07 Income Taxes.pdf - Income Taxes Test ID 7694119...

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Income Taxes Test ID: 7694119 Question #1 of 68 Question ID: 479061 A) B) C) Question #2 of 68 Question ID: 414538 A) B) C) Question #3 of 68 Question ID: 414579 A) B) C) Question #4 of 68 Question ID: 414581 Firm 1 has a deferred tax liability and Firm 2 has a deferred tax asset. If the tax rate decreases, the balance sheet values of these deferred tax items will: Firm 1 Firm 2 increase. decrease. increase. increase. decrease. decrease. Explanation A decrease in the future tax rate decreases the balance sheet value of either a deferred tax liability or a deferred tax asset. When analyzing a company's financial leverage, deferred tax liabilities are best classified as: neither as a liability, nor as equity. a liability or equity, depending on the company's particular situation. a liability. Explanation Depends on the "performance" of the timing difference. All of the following factors complicate the comparability of effective tax rates across firms EXCEPT: comparisons over relatively short time horizons. volatility in the effective tax rate over the comparison period. changes in the statutory tax rate. Explanation Comparability decreases when the comparison period is relatively short (e.g. quarters vs. years), with the presence of volatility in the effective tax rate over the comparison period, and operations in different tax jurisdictions. While evaluating the financial statements of Omega, Inc., the analyst observes that the effective tax rate is 7% less than the 1 of 27
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A) B) C) Question #5 of 68 Question ID: 414570 A) B) C) Question #6 of 68 Question ID: 434302 statutory rate. The source of this difference is determined to be a tax holiday on a manufacturing plant located in South Africa. This item is most likely to be: continuous in nature, so the termination date is not relevant. sporadic in nature, but the effect is typically neutralized by higher home country taxes on the repatriated profits. sporadic in nature, and the analyst should try to identify the termination date and determine if taxes will be payable at that time. Explanation As the name suggests, a tax holiday is usually a temporary exemption from having to pay taxes in some tax jurisdiction. Because of the temporary nature, the key issue for the analyst is to determine when the holiday will terminate, and how the termination will affect taxes payable in the future. Enduring Corp. operates in a country where net income from sales of goods are taxed at 40%, net gains from sales of investments are taxed at 20%, and net gains from sales of used equipment are exempt from tax. Installment sale revenues are taxed upon receipt. For the year ended December 31, 2004, Enduring recorded the following before taxes were considered: Net income from the sale of goods was $2,000,000, half was received in 2004 and half will be received in 2005. Net gains from the sale of investments were $4,000,000, of which 25% was received in 2004 and the balance will be received in the 3 following years.
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