expense is now the sum of current income tax expense (the income tax liability for the year) and the net change in deferred tax accounts. The expense is a residual amount, based on the changes in assets and liabilities. Matching is no longer the conceptual basis for measurement.

3

Rein Inc. reported deferred tax assets and deferred tax liabilities at the end of 2003 and at the end of 2004.

According to FASB Statements No. 109 Accounting for Income Taxes, for the year ended 2004, 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.

D. The net amount of deferred tax expense or benefit is that amount that is not recognized in current period income.

A simple equation describes the total tax effects for a period: income tax expense or benefit + deferred income tax expense or benefit = current tax liability. The deferred income tax expense or benefit can further be described as the net change in both types of deferred tax accounts.

4

T/F: Income tax expense reflects the amount of tax that will ultimately be payable on transactions for the period.

True

5

T/F: Income tax expense generally is the amount paid to the IRS in the period.

False.
The amount reported in the IS that measures the income tax cost for the year's transactions. Income tax expense = the income tax liability +/- the net change in the deferred tax accounts for the period.

6

T/F: The current tax liability is called the current provision for income tax and equals taxable income multiplied by the current tax rate.

True

7

T/F: The deferred tax liability decreased during the year, and the deferred tax asset increased. Therefore, the current provision of income tax exceeds total income tax expense.

True

8

T/F: The income tax liability for a period equals the ending balance of income tax payable for most firms.

False.
This is the amount of income tax the firm must pay on taxable income for a year. Firms pay this liability in estimated quarterly installments with the last installment due early in the year following the tax year.

9

T/F: The total amount of expense or revenue to be recognized under the two systems of reporting is the same for items causing temporary differences. Only the amounts recognized in particular periods are different.

True

10

T/F: A deduction for tax reporting is analogous to an expense for financial statement reporting.

True

11

T/F: The current portion of income tax expense is the same as the income tax liability for the period.

True

12

T/F: Income tax is the income tax liability for the year plus or minus the net change in the deferred tax accounts for the year.

True

13

T/F: The deferred portion of income tax expense is the same as the net change in the deferred tax accounts for the period.

True

14

T/F: Taxable income is income before tax for financial reporting purposes.

False.
Taxable income is the income before tax for tax purposes. The pretax accounting income is the income before income tax for financial accounting purposes determined by applying GAAP.

15

T/F: The deferred tax liability increased during the year, and the deferred tax asset decreased. Therefore, income tax expense exceeds the current provision of income tax.

True

16

Which of the following is not considered a permanent difference:
Tax-free interest income
Interest income
Life insurance expense
Proceeds on Life insurance
Dividends received deduction
Fines and penalties
Depletion

Interest Income.

17

T/F: The rule for permanent differences is: The effect of a permanent difference on income tax expense is the same as its effect on the income tax liability for the period.

True

18

T/F: Permanent differences are not considered in the process of interperiod tax allocation.

True

19

T/F: A firm receives dividends from stock investments that qualify for the dividends received deduction. The permanent difference is 80% (amount subject to change) of the amount of dividends received.

True

20

T/F: The proceeds from a life insurance policy on a key employee increases income for financial reporting purposes and is taxable on receipt.

False.
These are not taxable, but are included as a gain for financial reporting purposes.

21

T/F: A permanent difference generally can be found in a balance sheet account.

False.
The effect of a permanent difference on income tax expense is the same as its effect on the income tax liability for the period.
True for temporary differences.

22

T/F: Firms may deduct "statutory" depletion under the tax code. This amount often exceeds "cost" depletion. The difference is a permanent difference for tax purposes.

True

23

T/F: A firm has pretax income of $19,000, which reflects $1,000 of insurance premiums on a life insurance policy for a key employee. If the tax rate is 30%, income tax expense for the year is $6,000.

True

24

T/F: Municipal bond interest is included in interest revenue for the books but is not taxed.

True

25

T/F: Casualty insurance premiums are deductible.

True

26

When accounting for income taxes, a temporary difference occurs in which of the following scenarios?
A. An item is included in the calculation of net income, but is neither taxable nor deductible.
B. An item is included in the calculation of net income in one year and in taxable income in a different year.
C. An item is no longer taxable, owing to a change in the tax law.
D. The accrual method of accounting is used.

B. This answer describes one category of temporary difference. In general, a temporary difference is one for which the item's recognition takes place at a different rate or time for financial reporting and the tax return. However, the total impact of the item is the same over its life, for both systems of reporting.

27

Orleans Co., a cash-basis taxpayer, prepares accrual-basis financial statements. Since 2002, Orleans has applied FASB Statement No. 109, Accounting for Income Taxes. In its 2005 balance sheet, Orleans' deferred income- tax liabilities increased compared to 2004.

Which of the following changes would cause this increase in deferred income tax liabilities?

I. An increase in pre-paid insurance.
II. An increase in rent receivable.
III. An increase in warranty obligations.

Deferred tax liabilities are the future tax effects of future taxable temporary differences. Such differences cause future taxable income to exceed future pre-tax accounting income.

I. An increase in pre-paid insurance implies that future accounting insurance expense will exceed future tax insurance expense. Therefore, future taxable income will increase relative to future pre-tax accounting income. This increases the deferred tax liability.

II. An increase in rent receivable implies that future tax-rent revenue will exceed future accounting-rent revenue. A rent receivable is recorded when accounting-rent revenue is recognized before cash is received. Cash will be received in the future, which will be recognized as rent revenue for tax, but no revenue will be recognized for accounting. Therefore, again, future taxable income will increase relative to future pre-tax accounting income.

III. An increase in warranty obligations implies that future tax-warranty expense will exceed future accounting-warranty expense. Accounting has recognized the warranty expense in the year of sale, whereas tax-warranty expense is recognized in the year the repairs are made. This time, future taxable income will decrease relative to future pre-tax accounting income. This increases the deferred tax asset, rather than the deferred tax liability.

Therefore, only I and II increase the deferred tax liability.

28

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.

According to FASB Statement No. 109, Accounting for Income Taxes, the year-two balance sheet should include a deferred tax
Asset
Liability

No, Yes
More profit will be recognized under completed contract in year three for tax purposes than will be recognized under percentage-of-completion in year three for accounting purposes. The entire profit will be recognized under completed contract (tax purposes) in year three. But a portion of income has already been recognized for accounting purposes before year three. Therefore, less income will be recognized in year three for accounting purposes.

Consequently, at the end of year two, there is a future taxable difference because future taxable income will exceed future pre-tax accounting income. Taxable differences give rise to deferred tax liabilities.

29

T/F: A temporary difference in its first year is called an originating difference.

True

30

T/F: Accounts receivable represents a future taxable difference.

True

31

T/F: The ending deferred tax liability equals the sum of all future deductible differences.

False.
The ending deferred tax liability equals the sum of all future taxable differences, multiplied by the enacted future tax rate.

32

T/F: A future deductible temporary difference causes pretax accounting income to exceed taxable income in the future.

True

33

T/F: A temporary difference causes future pretax income to decrease relative to taxable income. The difference is classified as taxable.

True

34

T/F: Revenues recognized more slowly for book purposes cause future taxable differences.

False.
They cause current year differences.

35

T/F: A deductible temporary difference is associated with a deferred tax liability account.

False.
It's associated with a deferred tax asset.

36

T/F: A taxable temporary difference is associated with a deferred tax liability account.

True

37

T/F: Pretax accounting income is $10. Fines and penalties are $2. Installment receivables recorded but not received in the current year amount to $5. Taxable income is $7.

True

38

T/F: Unearned rent causes a future deductible difference.

True

39

T/F: The temporary differences that are of most concern in interperiod tax allocation are the future temporary differences.

True

40

T/F: Pretax accounting income is $10. Municipal bond interest is $2. Unearned rent received in the current period is $4. Taxable income is $12.

True

41

T/F: Revenues recognized more quickly for financial reporting cause future deductible differences.

False.
These are taxable.

42

T/F: A temporary difference causes future pretax income to increase relative to taxable income. The difference is classified as deductible.

True

43

T/F: The ending deferred tax liability equals the sum of all future taxable differences, multiplied by the current tax rate.

False.
multiplied by the future enacted tax rate.

44

T/F: Expenses that are recognized more quickly for financial reporting purposes cause future deductible differences.

True

45

T/F: Many temporary differences are reflected in balance sheet accounts.

True

46

According to FASB Statement No. 109, Accounting for Income Taxes, which of the following items should affect current income tax expense for 2005?
A. Interest on a 1989 tax deficiency paid in 2005.
B. Penalty on a 1989 tax deficiency paid in 2005.
C. Change in income tax rate for 2005.
D. Change in income tax rate for 2006.

C. Current income tax expense is the income tax liability for the year. A change in 2005's tax rate changes the tax on taxable income and therefore current income tax expense. A change in the 2006 tax rate, even if enacted in 2005, would not change current income tax expense. It would change deferred income tax, however.

The other two answer alternatives are amounts that must be paid in 2005, but are not recognized as current income tax. These amounts are separately payable to the taxing authority and are not computed as part of taxable income for 2005. Therefore, current income tax for 2005, which is income tax liability for 2005, is unaffected by these items.

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