Section I: Terminology. Please define the following terms in the space provided. 2 pts./ea.
Deferred Tax Liability
Deferred Tax Asset
Taxable Temporary Difference
Net Operating Loss
Uncertain Tax Positions
ACC 202, Ch. 19 Quiz, contd. -2-
Section II: True/False. Place a T (true) or an F (false) in the space provided. 3 pts./ea.
_______ 1) Taxable income is a tax accounting term also referred to as income before taxes.
_______ 2) Pretax financial income is the amount used to compute income tax payable.
_______ 3) A deferred tax liability represents the increase in taxes payable in future years as a result of taxable
temporary differences existing at the end of the current year.
_______ 4) A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible
temporary differences existing at the end of the current year.
_______ 5) Companies should consider both positive and negative evidence to determine whether it needs to record
a valuation allowance to reduce a deferred tax asset.
_______ 6) Taxable temporary differences will result in taxable amounts in future years when the related assets are
_______ 7) Examples of taxable temporary differences are subscriptions received in advance and advance rental
_______ 8) Permanent differences do not give rise to future taxable or deductible amounts.
_______ 9) Companies must consider presently enacted changes in the tax rate that become effective in future years
when determining the tax rate to apply to existing temporary differences.
_______ 10) A possible source of taxable income that may be available to realize a tax benefit for loss carry-forwards
is future reversals of existing taxable temporary differences.
Section III: Multiple Choice. Place the letter of the correct response in the space provided. 3 pts./ea.
_______ 1) Taxable income of a corporation differs from pretax financial income because of
a. No No
b. No Yes
c. Yes Yes
d. Yes No
_______ 2) The deferred tax expense is the
a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.
_______ 3) At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued receivable for
financial reporting purposes but not for tax purposes. When this asset is recovered in 2011, a future
taxable amount will occur and
a. pretax financial income will exceed taxable income in 2011.
b. Unruh will record a decrease in a deferred tax liability in 2011.
c. total income tax expense for 2011 will exceed current tax expense for 2011.
d. Unruh will record an increase in a deferred tax asset in 2011.
ACC 202, Ch. 19 Quiz, contd. -3-
_______ 4) Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give
rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only
_______ 5) A major distinction between temporary and permanent differences is
a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only once.
c. once an item is determined to be a temporary difference, it maintains that status; however, a
permanent difference can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas permanent
differences do not reverse.
_______ 6) Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is
recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting purposes and on the
installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.
_______ 7) Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial income.
_______ 8) An example of a permanent difference is
a. proceeds from life insurance on officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers.
d. all of these.
_______ 9) When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts
a. handled retroactively in accordance with the guidance related to changes in accounting principles.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or
increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the
tax rate change, but not subsequent to the date of the change.
_______ 10) With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when
a. it is probable and can be reasonably estimated.
b. there is at least a 51% probability that the uncertain tax position will be approved by the taxing
c. it is more likely than not that the tax position will be sustained upon audit.
d. Any of the above exist.
ACC 202, Ch. 19 Quiz, contd. -4-
Section IV: Problems. Solve each of the problems as directed below. Show your work. 10 pts./ea.
1) Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 500,000
Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income $ 750,000
The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years.
a) The income tax expense is: $______________________________
b) The deferred tax asset to be recognized is: $_________________________________
c) The deferred tax liability—current to be recognized is: $_______________________________
2) Lyons Company deducts insurance expense of $84,000 for tax purposes in 2010, but the expense is not yet recognized for accounting purposes. In 2011, 2012, and 2013, no insurance expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $72,000 at the end of 2010. There were no deferred taxes at the beginning of 2010.
a) The deferred tax liability at the end of 2010: $______________________________
b) Income tax expense for 2010 is: $__________________________________
c) Assuming that income tax payable for 2011 is $96,000, the income tax expense for 2011 would be: