ch09 - Chapter 9 Solutions Overview: Problem Length {S} {M}...

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Chapter 9 – Solutions Overview: Problem Length Problem #s {S} 1 - 4, 6, 11, 15 {M} 5, 7 - 9, 13, 14, 16 {L} 10, 12 1.{S}Deferred taxes can be found in all of the categories listed. Examples are: (i) Current liabilities may include deferred tax liabilities arising from an installment sale with cash payments expected within one year. (ii) Deferred income tax credits resulting from the use of accelerated depreciation for tax purposes and straight line for financial reporting are reported in long-term liabilities. (iii) The stockholders’ equity account may include the deferred tax offset to the valuation allowance for available-for-sale securities or the cumulative translation adjustment account. (iv) The deferred tax asset (debit) due to accrued compensation with cash payment expected within one year is a component of current assets. (v) Long-term assets would include deferred tax assets (debits) recognized, (for example for, postretirement benefits or restructuring charges), but not expected to be funded within one year. 2.{S}(i) Correct: Under SFAS 109, changes in tax laws must be reflected in the deferred tax liability in the period of enactment. (ii) Correct: Answer to (i) also applies to deferred tax assets. (iii) Correct: The tax consequences of events that have not been reflected in the financial statements (such as future earnings or losses) are not recognized. (iv) Incorrect: See answers to (i) and (ii) above. This statement is true for the deferral method (see footnote 2 on text page 292). (v) Incorrect: Changes in deferred tax assets and liabilities are included in income tax expense except for those charged directly to stockholders’ equity. 9-1
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3.{S}a. Permanent differences are items of income or expense that affect either tax return income or financial income, but not both. Examples include: Tax-exempt interest income (not reported on the tax return, Interest expense on amounts borrowed to purchase tax-exempt securities (not deductible on the tax return), Tax or other nondeductible government penalties (not reported on the tax return), Statutory mineral depletion in excess of cost basis depletion (not reported in the financial statements), Premiums on key-person life insurance policies (not deductible on the tax return), Proceeds from key-person life insurance policies (not reported on the tax return). b. Permanent differences, depending on their nature, either increase or decrease the firm’s effective tax rate relative to the statutory rate. For example, tax- exempt interest income (the first example listed) reduces the effective tax rate as there is no tax expense associated with this income. 4.{S}a. (i) If the deferred tax liability is not expected to reverse, there is no expectation of a cash outflow and the liability should be considered as equity.
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This note was uploaded on 04/15/2009 for the course ACCOUNTING BUSI0027 taught by Professor Guan during the Spring '09 term at HKU.

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ch09 - Chapter 9 Solutions Overview: Problem Length {S} {M}...

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