Accounting Chapter 16

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Which of the following creates a temporary difference between financial and taxable income?
Which of the following creates a temporary difference between financial and taxable income?
A-Accelerated cost recovery on plant and equipment
B-Premiums paid for officer's life insurance (company is beneficiary)
C-Fines from violation of law
D-Interest on municipal bonds

A- Accelerated cost recovery on plant and equipment.

Which of the following temporary differences ordinarily creates a deferred tax asset?
A-Accrued warranty costs
B-Depreciation
C-Installment sales
D-Prepaid Insurance

A-Accrued Warranty Costs

Which of the following temporary differences ordinarily results in a deferred tax liability?
A-Subscription revenue received in advance
B-Unrealized losses on marketable securities
C-Accrued warranty costs
D-Depreciation

D-Depreciation

Jackson Company had taxable income of $12,000 during 2012. Jackson used accelerated depreciation for tax purposes ($3,400) and straight-line depreciation for accounting purposes ($2,000). Assuming Jackson had no other temporary differences, what would the company's pretax accounting income be for 2012?
A-$17,400
B-$6,600
C-$13,400
D-$1,400

C-13,400

Townson had pretax accounting income of $1,400 during 2012. Townson used accelerated depreciation for tax purposes ($1,000) and straight-line depreciation for financial reporting purposes ($200). During 2012, Townson accrued warranty expenses of $900 and paid cash to honor warranties of $500. Townson's taxable income for 2012 would be
A-$2,600.
B-$1,800.
C-$200.
D-$1,000.

D- $1,000

Which of the following creates a permanent difference between financial income and taxable income?
A-Interest received on municipal bonds
B-Accelerated cost recovery on plant and equipment
C-Unearned rent revenue
D-Completed contract method of recognizing construction revenue

A-Interest received on municipal bonds

On December 31, 2012, Bennett, Inc., reported a current deferred tax liability of $140,000 and a noncurrent deferred tax asset of $40,000. At the end of 2013, Bennett reported a current deferred tax liability of $100,000, and a noncurrent deferred tax liability of $44,000. The deferred tax expense for 2013 is
A-$4,000.
B-$144,000.
C-$44,000.
D-$36,000.

C-$44,000

In 2012, Danson Company, reported pretax financial income of $500,000. Included in that pretax financial income was $90,000 of nontaxable life insurance proceeds received as a result of the death of an officer; $120,000 of warranty expenses accrued but unpaid as of December 31, 2012; and $20,000 of life insurance premiums for a policy for an officer. Assuming that no income taxes were previously paid during the year and assuming an income tax rate of 40 percent, the amount of income taxes payable on December 31, 2012, would be
A-$220,000.
B-$212,000.
C-$180,000.
D-$200,000.

A-$220,000

For the current year, Northern Pacific Company reported income tax expense of $45,000. Income taxes payable at the end of the prior year were $20,000 and at the end of the current year were $27,000. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes increased from $18,000 at the beginning of the current year to $23,000 at the end of the current year. How much cash was paid for income taxes during the year?
A-$45,000
B-$33,000
C-$47,000
D-$38,000

B-$33,000

On the statement of cash flows using the indirect method, an increase in the deferred tax liability would be shown as
A-an addition to net income.
B-a deduction from net income.
C-an increase in investing activities.
D-an increase in financing activities.

A- An addition to net income

The asset-liability method of interperiod tax allocation currently required by U.S. GAAP is an example of the
A-comprehensive recognition approach.
B-partial recognition approach.
C-discounted comprehensive recognition approach.
D-no-deferral approach.

A- Comprehensive recognition approach

Historically, the United Kingdom has recognized only those deferred tax liabilities expected to "crystallize." The term "crystallize" is most nearly synonymous with the term
A-amortized.
B-realized.
C-recognized.
D-liquidated.

B-Realized

During a year, Great Northern Company reported income tax expense of $200,000. The amount of taxes currently payable remained unchanged from the beginning to the end of the year. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes, increased from $40,000 at the beginning of the year to $44,000 at the end of the year. How much cash was paid for income taxes during for the year?
a. $156,000
b. $196,000
c. $206,000
d. $160,000

B-$196,000

For the current year, Santa Fe Company reported income tax expense of $195,000. Income taxes payable at the end of the prior year were $125,000 and at the end of the current year were $130,000. The deferred tax liability classified as noncurrent that resulted from the use of MACRS for tax purposes and straight-line depreciation for financial reporting purposes increased from $120,000 at the beginning of the current year to $123,000 at the end of the current year. How much cash was paid for income taxes during the year?
a. $190,000
b. $197,000
c. $187,000
d. $195,000

C-$187,000

International accounting standards currently are moving toward the
A-comprehensive recognition approach.
B-no-deferral approach.
C-partial recognition approach.
D-discounted comprehensive recognition approach.

A-Comprehensive recognition approach

If all temporary differences entering into the determination of pretax accounting income are considered in the computation of deferred taxes and income tax expense, then the
A-partial recognition approach is being applied.
B-no-deferral approach is being applied.
C-comprehensive recognition approach is being applied.
D-net-of-tax method is being applied.

C- Comprehensive recognition approach is being applied

Burns Company reported net incomes in 2011 and 2012 before sustaining a significant operating loss in 2013. All of the 2013 loss can be carried back against the income of 2011 and 2012 for purposes of determining the company's 2013 income tax liability. How should the carryback be presented in the company's 2013 financial statements?
A- As a reduction in the operating loss on the income statement for the year 2013
B-As the correction of an error in the retained earnings statement
C-As a revenue from operations in the income statement
D-As an extraordinary item in the income statement

A- As a reduction in the operating loss on the income statement for the year 2013.

In 2012, Olber Corporation reported $90,000 net income before income taxes. The income tax rate for 2012 was 30 percent. Olber had an unused $60,000 net operating loss carryforward arising in 2011 when the tax rate was 35 percent. The income tax expense Olber would report for 2012 would be
A-$10,500.
B-$6,000.
C-$9,000.
D-$27,000.

C- $9,000

Assume the taxable temporary difference was created entirely in 2012 and will reverse in equal net taxable amounts in each of the next three years. If tax rates are 40 percent in 2012, 35 percent in 2013, 35 percent in 2014, and 30 percent in 2015, then the total deferred tax liability Garrison should report on its December 31, 2012, balance sheet is
a. $15,750.
b. $18,000.
c. $13,500.
d. $15,000.

D-$15,000

When enacted tax rates change, the asset and liability method of interperiod tax allocation recognizes the rate change as
A-a separate charge or benefit to income tax expense.
B-a separate charge to the current year's net income.
C-an adjustment to be netted against the current income tax expense.
D-a cumulative effect adjustment.

A- A separate charge or benefit to income tax expense

A deferred tax liability arising from the use of an accelerated method of depreciation for tax purposes and the straight-line method for financial reporting purposes would be classified on the balance sheet as
A-a current liability.
B-a noncurrent liability.
C-a current liability for the portion of the temporary difference reversing within a year and a noncurrent liability for the remainder.
D-an offset to the accumulated depreciation reported on the balance sheet.

B- A noncurrent liability

Pretax accounting income is $100,000 and the tax rate is 40%. Included in income is a $20,000 fine levied for pollution violations and other infractions during the year. In the reconciliation of the statutory and effective rate (beginning with the statutory rate), which one of the following amounts would appear?
a. (.04)
b. (.08)
c. (.20)
d. .08

D-.08

Recognizing tax benefits in a loss year due to a loss carryforward requires
A-only a footnote disclosure.
B-creating a deferred tax asset.
C-creating a deferred tax liability.
D-creating a new carryforward for the next year.

B- Creating a deferred tax asset

A company would most likely choose the carryforward option for a net operating loss if the company expected
A-lower tax rates in the future compared to the past.
B-lower earnings in the future compared to the past.
C-higher tax rates in the future compared to the past.
D-higher earnings in the future compared to the past.

C- Higher tax rates in the future compared to the past

Cardinal Industries reported an excess of warranty expense over warranty deductions of $72,000 for the year ended December 31, 2012. This temporary difference will reverse in equal amounts over the years 2013 to 2015. The enacted tax rates are as follows:

The reporting for this temporary difference at December 31, 2012, would be a
A-current deferred tax liability of $8,400 and a noncurrent deferred tax liability of $13,200.
B-deferred tax asset of $28,800.
C-deferred tax liability of $28,800.
D-current deferred tax asset of $8,400 and a noncurrent deferred tax asset of $13,200.

D- Current deferred tax asset of $8,400 and a noncurrent deferred tax asset of $13,200.

Assume the taxable temporary difference was created entirely in 2012 and will reverse in equal net taxable amounts in each of the next three years. If tax rates are 40 percent in 2012, 35 percent in 2013, 35 percent in 2014, and 30 percent in 2015, then the total deferred tax liability Markham should report on its December 31, 2012, balance sheet is
a. $21,000.
b. $18,000.
c. $24,000.
d. $20,000.

D- $20,000

Which of the following statements is not correct?
A-Deferred tax assets related to carryforwards shall be classified as current or noncurrent on the balance sheet based on their expected date of reversal.
B- All current deferred tax liabilities and assets shall be offset and presented as a single amount on the balance sheet.
C-Deferred tax liabilities and assets shall be classified as current or noncurrent on the balance sheet based on the classification of the asset or liability giving rise to the deferred tax item.
D-All current and noncurrent deferred tax assets shall be offset and presented as a single amount on the balance sheet.

D-All current and noncurrent deferred tax assets shall be offset and presented as a single amount on the balance sheet.

Which of the following does not help explain why income tax expense is different from the product of pretax income times the current tax rate?
A-Permanent differences
B-Temporary differences
C-A change in the valuation allowance account for the deferred tax asset.
D-The fact that future and current tax rates are different

B- Temporary difference

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