FAR 37 - Income Taxes 3 - NOL/Temp Diff/IFRS Flashcards Preview

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Flashcards in FAR 37 - Income Taxes 3 - NOL/Temp Diff/IFRS Deck (18):
1

At the end of the previous year, a firm reported a $6,000 deferred tax asset from a net-operating-loss carry-forward that can be carried forward several years into the future. The tax rate is 30%. For the current year, the firm records estimated warranty expense of $30,000 for the year and incurred $10,000 of warranty-claims costs. Taxable income for the current year is $12,000. Compute income tax expense (benefit) for the current year.
A. ($5,400)
B. $2,400
C. $3,600
D. Neither expense nor benefit.

B. The unused net operating loss (NOL) at the beginning of the year is $20,000 (= $6,000/.3). The firm pays no tax for the current year, because $12,000 of the NOL is used to absorb the $12,000 of taxable income. $8,000 of the NOL remains to carry forward to the next year. Also, there is a future temporary difference of $20,000 from the future warranty deduction ($30,000 - $10,000 current-year claims). In total, then, the basis for the ending deferred tax asset is $28,000 (= $8,000 + $20,000). The ending deferred tax asset balance is $8,400 (= $28,000 x .3). The beginning deferred tax asset balance is $6,000. Therefore, the deferred tax asset is increased by $2,400 and income tax benefit of that amount also is recorded (credited) in the tax-accrual entry.

2

Which of the following should be disclosed in a company's financial statements related to deferred taxes?

I. The types and amounts of existing temporary differences.
II. The types and amounts of existing permanent differences.
III. The nature and amount of each type of operating loss and tax credit carry-forward.

I and III only.
Deferred income tax accounts are not affected by permanent differences, because their effect on income tax is the same as their effect on income tax liability.

But temporary differences and operating loss and tax-credit carry-forwards produce deferred tax accounts. Temporary differences cause both deferred tax liabilities and assets to be recognized. Operating loss and tax credit carry-forwards generate only deferred tax assets.

To fully understand the nature of deferred tax accounts, the types and amounts of I and III are reported in a detailed footnote. For example, depreciation differences are major causes of deferred tax liabilities.

3

No deferred tax asset was recognized in the 2004 financial statements by the Chaise Company when a loss from discontinued segments was carried forward for tax purposes. Chaise had no temporary differences. The tax benefit of the loss carried forward reduced current taxes payable on 2005 continuing operations.

In accordance with FASB Statement No. 109, the 2005 income statement would include the tax benefit from the loss brought forward in
A. Income from continuing operations.
B. Gain or loss from discontinued segments.
C. Extraordinary gains.
D. Cumulative effect of accounting changes.

A. The tax benefit of the carry-forward reduced taxes on 2005 income from continuing operations, as indicated in the question. Therefore, the benefit is included in income from continuing operations.

4

T/F: A firm has a net operating loss and chooses the carryback option. The taxable income of the earliest of the two preceding years must be absorbed first.

True

5

T/F: The carryback option produces a refund if taxable income was earned in the three years previous to the net operating loss.

False.
It's only 2 years back. If taxable income was earned, then there was no NOL to absorb prior years' taxable income for the refund.

6

T/F: The ending balance of a deferred tax asset stemming from a net operating loss carryforward equals the remaining amount of loss to carryforward times the future enacted tax rate.

True

7

T/F: The ending deferred tax asset balance is the sum of all future deductible differences and net operating loss carryforwards, multiplied by the future tax rate.

True

8

T/F: A firm with only current deferred tax liabilities and assets need not include future deductible differences with net operating loss carryforwards when determining the ending deferred tax asset balance before classification.

False.
A carryforward generates a deferred tax asset.
The carryforward is recorded as follows
Dr. Deferred Tax Asset (future enacted tax rate)(remaining NOL)
Cr. Income tax benefit (future enacted tax rate)(remaining NOL)

9

T/F: International reporting standards are more restrictive with respect to recognition of deferred tax assets, relative to U.S. reporting standards.

True

10

T/F: Both future taxable temporary differences and net operating loss carryforwards contribute to a firm's ending deferred tax asset balance.

False.
future deductible temporary differences...

11

T/F: The entry to record a carryforward involves a credit to income tax benefit.

True

12

T/F: A firm's deferred tax asset is based solely on a net operating loss carryforward. To determine the reduction (credit) in the deferred tax asset for a period for this firm, the amount of the net operating loss carryforward used to absorb taxable income for the period is multiplied by the current tax rate.

False.
...multiplied by the future enacted tax rate.

13

T/F: A firm has two options for net operating losses: carryforward, and carryback-carryforward.

True

14

T/F: The carryforward feature of the options available with net operating losses creates deferred tax assets.

True

15

T/F: The carryback feature of the options available with net operating losses creates deferred tax assets.

False.
The carryback feature generates an immediate refund of tax.

16

T/F: The value to a firm of a net operating loss carryforward is the amount of the carryforward.

False.
the value is the remaining NOL multiplied by the future enacted tax rate

17

T/F: A carryforward of an operating loss can occur in either one of the options available to a firm with a net operating loss.

True

18

T/F: The refund associated with a carryback is based on the future enacted tax rates.

False.
is limited to the taxes paid in the previous two years.

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