Permanent and Temporary Differences Flashcards
(34 cards)
True or False:
A permanent difference is the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts or deductible amounts in future years.
False
True or False:
When there are temporary differences between the amounts reported for tax purposes and those reported for book purposes, the future tax effects on taxable income must be reported in the current financial statements.
True
True or False:
A deferred tax liability is recognized when existing permanent differences between the tax basis of an asset or liability and its reported amount in the financial statements will result in an obligation to pay taxes in future years.
True
True or False:
A deferred tax expense will result in an increase in the deferred tax liability during the accounting period.
True
True or False:
According to GAAP, the deferred tax liability meets the definition of a liability, when: a. it results from a past transactions. b. it is a present obligation. c. it represetns a future sacrafice.
True
True or False:
The objectives of accounting for income taxes are to recognize the amount of deferred taxes for the current year; and to recognize the taxes payable or refundable for the future tax consequences of events that have been recognized in the financial statements or tax returns.
False
True or False:
A deferred tax liability represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.
False
True or False:
Deferred tax assets meet only two of the main three conditions for an item to be recognized as an asset, and therefore should not be recognized int he financial records.
False
True or False:
A company should reduce a deferred tax asset by valuation allowance if, based on available evidence, it is absolutely certain that some portion or all of the deferred tax asset will not be realized.
False
More likely than not
True or False:
Only negative evidence shall be considered to determine whether a valuation allowance for deferred tax assets is needed.
False
True or False:
Expenses and losses are deductible before they are recognized in financial income.
True
True or False:
Reversing difference is the difference between the book basis and the tax basis of an asset or a liability.
False
Reversing difference occurs when a temporary difference that originated in a prior period is eliminated and the related tax effect is removed from the Deferred tax account.
True of False:
A reversing difference occurs when a permanent difference is eliminated and the related tax effect is removed from the deferred tax account.
False
Reversing difference occurs when a temporary difference that originated in a prior period is eliminated and the related tax effect is removed from the Deferred tax account.
True or False:
A permanent difference results from items that enter into pretax financial income but never into taxable income, or enter into taxable income but never into pretax financial income.
True
True of False:
A corporation that has tax free income ahs an effective tax rate that equals its statutory rate.
False
In 2019, Delta company had revenues of $120,000 for book purposes and $100,000 for tax purposes. Delta had expenses of $90,000 for book purposes and 80,000 for tax purposes. What are Delta’s income taxes payable for 2019 if the tax rate is 25%?
a. $ 5,000
b. $10,000
c. $7,500
d. $2,500
a. $ 5,000
The computation of income tax payable is calculated as follows:
Income taxes payable = taxable income * tax rate
Revenues …………………….$100,000
Expenses……………………..$80,000
Taxable income for 2019…….$20,000
Tax rate……………………….25%
Income taxes payable……….$5,000
Note that revenues and expenses for tax purposes are used to compute the taxable income and the income taxes payable.
Omega has income before taxes of $420,000 in its income statement. Due to temporary differences, the taxable income is $300,000. What amount of net income should Omega report if the tax rate is 20%?
a. $240,000
b. $360,000
c. $336,000
d. $300,000
c. $336,000
Income tax expense (current portion) = taxable income * tax rate
Income tax expense (current portion) = $300,000*20% = $60,000
Due to the temporary differences, a deferred tax expense should be recognized:
Deferred tax expense = ($420,000 – $300,000)*20% = $24,000
Total income tax expenses = $60,000 + $24,000 = $84,000
Net income = Income before taxes – total income tax expenses
Net income = $420,000 – $84,000 = $336,000
Which of the following statements regarding a deferred tax liability is (are) correct?
- It is a present obligation
- It represents a future sacrifice
- It results from a past transaction.
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No No No
a. Yes Yes Yes
According to FASB, the deferred tax liability meets the definition of a liability.
It is a present obligation. Taxable income in future periods will exceed pretax financial income as a result of this temporary difference. Thus, a present obligation exists.
It represents a future sacrifice. Taxable income and taxes due in future periods will result from past events. The payment of these taxes when they come due is a future sacrifice.
It results from a past transaction. For example, a company performs services for customers and recognizes revenue for financial reporting purposes, but defers it for tax purposes.
Report Card for: Common Gradebook
Overall GradeC+
GradesC+
Responses
Emmi Layton
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Mohit
15 April 2024
Permanent Differences IA Question 17
How can warranty lead to DTL ? When warranty expenses actually occur they would reduce the income tax payable hence they should be a deferred tax asset.
Reply
Alex
20 April 2024
Hello Mohit,
We are checking the question and will get back to you within 24 hours.
Farhat Lectures Support Team
Reply
Alex
20 April 2024
Hello Mohit,
You can think of it from a JE perspective, since we have a Income tax expense USD 42,000 and Income taxes payable USD 39,000 , the entry to balance the JV is a credit DTL of 3,000 USD.
Hope this makes sense !
Reply
Alex
20 April 2024
Hello Mohit,
Please recheck the test bank, we have updated the question.
Farhat Lectures Support Team
Reply
Rumbidzai Loraine
24 July 2024
why are you multiplying the income tax expense with the tax rate when we are already given the tax expense? Current tax expense= Taxable Income x Tax rate and not Income tax payable x tax rate. Can you kindly clarify on that one?
Reply
Maroun, CPA
28 July 2024
Hello Rumbidzai Loraine,
There is a typo in the question, $114,000 is the taxable income and not the income taxes payable. I corrected the typo.
It is worth mentioning that Income Tax Expense – Current Portion and Tax Payable may have different amounts. Estimated tax payments and withholdings made during the year affect the tax payable at the end of the year but do not influence the current tax expense. Another reason for the potential difference is delinquent income taxes from previous years which make the balance in the income taxes payable higher than the current income tax expense.
Thank you for bringing this to our attention and sorry for the confusion!
Reply
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Armani co. had a deductible temporary difference of $1,000,000 at the end of its first year of operations. Its tax rate is 20%. Armani co. properly recorded deferred tax assets of $200,000 and income taxes payable of $900,000. After reviewing the available evidence, Armani co determined that it is more likely than not that it will not realize $80,000 of this deferred tax asset. How should Armani record this reduction in value?
a. Income tax expenses $80,000 Valuation Allowance $80,000
b. Valuation Allowance $80,000 Income tax expenses $80,000
c. Deferred tax asset $80,000 Income tax payable $80,000
d. Deferred tax asset $80,000 Income tax expenses $80,000
a. Income tax expenses $80,000 Valuation Allowance $80,000
Armani co. should increase income tax expenses in the current period
because it does not expect to realize a favorable tax benefit for a portion of the deductible
temporary difference.
Armani co. should establish a valuation allowance to reduce the deferred tax asset to the expected realizable value:
Expected realizable value = Deferred tax assets – Valuation Allowance
Expected realizable value = $200,000 – $80,000 = $120,000.
Which of the following statements is true regarding temporary and permanent differences?
a. Permanent differences affect only the period in which they occur, they do not give rise to future taxable or deductible amounts.
b. Permanent differences result from items that enter into pretax financial income and into taxable income.
c. Taxable temporary differences result in taxable amounts in the present year when the related assets are recovered.
d. Deductible temporary differences give rise to recording deferred tax liabilities.
a. Permanent differences affect only the period in which they occur, they do not give rise to future taxable or deductible amounts.
Which of the following is a result of using accelerated depreciation for tax purposes and straight-line depreciation for accounting purposes?
a. The income statement will show a larger amount of depreciation expense than the tax return over the asset’s useful life.
b. The income statement will show a larger amount of depreciation expense than the tax return during the first year of the asset’s useful life.
c. The income statement will show a larger amount of depreciation expense than the tax return during the last year of the asset’s useful life.
d. The tax return will show a larger amount of depreciation expense than the income statement during the last year of the asset’s useful life.
c. The income statement will show a larger amount of depreciation expense than the tax return during the last year of the asset’s useful life.
Which of the following is an example of temporary expenses or losses deductible before they are recognized in the income statement?
a. Subscriptions received in advance
b. Interest received on municipal bonds.
c. Depreciable property.
d. Litigation accruals.
c. Depreciable property.
Depreciable property is a temporary expense deductible before it is recognized in financial income.
Choices A is incorrect. Subscriptions received in advance are examples of temporary revenues taxable before they are recognized in the income statement.
Choice B is incorrect. The interest received on municipal bonds is a permanent difference that is normally recognized for financial reporting purposes but not for tax purposes.
Choice D is incorrect. Litigation accruals are temporary expenses deductible after they are recognized in the income statement.
Which of the following is a permanent difference that is recognized for financial reporting purposes but not for tax purposes?
a. Fines resulting from a violation of the law.
b. Percentage depletion of natural resources in excess of their cost.
c. Deduction for dividends received from US corporations.
d. Prepaid contracts and royalties received in advance.
a. Fines resulting from a violation of the law.
Fines and penalties resulting from a violation of the law are permanent differences that are recognized for financial reporting purposes, and not allowed for tax purposes.
Choices B and C are incorrect. Percentage depletion of natural resources in excess of their cost and deduction for dividends received from US corporations represent permanent differences that are recognized for tax purposes and not for financial reporting purposes.
Choice D is incorrect. Prepaid contracts and royalties received in advance are temporary differences.
Which of the following is a temporary difference classified as revenue or gain that is taxable before it is recognized in the income statement?
a. Deductible pension funding exceeding expense.
b. Rent received in advance.
c. Product warranty liabilities.
d. Stock-based compensation expenses.
b. Rent received in advance.
Choice A is incorrect. Deductible pension funding exceeding expense is a temporary difference classified as expense or loss that is deductible before it is recognized in the income statement.
Choices C and D are incorrect. Product warranty liabilities and stock-based compensation expenses are classified as losses or expenses that are deductible after they are recognized in the income statement.
