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Flashcards in NOL Deck (9):

No deferred tax asset was recognized in the year 1 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 year 2 continuing operations.
The year 2 financial statements would include the tax benefit from the loss brought forward in

A. Income from continuing operations.
B. Gain or loss from discontinued segments.
C. Owners' equity.
D. Cumulative effect of accounting changes.

A. Income from continuing operations.

The tax benefit of the carry-forward reduced taxes on year 2 income from continuing operations, as indicated in the question. Therefore, the benefit is included in income from continuing operations.


Deferred income tax expense?

Take the temporary Tax liability:
Less ending deferred tax asset
Deferred income Tax expense


Brass Co. reported income before income tax expense of $60,000 for year 2. Brass had no permanent or temporary timing differences for tax purposes. Brass has an effective tax rate of 30% and a $40,000 net operating loss carry-forward from year 1. What is the maximum income tax benefit that Brass can realize from the loss carry-forward for year 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.

A. I and II only.
B. I and III only.
C. II and III only.
D. I, II, and III.

B. 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.


On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings?
A. $8,000
B. $15,000
C. $21,000
D. $23,000

B. $15,000

This is the amount ($15,000) that Peace will report as dividends in its consolidated statement of retained earnings. Only Peace's (the parent's) dividends paid of $15,000 are shown on the Peace/Surge consolidated statement of retained earnings.

The dividend paid by Surge to Peace ($8,000 x .75 = $6,000) will not show on the consolidated statement of retained earnings, because it will be eliminated as intercompany dividend (you can't pay a dividend to yourself!). The balance of Surge's dividend ($8,000 x .25 = $2,000) goes to the 25% minority shareholders in Surge and reduces their claim to Surge's retained earnings, not Peace's consolidated retained earnings.


On January 3, 2005, Ard Corp. owned a machine that had cost $60,000. The accumulated depreciation was $50,000, estimated salvage value was $5,000, and fair market value was $90,000.
On January 4, 2005, this machine was irreparably damaged by Rice Corp. and became worthless. In October 2005, a court awarded damages of $90,000 against Rice in favor of Ard. At December 31, 2005, the final outcome of this case was awaiting appeal and was, therefore, uncertain.

However, in the opinion of Ard's attorney, Rice's appeal will be denied.
At December 31, 2005, what amount should Ard accrue for this gain contingency?

A. $90,000
B. $80,000
C. $75,000
D. $ -0-


Gain's aren't recorded, maybe footnoted.


Conlon Co. is the plaintiff in a patent-infringement case. Conlon has a high probability of a favorable outcome and can reasonably estimate the amount of the settlement. What is the proper accounting treatment of the patent infringement case?
A. A gain contingency for the minimum estimated amount of the settlement.
B. A gain contingency for the estimated probable settlement.
C. Disclosure in the notes only.
D. No reporting is required at this time

C. Disclosure in the notes only.

If probable or reasonably possible, a gain contingency is disclosed in the notes to the financial statements. Gain contingencies are not recognized, however. This particular gain contingency is probable.


Invern, Inc. has a self-insurance plan.
Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of a 2005 accident, Invern is a defendant in a lawsuit in which it will probably have to pay damages of $190,000.

What are the effects of this lawsuit's probable outcome on Invern's 2005 financial statements?

A. An increase in expenses and no effect on liabilities.
B. An increase in both expenses and liabilities.
C. No effect on expenses and an increase in liabilities.
D. No effect on either expenses or liabilities.

B. An increase in both expenses and liabilities.


During 2005, Haft Co. became involved in a tax dispute with the IRS.
At December 31, 2005, Haft's tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $200,000 but could be as much as $300,000. After the 2005 financial statements were issued, Haft received and accepted an IRS settlement offer of $275,000.

What amount of accrued liability should Haft have reported in its December 31, 2005 balance sheet?

A. $200,000
B. $250,000
C. $275,000
D. $300,000

A. $200,000

When a range of possible losses is estimated, and no one amount is considered more probable than the others, the lowest estimate is accrued, if also probable.