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17 Cards in this Set
- Front
- Back
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Long-term obligations that are or will become callable by the creditor because of the debtor’s violation of a provision of the debt agreement at the balance sheet date should be classified as |
Current liabilities also include (1) obligations that by their terms are or will be due on demand within 1 year (or the operating cycle, if longer), and (2) obligations that are or will be callable by the creditor within 1 year because of a violation of a debt covenant. |
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Buc Co. receives deposits from its customers to protect itself against nonpayments for future services. These deposits should be classified by Buc as A.A contra account. B.A liability. C.Revenue. D.A deferred credit deducted from accounts receivable. |
Answer (B) is correct. |
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Intraperiod income tax allocation arises because
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Items included in the determination of taxable income may be presented in different sections of the financial statements.
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Interperiod income tax allocation arises because |
Items included in the determination of taxable income may be presented in different periods than the financial statements (Temporary Differences) or some items may have just tax consequences and not financial statement effects (Permanent Difference). |
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If income under GAAP > Taxable Income |
Future Taxable Amounts. Differed Taxable Liability. Less tax was paid than shown on financials |
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If income under GAAP < Taxable Income |
Future Deductible amounts. Differed Taxable Asset. More tax was paid than shown on financials. Revenues are included in taxalbe income before recognized under GAAP |
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Orlean Co., a cash-basis taxpayer, prepares accrual-basis financial statements. In its current-year balance sheet, Orlean’s deferred income tax liabilities increased compared with those reported for the prior year. Which of the following changes would cause this increase in deferred income tax liabilities? 1. An increase in prepaid insurance2. An increase in rent receivable 3. An increase in warranty obligations |
I and II only. An increase in prepaid insurance signifies the recognition of a deduction on the tax return of a cash-basis taxpayer but not in the accrual-basis financial statements. The result is a temporary difference giving rise to taxable amounts in future years when the reported amount of the asset is recovered. An increase in rent receivable involves recognition of revenue in the accrual-basis financial statements but not in the tax return of a cash-basis taxpayer. This temporary difference also will result in future taxable amounts when the asset is recovered. A deferred tax liability records the tax consequences of taxable temporary differences. Hence, these transactions increase deferred tax liabilities. An increase in warranty obligations is a noncash expense recognized in accrual-basis financial statements but not on a modified-cash-basis tax return. The result is a deductible temporary difference and an increase in a deferred tax asset. |
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Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During the year, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. All the undistributed earnings of Flame will be distributed as dividends in future periods. The dividends received from Flame are eligible for the 80% dividends received deduction. There are no other temporary differences. Enacted income tax rates are 30% for the current year and thereafter. In its December 31 balance sheet, what amount should Taft report for deferred income tax liability? |
The deferred tax liability constitutes the “deferred tax consequences attributable to taxable temporary differences. A deferred tax liability is measured using the applicable enacted tax rate and provisions of the enacted tax law.” Taft’s recognition of $180,000 of equity-based earnings creates a temporary difference that will result in taxable amounts in future periods when dividends are distributed. The deferred tax liability arising from this temporary difference is measured using the 30% enacted tax rate and the dividends received deduction. Accordingly, given that all the undistributed earnings will be distributed, a deferred tax liability of $9,000 [($180,000 equity – $30,000 dividends received) × 20% not deductible × 30% tax rate applicable after the current year] should be reported. |
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Which of the following does not result in recognition of a deferred tax asset? A.Immediate expensing of organizational costs. B.An operating loss carryforward. C.Subscriptions revenue received in advance. D.Receipt of municipal bond interest. |
Municipal bond interest is nontaxable, so it results in a permanent, not a temporary, difference. A permanent difference is an event that is recognized either in pretax financial income or in taxable income but never in the other. It does not result in a deferred tax asset or liability. Examples of items recognized in pretax financial income but not in taxable income are municipal bond interest, premiums paid by a beneficiary entity on insurance policies for its key executives, and the proceeds from such policies. Examples of items recognized in taxable income but not in financial income are the dividends received deduction and percentage depletion. |
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Among the items reported on Cord, Inc.’s income statement for the year ended December 31 were the following: Compensation expense for a stock option plan $50,000 Insurance premium on the life of an officer (Cord is the owner and beneficiary.) 25,000 Neither is deductible for tax purposes. Temporary differences amount to |
0$ |
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When a change in the tax law or rates occurs, the effect of the change on a deferred tax liability or asset is recognized as an adjustment in the period . |
That includes the enactment date of the change. The adjustment is allocated to income from continuing operations in the first financial statements issued for the period that includes the enactment date |
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Taxable Income Equals |
Pretax Accounting Income adjusted for Permanent and Temporary Differences |
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Taxable income calculation |
Pretax Accounting Income Temp Differences Less: Revenues recognized under GAAP First Less: Expenses First Recognized on Tax Return Add:Revenues Recognized first on Tax Add: Expenses First Recognzed under GAAP Permanent Differences Less: GAAP Revenues not Taxable Less: Deductible Expenses not Recognized under GAAP Add: GAAP expenses not deductible
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JE- Increase in DTL |
Income Tax Expense-Deferred XXX Deferred Tax Liability XXX |
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JE- Increase in DTA |
Deferred Tax Asset XXXX Income Tax Expense -Deferred XXX |
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Deferred Tax Expense = |
Net change in DTL and DTA |
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JE for income tax expense |
Income Tax expense - Current 400,000 Income Tax expense - Deferred 2,000 Deferred Tax Asset 8,000 Income Tax Payable 400,000 Deferred Income Tax Liability 10,000 |
