Income taxes Flashcards
(7 cards)
Concerning permanent differences, which of the following statements is false?
A All events recognized in financial statements will have tax consequences under the regular U.S. tax system.
B Certain revenues are exempt from taxation and certain expenses are not deductible.
C Events that do not have tax consequences do not give rise to temporary differences and, therefore, do not give rise to deferred tax assets or liabilities.
D Differences that will not have future tax consequences are often referred to as permanent differences.
All events recognized in financial statements will have tax consequences under the regular U.S. tax system.
At the end of year 3, the tax effects of temporary differences for Thorn Co. were as follows:
Accelerated tax depreciation ($75,000) Noncurrent liability
Additional costs in inventory for tax purposes $25,000 Noncurrent asset
($50,000)
A valuation allowance was not considered necessary. Thorn anticipates that $10,000 of the deferred tax liability will reverse in year 4. In Thorn’s December 31, year 3 balance sheet, what amount should Thorn report as a deferred tax liability?
$50,000
Which of the following is true regarding the enacted tax rate?
A The enacted tax rate is the expected tax rate applied to taxable income in the years that the liability is expected to be settled or the asset recovered, and is used to measure deferred tax liabilities and deferred tax assets.
B The presently enacted changes in tax rates and laws must be considered when determining the tax rate to apply to temporary differences reversing in that year(s).
C The enacted tax rate is the tax rate for the current year if no changes have been enacted for future years.
D All of the above are true.
All of the above.
The tax rate that is used to measure deferred tax liabilities and deferred tax assets is the enacted tax rate(s) expected to apply to taxable income in the years that the liability is expected to be settled or the asset recovered. Presently enacted changes in tax laws and rates that become effective for a particular future year or years must be considered when determining the tax rate to apply to temporary differences reversing in that year(s). Tax laws and rates for the current year are used if no changes have been enacted for future years
For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There were no other differences between its taxable and financial statement income. Cable’s effective tax rate for the current year is 45%, but a 40% rate has already been passed into law for next year. In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability)?
$40,000 Liability
The balance in a tax liability account is the amount of taxes expected to be paid in the future as a result of the turn-around (reversal) of the temporary difference(s). Because Cable deducted an expense from its income tax before it was reportable in the financial statements, the transaction results in a future tax liability. The amount of temporary difference is multiplied times the future tax rate(s) already enacted into law to arrive at the future tax asset or liability. ($100,000 × .40 = $40,000).
Generally, the manner of reporting the tax benefit of an operating loss carryforward or carryback is determined by the source of the
Income or loss
in the current year
At the end of year 1, Cody Co. reported a profit on a partially-completed construction contract by applying an adjusted version of the percentage-of-completion method in accordance with the input method prescribed in ASC 606 and recognized revenue “over time”.
By the end of year 2, the total estimated profit on the contract at completion in year 3 had been drastically reduced from the amount estimated at the end of year 1. Consequently, in year 2, a loss equal to one-half of the previous year profit was recognized.
Conversely, Cody recognized revenue at a “point in time” for income tax purposes and had no other contracts. The year 2 balance sheet should include a deferred tax
Liability
At the end of year 1, a cumulative difference exists which is equal to the contract profit recognized on the income statement in the previous year. The cumulative difference will result in future taxable amounts, so a deferred tax liability is established for an amount equal to the cumulative temporary difference multiplied by the tax rate enacted for the year(s) in which the temporary difference is expected to reverse.
In year 2, half of the cumulative temporary difference reverses because of the recognition of a loss to offset half of the profit reported in the previous year. With no change in enacted future tax rates, this reversal results in a decrease in the related deferred tax liability account. Therefore, at the end of year 2, Cody has a deferred tax liability balance equal to half of the balance that was in that account at the end of year 1.
