1. Permanent differences between pretax financial income and taxable income result when (Points: 2)
a company engages in fraudulent activity
the SEC imposes a penalty on a company
the IRS imposes interest on a late payment
the FTC changes how an advertisement can be shown on TV even though the company has paid for the ad
2. The interperiod tax allocation method that is balance-sheet oriented, reports deferred taxes based on the future enacted tax rates, and more closely meets the conceptual definitions of assets and liabilities established by the FASB is the (Points: 2)
deferred method
net-of-tax method
partial income tax allocation approach
asset/liability method
3. All of the following involve a temporary difference for purposes of income tax allocation except (Points: 2)
revenues or gains that are included in pretax financial income prior to the time they are included in taxable income
expenses or losses that are deducted to compute taxable income prior to the time they are deducted to compute pretax financial income
revenues or gains that are included in taxable income prior to the time they are included in pretax financial income
deductions that are allowed for income tax purposes but that do not qualify as expenses under generally accepted accounting principles
4. Temporary differences arise when revenues or gains are included in pretax financial income
Prior to the Time
They Are Included in
Taxable Income After the Time
They Are Included
in Taxable Income
(Points: 2)
YesYes
YesNo
NoYes
NoNo
5. As of December 31, 2010, the Austin Company reported a deferred tax asset of $60,000 related to accrued, unpaid warranty costs. However, since profits have been declining, Austin decides that it is more likely than not that $24,000 of the deferred tax asset will not be realized. The entry to record the valuation allowance would include a (Points: 2)
debit to Income Tax Expense for $60,000
credit to Income Tax Expense for $24,000
debit to Allowance to Reduce Deferred Tax Asset to Realizable Value for $24,000
credit to Allowance to Reduce Deferred Tax Asset to Realizable Value for $24,000
6. The Channelview Company incurred the following expenses in 2010, which are reported differently for financial reporting purposes and taxable income:
Estimate of bad debts expense (but not written off)$40,000
Estimated product warranty costs (but not paid)20,000
If the tax rate is 40%, the total temporary difference is (Points: 2)
$20,000
$24,000
$60,000
$150,000
7. Which one of the following statements regarding operating losses is not true? (Points: 2)
The tax benefit of an operating loss carryback is recognized in the period of loss as a current receivable on the balance sheet.
Temporary differences and operating loss carryforwards are accounted for similarly.
The journal entry to recognize an operating loss carryback would include a credit to Income Tax Benefit from Operating Loss Carryback.
The tax benefit of an operating loss carryforward is to be recognized in the period of loss as a current receivable.
8. When accounting for the current impact of loss carrybacks and carryforwards it is proper to (Points: 2)
recognize the tax benefit of the operating loss carryback as an asset
recognize the tax benefit of the operating loss carryforward as an asset
recognize the tax benefit of the operating loss carryback as a deferred liability
recognize the tax benefit of the operating loss carryforward as a deferred liability
9. At the end of its first year of operations on December 31, 2010, the Belton Company reported taxable income of $100,000 and had a pretax financial loss of $60,000. Differences between taxable income and pretax financial income included interest revenue received from municipal obligations of $20,000 and warranty expense accruals of $180,000. Warranty expenses of $90,000 are expected to be paid in 2011 and $110,000 in 2012. The enacted income tax rates for 2010, 2011, and 2012 are 30%, 35%, and 40%, respectively. The journal entry to record income tax expense on December 31, 2010, would be (Points: 2)
Deferred Tax Asset 75,500
Income Taxes Payable 30,000
Income Tax Benefits from Operating Loss Carryforward 45,500
Deferred Tax Asset 30,000
Income Taxes Payable 30,000
Income Tax Expense 30,000
Income Taxes Payable 30,000
Deferred Tax Asset
Income Taxes Payable 105,500
30,000
Income Tax Benefit from
Operating Loss Carryforward 75,500
10. During its first year of operations, 2010, the Hico Company reported both a pretax financial and a taxable loss of $200,000. The income tax rate is 30% for the current and future years. Due to a sufficient backlog of sales orders, Hico did not establish a valuation allowance to reduce the $60,000 deferred tax asset. However, early in 2011, one major customer, representing 60% of the 2011 year-end sales backlog, went bankrupt. Hico now believes that it is more likely than not that 70% of the deferred tax asset will not be realized. The entry to record the valuation allowance would be (Points: 2)
Income Tax Expense 42,000
Deferred Tax Asset 42,000
Income Tax Benefit from Operating
Loss Carryforward
42,000
Deferred Tax Asset 42,000
Income Tax Expense 42,000
Allowance to Reduce Deferred Tax Asset to Realizable Value 42,000
Allowance to Reduce Deferred Tax
Asset to Realizable Value
42,000
Income Tax Expense 42,000