INCOME TAXES

Question 1

How are deferred tax accounts offset for reporting?

Answer 1

Current accounts are offset; noncurrent accounts are offset; two net accounts remain for reporting.

Question 2

Why is the procedure for offsetting deferred tax accounts reasonable given the nature of the underlying differences?

Answer 2

It is reasonable because future deductible and taxable differences will naturally cancel in the relevant future periods.

Question 3

How are deferred tax accounts reported on the balance sheet?

Answer 3

Current assets and liabilities are netted.; Noncurrent assets and liabilities are netted.

Question 4

Noncurrent assets and liabilities are netted.

Answer 4

Based on expected year of reversal.

Question 5

How is the classification of a deferred tax account determined?

Answer 5

Same as asset/liability that caused the temporary difference.

Question 6

Short-term prepaid rent gives rise to what type of deferred tax account and how is it classified?

Answer 6

Current deferred tax liability.

Question 7

List the four internal deferred tax accounts possible.

Answer 7

Classified separately, therefore: 1. Current deferred tax asset; 2. Noncurrent deferred tax asset; 3. Current deferred tax liability; 4. Noncurrent deferred tax liability.

Question 8

Organization costs give rise to what type of deferred tax account and how is it classified?

Answer 8

Deferred tax asset; classification depends on expected period of reversal.

Question 9

How is the required ending deferred tax liability balance expressed?

Answer 9

Product of sum of future taxable differences and the future enacted tax rate.

Question 10

What effect does an originating deductible difference have on the tax accrual entry?

Answer 10

Increases the required ending deferred tax asset balance.

Question 11

How is the change in the deferred tax liability account for a period expressed?

Answer 11

Required ending deferred tax liability balance less beginning deferred tax liability balance.

Question 12

What effect does a reversing taxable difference have on the tax accrual entry?

Answer 12

Decreases the required ending deferred tax liability balance.

Question 13

What is the general formula for computing income tax expense?

Answer 13

Income tax liability plus or minus the change in the deferred tax accounts.

Question 14

What tax rate is used for computing the tax liability?

Answer 14

Current tax rate.

Question 15

If future enacted tax rates are not the same as the current rate and future temporary differences originated in the current period, which rate(s) do(es) income tax expense reflect?

Answer 15

Both current and future enacted tax rates are reflected.

Question 16

If more than one tax bracket and tax rate applies, what rate is used to determine the change in deferred tax accounts?

Answer 16

Average future enacted tax rate is used to determine the change in deferred tax accounts.

Question 17

What effect does income tax benefit have on income for financial reporting?

Answer 17

Increase net income.

Question 18

What is the effective length of the taxing period for the carryback-carryforward option?

Answer 18

Effective length of the taxing period is 23 years.

Question 19

What tax rate is used in computing a refund from carryback of net operating losses?

Answer 19

Tax rate paid on taxable income for the previous two years.

Question 20

What is the journal entry for recording a net operating loss carryforward?

Answer 20

DR: Deferred Tax Asset; CR: Income Tax Benefit

Question 21

What is the required ending balance of a deferred tax asset when there are future deductible differences and an unused net operating loss (NOL) carryforward?

Answer 21

Product of future enacted tax rate and sum of future deductible differences plus unused NOL carryforward.

Question 22

What is the journal entry for recording a net operating loss carryback?

Answer 22

DR: Refund Receivable; CR: Income Tax Benefit

Question 23

Refund of taxes paid in the past is a feature of which option for net operating losses?

Answer 23

Carryback-carryforward only.

Question 24

What effect does a change in tax status from taxable to nontaxable have on deferred tax accounts?

Answer 24

Close the accounts against income tax expense (for example, closing a deferred tax asset increases income tax expense).

Question 25

What is the ending balance of deferred tax asset for a net operating loss (NOL) carryforward?

Answer 25

Product of enacted future tax rate and NOL remaining to carryforward.

Question 26

What effect do future taxable differences have on the ending deferred tax asset for a firm with an unused net operating loss carryforward?

Answer 26

No effect; taxable differences yield deferred tax liabilities.

Question 27

What should deferred tax accounts under international accounting standards be classified as?

Answer 27

The classification is all noncurrent.

Question 28

How is a carryforward valued?

Answer 28

Product of enacted future tax rate and NOL remaining to carryforward.

Question 29

What is the main reason for choosing the carryforward only option?

Answer 29

An expectation of higher future tax rates.

Question 30

What effect does a change in tax status from nontaxable to taxable have on deferred tax accounts?

Answer 30

Apply interperiod tax allocation as usual; there are no beginning deferred tax balances to use.

Question 31

Increase in deferred tax asset is a feature of which option for NOLs?

Answer 31

Both the Carryback Carryforward Option and the Carryforward Only Option.

Question 32

Describe the general effect of net operating loss (NOL) on ending deferred tax asset balance for carryback-carryforward option.

Answer 32

Include in ending DTA for the portion of NOL remaining after being used in the carryback, multiplied by the future enacted tax rate.

Question 33

List the net operating loss options a taxpayer has.

Answer 33

1. Carryback Carryforward Option; 2. Carryforward Only Option.

Question 34

Describe the general effect of net operating loss (NOL) on ending deferred tax asset balance for carryforward only option.

Answer 34

Include in ending DTA the full NOL multiplied by the future enacted tax rate.

Question 35

True or False: The total of all deferred tax assets and deferred tax liabilities are not required to be disclosed.

Answer 35

False. Total of all deferred tax assets and deferred tax liabilities are required to be disclosed.

Question 36

Which years of taxable income are absorbed by a net operating loss (NOL) carryback?

Answer 36

The taxable income two years before the year of the NOL is used first, then one year before the NOL.

Question 37

What is the general expression for the change in deferred tax asset for a period for a net operating loss (NOL) carryforward that is not fully used up in the period?

Answer 37

End of period sum of future deductible differences plus unused NOL carryforward, multiplied by future enacted tax rate, less beginning deferred tax asset.

Question 38

Define "net operating loss".

Answer 38

Negative taxable income (strictly a tax term).

Question 39

What period of years can a net operating loss (NOL) be carried back and forward?

Answer 39

Two years back, twenty years forward.

Question 40

What is the effect of a nontaxable revenue on income tax liability?

Answer 40

Income tax liability is not increased.

Question 41

List some common permanent differences.

Answer 41

1. Tax-Free Interest Income; 2. Life Insurance Expense Premiums on key employee; 3. Proceeds from life insurance on key employee; 4. Dividends Received Deduction; 5. Fines and penalties.

Question 42

If book depletion is $4,000 and tax depletion is $12,000, what is the amount of the permanent difference?

Answer 42

The amount is $8,000.

Question 43

What general effect does income tax expense have on permanent differences?

Answer 43

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

Question 44

What is the effect of a nondeductible expense on income tax expense?

Answer 44

Income tax expense is not reduced.

Question 45

Define "permanent difference".

Answer 45

An amount that appears in the tax return or income statement but never both.

Question 46

Are current year or future permanent differences used in the current year tax accrual entry?

Answer 46

Current year differences are used.

Question 47

What is the effect of a nontaxable revenue on income tax expense?

Answer 47

Income tax expense is not increased.

Question 48

List the formula for computing the effect of a permanent difference on the effective tax rate.

Answer 48

Product of permanent difference and stated rate, divided by pretax accounting income.

Question 49

What book vs. tax differences does the computation of income tax liability consider?

Answer 49

It considers current period temporary and permanent differences.

Question 50

How is income tax expense for a period computed?

Answer 50

It is a derived amount or "plug" figure, the net change caused by the changes in deferred tax accounts and the income tax liability.

Question 51

What tax rate should be used when computing the change in the deferred tax accounts?

Answer 51

Enacted future tax rates (which could be the same as the current tax rate if rates have not been changed).

Question 52

How do permanent differences affect the tax accrual entry?

Answer 52

Taxable income excludes them; this exclusion is reflected in income tax expense - a plug figure.

Question 53

List the two categories of temporary differences.

Answer 53

1. Taxable Temporary Differences; 2. Deductible Temporary Differences.

Question 54

What type of temporary differences are caused by depreciation?

Answer 54

Taxable difference.

Question 55

Are originating or future reversing temporary differences used in determining the change in deferred tax accounts?

Answer 55

Future reversing temporary differences are used.

Question 56

Define "deductible temporary differences."

Answer 56

Differences that initially cause a prepayment of taxes.

Question 57

Define "deductible difference."

Answer 57

A temporary difference that causes future taxable income to be less than future book income.

Question 58

What type of deferred tax accounts do deductible temporary differences cause?

Answer 58

They cause Deferred tax assets.

Question 59

Define "deferred tax asset."

Answer 59

The future tax effect of a future deductible difference.

Question 60

What temporary difference causes future taxable income to exceed future book income?

Answer 60

Taxable temporary difference.

Question 61

Define "taxable temporary differences."

Answer 61

Differences that initially cause a postponement in the payment of taxes.

Question 62

Define "temporary difference."

Answer 62

An item of revenue or expense that, over the total life of the item, will affect pretax accounting income and taxable income in the same total amount but will be recognized in different amounts in any given year for financial reporting and tax purposes.

Question 63

What type of difference is caused by the liability for a warranty?

Answer 63

Deductible differences.

Question 64

True or False. Future taxable temporary differences are differences which cause deferred tax liabilities.

Answer 64

True.

Question 65

What is the minimum probability of sustaining an uncertain tax position to reduce income tax expense for an uncertain tax position?

Answer 65

Greater than 50%.

Question 66

Describe the accounting effect when the probability of sustaining an uncertain tax position is equal to or greater than the minimum for reducing income tax expense.

Answer 66

Recognize a reduction in income tax expense for the largest amount for which the cumulative probability of realization exceeds 50%, and an additional liability for the unrecognized portion.

Question 67

Define "uncertain tax position".

Answer 67

A position taken on the Firm's tax return that reduces income tax but which may be challenged by the Taxing Authorities.

Question 68

Describe the account effect when the probability of sustaining an uncertain tax position is less than the minimum for reducing income tax expense.

Answer 68

Report a liability for the uncertain tax position in addition to the income tax liability.

Question 69

Describe the accounting effect when actual tax benefit is less than expected in a later year.

Answer 69

Recognize income tax expense for the difference between benefit recognized in previous year and the actual benefit.

Question 70

Describe the accounting effect when actual tax benefit is greater than expected in a later year.

Answer 70

Reduce income tax expense for the difference between benefit recognized in previous year and the actual benefit.

Question 71

How is the amount of a valuation allowance determined?

Answer 71

Enough to reduce deferred tax asset to amount that has a better than 50% chance of being realized.

Question 72

Compute the ending valuation allowance if the total future deductible difference is $4,000, tax rate is 30%, and only $1,000 of future taxable income is assured.

Answer 72

$900 (deferred tax asset balance is $1,200, but only $300 is expected to be realized).

Question 73

When is a valuation allowance created for a deferred tax asset?

Answer 73

When there is a 50% or less chance of the deferred tax asset being fully realized.

Question 74

What percentage is used for determining realization of a deferred tax asset?

Answer 74

Fifty percent.

Question 75

What is the classification of the valuation allowance for deferred tax assets?

Answer 75

The classification is contra deferred tax asset.

Question 76

List the sources for realizing a deferred tax asset.

Answer 76

1. Expectation of future taxable income; 2. Taxable income in prior years w/i carryback period; 3. Future taxable differences; 4. Tax planning strategies.

Question 77

List the evidence suggesting the need of a valuation allowance.

Answer 77

1. History of unused net operating losses; 2. History of operating losses; 3. Losses expected in future years; 4. Very unfavorable contingencies; 5. Very brief carryback or carryforward period.

Question 78

What does a history of unused net operating losses suggest?

Answer 78

Evidence suggesting that the deferred tax asset will not be realized.