M6 - Income Taxes: Part 1 Flashcards Preview

FAR 6 - Leases, Derivatives, Foreign Currency Accounting, and Income Taxes > M6 - Income Taxes: Part 1 > Flashcards

Flashcards in M6 - Income Taxes: Part 1 Deck (14)
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1
Q

Under GAAP, which approach is used to determine income tax expense?

A

Asset and Liability approach (sometimes referred to as the balance sheet approach)

This method is used to squeeze out the amount of income tax expense after the amount of deferred tax assets and liabilities have been determined.

2
Q

Journal entry for Deferred tax liability: (in one example)

A

DB: Tax Expense - Current
DB: Tax Expense - Deferred
CR: Tax Liability - Current
CR: Deferred Tax Liability

3
Q

Justification for the method of determining periodic deferred tax expense is based on the concept of what?

A

Recognition of assets and liabilities.

4
Q

True or False: Whenever income is recognized in the F/S before it is reported as taxable income, a deferred tax liability should be reported.

A

True

(from the question CPA-00829)
Even though a loss was recognized in Year 2, on a cumulative basis the F/S have recognized income that has not been recognized for tax purposes. Accordingly, a deferred liability will still exist at the end of Year 2 (however, it will be less than the deferred liability reported at the end of Year 1)

5
Q

A company reported a deferred tax asset in Y1. Will reversal of current temporary differences result in taxable or deductible amounts, and did the company have a Y1 profit or loss for tax purposes?

A

Deductible & Profit

The reversal of the current temporary differences will result in future deductible amounts because a deferred tax asset represents future tax savings. These tax savings will be realized in the form of future tax deductions that will reduce the amount of future taxes owed.

This company must have had a taxable profit in Y1 because it is reporting a deferred tax asset on the balance sheet. If the company had reported a taxable loss (NOL) in Y1, it would have been required to record a full valuation allowance against its deferred tax asset. This is because, absent significant evidence to the contrary (and none is provided in this question), a current NOL implies that there is a >50% chance that the company will have NOLs in future periods and will not have income to offset with the future tax deductions. If it is probable that a company will not be able to utilize the benefits of a DTA, then a full valuation allowance is recorded and the net DTA is $0.

6
Q

If the book basis of an asset is greater than tax basis (resulting from different depreciation methods), a deferred tax (ASSET OR LIABILITY) should be established for the tax effect of the difference?

A

Liability

In future years the taxable income will be higher than book income when the temporary difference reverses.

DR: Tax Expense
CR: Taxes Payable
CR: Deferred Tax Liability
———————————————————–

DR: Tax Expense
DR: Deferred Tax Liability
CR: Taxes Payable
————————————————————-

7
Q

A temporary difference arises in situations where items of revenue and expense enter into pretax GAAP financial income in a period before or after they enter into taxable income. (true or false)

A

True

8
Q

How to calculate effective tax rate

A

Effective Tax Rate = Income tax expense/ Pretax income

9
Q

True or False: GAAP does not require intraperiod income tax allocation to operating income. Only select items on the income statement are shown “net of income tax,” and operating income is not one of them.

A

True

GAAP requires intraperiod income tax allocation to

  • Discontinued Operations
  • Income from continuing operations
  • Accounting principle changes treated retrospectively
10
Q

Revenues that are recognized in financial income this year and taxable next year represent a deferred tax asset. True or false?

A

FALSE

Revenues that hit the income statement before they hit the tax forms will result in lower taxes owed now and higher taxes owed in the future. This temporary difference will result in a deferred tax liability.

11
Q

A deferred tax asset is recognized when the company will benefit from a tax perspective in the future. (true or false)

A

True

Which occurs when taxable income reported on the tax return exceeds pretax income in the current period on the income statement.

12
Q

Accrued warranty costs are expensed for GAAP purposes before they are deductible for tax purposes. The future tax deductions that will result from actual future warranty costs create as deferred tax asset. (true or false)

A

True

13
Q

A change in circumstances that results in a change in judgment concerning the potential realization of a deferred tax asset should be recognized in income from continuing operations in the period of the change. (true or false)

A

True

Valuation allowances are only applicable to deferred tax assets.

A valuation allowance is needed whenever it is more likely than not part or all of a deferred tax asset will not be realized.

14
Q

What is the primary objective of accounting for income taxes?

A

To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.

The objective of inter-period tax allocation is to recognize the amount of current and future tax related to events that have been recognized in financial accounting income. Both permanent and temporary differences exist between GAAP financial income and taxable income; these differences will be used to determine the current year taxes (taxes payable/refundable) and future year taxes (deferred tax asset/liability).