Solution Manual Intermediate Accounting Volume 2 Canadian
7th Edition Beechy Conrod Farrell Dick 1259108023
9781259108020
Full download link at:
Solution manual: https://testbankpack.com/p/solution-manual-intermediate-accounting-volume-2-canadian-7thedition-beechy-conrod-farrell-dick-1259108023-9781259108020/
Test bank: https://testbankpack.com/p/test-bank-intermediate-accounting-volume-2-canadian-7th-editionbeechy-conrod-farrell-dick-1259108023-9781259108020/
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question
1) Deferred income tax liabilities are amounts owed to the government.
2) The phrase "provision for income taxes" encompasses both income tax expenses and liabilities.
3) Deferred taxes appear on a company's balance sheet as a result of inter-period tax allocation.
4) Temporary differences occur only because accounting standards and income tax laws differ as to when they recognize assets, liabilities, owners' equity, revenues, gains, expenses, and losses.
5) The use of inter-period income tax allocation is mandatory under ASPE.
6) Temporary differences relate only to items that will be recognized on both the income statement and the tax return, but in different reporting periods.
7) Temporary differences very seldom reverse (i.e., turnaround) in one or more future reporting periods.
Answer: B
8) Permanent differences are those that factor into the computation of both net income and taxable income.
A) True B) False
Answer: B
9) Income tax expense generally equals the product of the current period income tax rate and pre-tax accounting income
A) True
B) False Answer: B
10) Under IFRS, the amount of taxes paid must be disclosed on the face of the cash flow statement.
A) True
B) False Answer: B
11) The taxes payable method results in better matching than does the comprehensive allocation method. A) True
B) False Answer: B
12) Deferred taxes maybe classified as either current or non-current under IFRS. A) True
B) False Answer: B
13) Prepayments of Deferred income tax expense may be viewed as a deferred tax asset.
A) True
B) False Answer: B
14) "Taxable amounts" include revenues and gains that are included in the tax return BEFORE theyare recognized for accounting purposes. A) True
B) False Answer: B
15) "Taxable amounts" include expenses and losses that are included in the tax return BEFORE they are recognized for accounting purposes. A) True B) False Answer: B
16) Under the indirect method of preparing cash flows from operating activities, deferred income tax expense must be added back to net income. A) True B) False Answer: B
17) Netting of deferred income tax assets and liabilities is always forbidden under IFRS and ASPE. A) True B) False Answer: B
18) During the originating period of a temporarydifference, pre-tax accounting income is defined as taxable income plus taxable amounts minus deductible amounts. A) True B) False Answer: B
19) All temporarydifferences are related to differences in the timing of accounting recognition compared with income tax recognition. A) True B) False Answer: B
20) All temporarydifferences originate, then reverse, and eventually end with a zero net effect. A) True B) False Answer: B
21) Under the liability approach, deferred taxes on the balance sheet are valued at the tax rate in that will be in effect when the temporarydifferences reverse. A) True B) False Answer: B
22) Under the deferral approach, deferred taxes on the balance sheet are valued at the tax rate in that will be in effect when the temporarydifferences reverse. A) True B) False Answer: B
23) In Canada, tax rates are usually enacted in the year to which theypertain. A) True B) False Answer: B
24) The existence of deferred tax assets on the balance sheet is dependent on a company's going concern status. A) True B) False Answer: B
25) OCIelements are shown on the statement of comprehensive income on a pre-tax basis. A) True B) False Answer: B
26) Financial analysts tend to ignore deferred taxes when computing the effective tax rate. A) True B) False Answer: B
27) For inter-period tax allocation, the total income tax expense must be allocated to ongoing operations, discontinued operations and extraordinaryitems on the income statement. A) True B) False Answer: B
28) Income tax expense for continuing operations and discontinued operations must be disclosed separately on the income statement. A) True B) False Answer: B
29) All individual temporary differences are expected to fully reverse over time. A) True B) False Answer: B
30) Write-downs of inventories under lower of cost and net realizable value rules will trigger a DTL. A) True B) False Answer: B
31) Ryan Companypaid the golf dues of one of its employees. This represents a temporarydifference A) True B) False Answer: B
32) When a temporarydifference causes cumulative taxable income to rise faster than accounting income reported to date, a Deferred Tax Asset (DTA) will be recognized (Assume that the Taxes Payable Method) is NOT used. A) True B) False Answer: B
33) Deferred Tax balances are discounted when their underlying temporarydifferences are material or are expected to reverse out many years into the future
A) True
B) False Answer: B
34) If a companyincurs $1,500 of expenditures for meals and entertainment, this amount represents a permanent difference.
A) True
B) False Answer: B
35) Amanda Companysold an asset and as a result had a capital gain of $15,000. Fifty percent of this amount represents a permanent difference.
A) True
B) False Answer: B
36) Under the comprehensive allocation method, deferred tax assets and liabilities are valued at the tax rates that are expected to be substantially enacted in the year of reversal.
A) True
B) False Answer: B
37) Comprehensive allocation recognizes the amount of taxes assessed in each year as the income tax expense for that year.
A) True
B) False Answer: B
38) If the enacted tax rate is changed for the current and future years, the earnings effect of the change in the beginning balances of the deferred tax assets is recognized in the current year. A) True B) False Answer: B
39) ABC Co. in its first year of business has taxable income of $2,000, book depreciation of $3,000 and CCA of $4,600, and recognized $800 of warranty expense but performed no warranty service. ABC's pre-tax accounting income would be:
A) $2,000
B) $1,200
C) $2,800
D) $3,600 Answer: B
40) On January1, Year 2, GHI Inc. had depreciable assets with a book value of $920,000 and a historical cost of $1,000,000. CCA totalling $100,000 had been taken on these assets. During Year 2, depreciation of $80,000 and CCA of $20,000 had been taken on these assets. The tax rate in effect is 35% For Year 2, the temporarydifferences arising from the above would result in:
A) a decrease to income tax expense of $21,000.
B) a decrease to income tax expense of $14,000.
C) an increase to income tax expense of $7,000.
D) a decrease to income tax expense of $7,000.
Answer: A
41) CompanyA had depreciation of $14,000 and CCA of $12,500 during its first year of operations. The tax rates for Years 1 and 2 were 25% and 20% respectively The Year 2 tax rate was enacted in Year 1 At the end of year 1, this will result in:
A) a deferred income tax liabilityof $300
B) a deferred income tax asset of $300
C) a deferred income tax asset of $375
D) a deferred income tax liabilityof $375
Answer: B
42) CompanyA had depreciation of $14,000 and CCA of $12,500 during its first year of operations. The tax rates for Years 1 and 2 were 25% and 20% respectively. The Year 2 tax rate was enacted in Year 2. At the end of year 1, this will result in:
A) a deferred income tax asset of $375.
B) a deferred income tax liability of $375.
C) a deferred income tax liability of $300.
D) a deferred income tax asset of $300
Answer: A
43) On January1, Year 2, GHI Inc. had expensed $100,000 more of warranty expenses than it had deducted for income tax purposes to date. During Year 2, the companyhad deducted $150,000 more in warranty costs on its Year 2 tax return than it had accrued for that year. The income tax rate for Years 2 and prior was 20%. The tax rate for future years was expected to be 25%. This rate was enacted during Year 2. For Year 2, the temporary differences arising from the above would result in:
A) an increase to income tax expense of $30,000. A corresponding DTL of $10,000 would also be recorded as the end of Year 2.
B) an increase to income tax expense of $32,500. A corresponding DTL of $12,500 would also be recorded as the end of Year 2
C) a decrease to income tax expense of $32,500. A corresponding DTA of $12,500 would also be recorded as the end of Year 2
D) a decrease to income tax expense of $30,000. A corresponding DTA of $10,000 would also be recorded as the end of Year 2.
Answer: B
44) The HarryCompanyreported for pre-tax income of $500,000 for Year 2 Its pre-tax income included $40,000 of meals and entertainment expenses and CCA in excess of depreciation of $70,000. Harry's tax rate for Year 2 was 20%. The tax rate in effect for Year 3 and beyond was 25% The Year 3 tax rate was enacted during Year 2 At the start of Year 2, Harry's capital assets had a book value of $100,000 and a UCC of $200,000.
Based on the information provided above, Harry's total reported income tax expense for Year 2 woul have been:
A) $125,000.
B) $102,500.
C) $104,000.
D) $126,500.
Answer: B
45) On January1, Year 2, GHI Inc. had accrued $100,000 more sales revenue than it had declared for income tax purposes to date. During Year 2, the company had declared $150,000 more in sales revenues on its Year 2 tax return than it had accrued for that year. The income tax rate for Years 2 and prior was 20%. The tax rate for future years was expected to be 25%. This rate was enacted during Year 2. For Year 2, the temporarydifferences arising from the above would result in:
A) a decrease to income tax expense of $32,500. A corresponding DTA of $12,500 would also be recorded as the end of Year 2
B) a decrease to income tax expense of $30,000. A corresponding DTA of $10,000 would also be recorded as the end of Year 2
C) an increase to income tax expense of $32,500. A corresponding DTL of $12,500 would also be recorded as the end of Year 2.
D) an increase to income tax expense of $30,000. A corresponding DTL of $10,000 would also be recorded as the end of Year 2.
Answer: A
46) On January1, Year 2, GHI Inc. had spent $100,000 in capital development costs to date, 50% of which had been capitalized. During Year 2, the companyhad incurred additional capital development costs of $200,000, 60% of which was capitalized. The income tax rate for Years 2 and prior was 20%. The tax rate for future years was expected to be 25%. This rate was enacted during Year 2 For Year 2, the temporarydifferences arising from the above would result in:
A) an increase to income tax expense of $55,000. A corresponding DTL of $75,000 would also be recorded as the end of Year 2.
B) an increase to income tax expense of $40,000. A corresponding DTL of $60,000 would also be recorded as the end of Year 2.
C) a decrease to income tax expense of $55,000. A corresponding DTA of $75,000 would also be recorded as the end of Year 2.
D) a decrease to income tax expense of $40,000. A corresponding DTA of $60,000 would also be recorded as the end of Year 2.
Answer: D
47) The general terminologyused to describe income tax expense when shown on the statement of comprehensive income is:
A) Tax expense
B) Income tax expense
C) Income tax benefit
D) Provision for income tax expense
Answer: D
48) A taxable amount is exemplified by:
A) Expense that is included in the tax return after it is included in pre-tax accounting income.
B) Gain that is included in the tax return before it is included in pre-tax accounting income.
C) Expense that is included in the tax return before it is included in pre-tax accounting income.
D) Revenue that is included in the tax return before it is included in pre-tax accounting income.
Answer: D
49) A deductible amount is exemplified by all of the following except:
A) Gain that is included in the tax return before it is included in pre-tax accounting income
B) Expense that is included in the tax return after it is included in pre-tax accounting income
C) Loss that is included in the tax return after it is included in pre-tax accounting income
D) Revenue that is included in the tax return before it is included in pre-tax accounting income
E) Expense that is included in the tax return before it is included in pre-tax accounting income
Answer: B
50) Golf dues paid for bya companyare:
A) a reversing difference
B) a temporarydifference
C) a timing difference
D) a permanent difference
Answer: D
51) At the end of 2014, the onlyexpected future temporarydifference is implied bythe following accoun found in the balance sheet:
Prepaid rent = $22,000
The footnotes reveal that the prepaid rent applies onlyto 2015. You would also expect to find which of the following in the balance sheet:
A) Current deferred tax asset
B) Noncurrent deferred tax liability
C) Current deferred tax liability
D) Noncurrent deferred tax asset
Answer: A
52) At most, how manydeferred tax accounts will a firm report in its balance sheet?
A) 3
B) 4
C) 2
D) 1
Answer: B
53) Which of the following would result in a deferred tax asset?
A) Using straight-line depreciation for the books and accelerated depreciation for tax.
B) Rent received in advance.
C) Point of sale revenue recognition for the books, and cost recoverymethod of revenue recognition for tax.
D) Warranty provision.
Answer: B
54) During 2013, MJB has pre-tax accounting income of $8,400. There were no permanent differences. MJB's only temporary difference for 2013 was rent revenue collected in advance of $2,400. None of this amount is recognized for book purposes. MJB's taxable income for 2013 would be:
A) $9,600
B) $8,400
C) $10,800
D) $6,000
Answer: C
55) MNO's taxable income was $900 during 2013. MNO had product warranty costs of $360 recognizable for tax purposes and $400 recognizable for financial accounting purposes. MNO had no other temporarydifferences. MNO's pre-tax accounting income for 2013 would be:
A) $1,260
B) $860
C) $940
D) $900
Answer: B
56) STR provided the following data related to income tax allocation:
The deferred tax account showed a zero balance at the start of 2009. There was only one temporary difference, a revenue amount, which was taxable in 2009, but was recorded for accounting purposes in 2010. There are no carry backs or carry forwards. The journal entryto record the income tax consequences for 2009 would include a:
A) Debit of $400 to STR's deferred tax account.
B) Debit of $136 to STR's deferred tax account.
C) Credit of $136 to STR's deferred tax account.
D) Credit of $400 to STR's deferred tax account.
Answer: B
57) The following data of ABC Ltd. relates to the current year:
58) A firm reported the following in its income statement for the current year: depreciation expense, $4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000. The tax rate is 40% For tax purposes, the CCA deduction was $9,000. What amount of CURRENT income tax expense will be recognized for this year?
A) $8,800
B) $400
C) $7,800
D) $4,000
E) $6,800
Answer: E
59) A firm reported the following in its income statement for the current year: depreciation expense, $4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000. The tax rate is 40%. For tax purposes, the CCA deduction was $9,000. What amount of deferred income tax (benefit) expense will be recognized for this year? Assume no beginning deferred tax amounts and a constant tax rate of 40%
A) A $2,000 deferred tax expense.
B) A $6,800 deferred tax expense.
C) A $6,800 deferred tax benefit.
D) A $2,000 deferred tax benefit.
Answer: A
60) A firm reported the following in its income statement for the current year: depreciation expense, $4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000. The tax rate is 40% for the current year, and no changes to this rate are foreseen in the near term. For tax purposes, the CCA deduction was $9,000. What amount of deferred income tax (benefit) expense will be recognized for this year? Assume a beginning Deferred Tax asset balance of $4,000.
A) A $6,000 deferred tax benefit.
B) A $2,000 deferred tax expense.
C) A $6,000 deferred tax expense.
D) A $2,000 deferred tax benefit.
Answer: C
61) Ryan Companypaid golf dues on behalf of their two top employees. This is an example of a:
A) Temporarydifference
B) Fully deductible for income tax purposes
C) Permanent difference
D) Reversing difference
Answer: C
62) Amanda Corporation incurred $10,000 of meals and entertainment expenses for the year ended December 31. The amount that is deductible for tax purposes is:
A) $5,000
B) $10,000
C) $0
D) $7,500
Answer: A
63) EGR just completed its first year end. During the year, EGR recorded $12,000 in depreciation ($18,500 CCA). In addition there was a deduction in the accounting records for meals and entertainment amounting to $6,000. As a result taxable income will:
A) be lower than accounting income by $500.
B) be higher than accounting income by $500
C) be equal to accounting income
D) be lower than accounting income by $5,500.
E) be higher than accounting income by$5,500.
Answer: A
64) Temporarydifferences can be dealt with in a number of different ways. The method recommended for public companies is the:
A) Taxes Payable Method.
B) Partial Allocation Method.
C) Flow-through method
D) Comprehensive Allocation Method.
Answer: D
65) A characteristic of the taxes payable method is that:
A) It is mandatory for private companies.
B) Tax owed for the period will equal accounting income tax expense
C) The matching principle is respected
D) Inter-period income tax allocation is applied to some types of temporary differences but not all.
Answer: B
66) All of the following are all justifications for the use of the comprehensive allocation method except for:
A) The matching principle is best served byusing the comprehensive allocation method.
B) Proponents saythat this provides a more accurate figure than does the comprehensive allocation method.
C) Income tax is an aggregate measure, applied to the overall operations of the company.
D) Proponents saythat a future cash flow impact arises from all temporary differences.
Answer: C
67) Which of the following could never be subject to inter-period tax allocation?
A) Depreciation expense on operational assets
B) Estimated warranty expense
C) Proceeds from life insurance
D) Rent revenue
Answer: C
68) Which of the following is an example of a temporarydifference, which would result in a deferred tax asset?
A) Investment losses recognized later for accounting purposes than for tax purposes
B) Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
C) Use of a shorter depreciation period for accounting purposes than is used for income tax purposes
D) Rent revenue collected in advance when included in taxable income before it is included in pre-tax accounting income
Answer: D
69) Which of the following is an example of a temporarydifference, which could result in a deferred tax asset?
A) Gain on disposal of an asset when included in taxable income before it is included in pre-tax accounting income
B) Gross margin on instalment sales is recognized for accounting purposes before it is included in taxable income in the income tax return
C) Prepayments of expenses in year of payment; recognition of expense for accounting purposes occurs in a later year.
D) Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
Answer: A
70) Which of the following is an example of a temporarydifference which would not result in a deferred tax asset?
A) Unrealized loss on short term investment is recognized for accounting purposes during the holding period while the actual loss on date of disposal is used for tax purposes.
B) Use of sales method of revenue recognition for accounting purposes, and instalment method of revenue recognition for tax purposes.
C) Allowance method for doubtful accounts is used for accounting purposes while direct write-off is required for tax purposes.
D) Estimated loss on disposal of a segment of a business recognized for accounting purposes but reported on the income tax return later on the basis of the actual loss.
Answer: B
71) The term "taxable amount" includes:
A) Revenues that are included in the tax return BEFORE theyare recognized for accounting purposes.
B) Losses that are included in the tax return AFTER theyare recognized for accounting purposes.
C) Gains that are included in the tax return AFTER theyare recognized for accounting purposes.
D) Warranty deductions for accounting purposes.
Answer: A
72) A temporarydifference that is deductible in future years is called:
A) A deferred tax liability
B) A deferred tax asset
C) A permanent tax liability
D) A permanent tax asset
Answer: B
73) JMR Corporation has one asset worth $350,000. Depreciation accumulated to date is $200,000 and accumulated CCA is $230,000. Assuming the tax rate is 40% what is the income tax implication?
A) A Deferred income tax liabilityof $30,000
B) A Deferred income tax liabilityof $12,000
C) A Deferred income tax asset of $12,000
D) A Deferred income tax asset of $30,000
Answer: B
74) JMR Corporation has one asset worth $350,000. Depreciation accumulated to date is $230,000 and accumulated CCA is $200,000. Assuming the effective tax rate is constant at 40%, this will result in:
A) A Deferred income tax asset of $12,000
B) A Deferred income tax liabilityof $12,000
C) A Deferred income tax asset of $30,000
D) A Deferred income tax liabilityof $30,000
Answer: A
75) EGR Corporation has one asset worth $450,000. Accumulated Depreciation to date is $190,000 and accumulated CCA is $220,000. The Corporation also recorded warranty expense of $30,000. To date no customers have required warranty service, so no warranty expenditures have been made. Assuming the tax rate is constant at 40%, this will result in:
A) A net deferred income tax liabilityof $12,000
B) A net deferred income tax asset of $30,000
C) No temporarydifference.
D) A net deferred income tax asset of $12,000
Answer: C
76) EGR Corporation has one asset worth $650,000. Accumulated Depreciation to date is $230,000 and accumulated CCA is $200,000. The Corporation also recorded warranty expense of $35,000. To date no customers have required warranty service, so no warranty expenditures have been made Assuming the tax rate is constant at 40%, this will result in a:
A) A Deferred income tax liabilityof $2,000
B) A Deferred income tax liabilityof $26,000
C) A Deferred income tax asset of $26,000
D) A Deferred income tax asset of $2,000
Answer: C
77) The following information is available for Ryan Corporation: Assets at cost-$260,000; Accumulated depreciation-$80,000; Accumulated CCA-$90,000; meals and entertainment recorded in the books-$12,000; golf dues paid-$5,000 Based on this information and a tax rate of 45%, what is the amount of the temporary difference?
A) $10,000
B) $1,000
C) $0
D) $4,000
Answer: A
78) The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000. Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000. No CCA was taken during the current year. Based on this information and a tax rate of 45%, what is taxable income?
A) $41,000
B) $51,000
C) $46,000
D) $34,000
E) $35,000
Answer: B
79) The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000. Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000. No CCA was taken during the current year. Based on this information and a constant tax rate of 45%, which of the following would appear on the statement of financial position as a result of the information given above?
A) An income tax liability of $45,000.
B) A deferred tax liability of $18,135.
C) A deferred tax liability of $3,510.
D) A deferred tax asset of $18,135.
E) A deferred tax asset of $3,510.
Answer: C
80) The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life, straight-line depreciation, no salvage value, purchased 2 years ago); Accumulated depreciation-$65,000. Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000. No CCA was taken during the current year. From the information provided above, what is the total amount of expenses that will never have an effect on taxable income (and thus never trigger anyDTA/DTL amounts)?
A) $17,000
B) $11,000
C) $5,000
D) $6,000
Answer: B
81) An example of a "deductible amount" occurs when:
A) Accelerated depreciation is used for tax purposes but straight-line depreciation is used for accounting purposes.
B) Expenses are recognized more quickly for taxes than for accounting purposes.
C) A gain on instalment sales is recognized for tax purposes as the receivable is collected, but was earlier recognized for accounting purposes when the sale was made.
D) Product warranty costs recognized for tax purposes as the warranty conditions are met but recognized for accounting purposes earlier on the accrual basis.
Answer: C
82) KER commenced operations in 2013. The companyhas recorded an accrual for warranty in its books during the year ended December 31, 2014 amounting to $100,000 During the year 2014, customers required service from goods sold in 2013 amounting to $60,000. No similar expenditures were made during 2013. KER accrued warranty expenses totalling $100,000 for 2013 and 2014. As a result of the information above, what is the amount of deferred taxes that will appear on the 2014 statement of financial position? Assume a 20% tax rate for both years.
A) A Deferred tax asset of $8,000
B) A Deferred tax asset of $40,000
C) A Deferred tax liability of $8,000
D) Nil.
Answer: A
83) KER commenced operations in 2013. The companyhad recorded an accrual for warranty in its books during the year ended December 31, 2014 amounting to $100,000 During the year 2014, customers required service from goods sold in 2013 amounting to $60,000. No similar expenditures were made during 2013. KER accrued warranty expenses totalling $100,000 for 2013 and 2014. As a result of the information above, what is the amount of deferred taxes that will appear on the 2014 statement of financial position? KER adheres to ASPE and has elected to use the Taxes Payable Method. Assume a 20% tax rate for both years.
A) A Deferred tax asset of $40,000
B) A Deferred tax asset of $8,000
C) A Deferred tax liability of $8,000
D) Nil.
Answer: D
84) KER commenced operations in 2013. The companyhad recorded an accrual for warranty expenses in its books during the year ended December 31, 2013, its first year of operations, amounting to $100,000. During the year 2014, customers required service from goods sold in 2014 amounting to $60,000. There were no similar expenditures made during 2013. KER recorded an amount for possible warranty costs for goods sold during the year in the amount of $95,000. Accounting income amounted to $80,000 and the tax rate is 40%. Assuming that KER has no other differences between accounting and tax what are the current and deferred income tax amounts that will appear on the 2014 statement of financial position?
A) Income Taxes Payable (Current): $22,000; deferred tax liability: 14,000
B) Income Taxes Payable (Current): $22,000; deferred tax asset: $14,000
C) Income Taxes Payable (Current): $46,000; deferred tax liability: $54,000
D) Income Taxes Payable (Current): $46,000; deferred tax asset: $54,000
Answer: D
85) Recommended disclosures for the provision for income tax expense include all of the following except:
A) Income tax expense or benefit should be reported separately on the financial statements
B) Public companies should disclose the nature of temporarydifferences
C) Income tax expense should not be grouped with other expenses
D) Income taxes relating to discontinued items must be disclosed separately on the financial statements
Answer: D
86) Which of the following does not help in explaining why (1) and (2) are different:
(1) Income tax expense
(2) The product of pre-tax income and the current tax rate.
A) The fact that future and current tax rates are different
B) Temporarydifferences
C) A change in the effective tax rate
D) Permanent differences
Answer: A
87) GFH had pre-tax accounting income of $1,400 during 2015. GFH used accelerated depreciation for tax purposes ($1,000) and straight-line depreciation for financial accounting purposes ($200). During 2015 GFH accrued warranty expenses of $900 and paid cash to honour warranties of $500. GFH's taxable income for 2015 would be:
A) $1,000
B) $1,800
C) $2,600
D) $200
Answer: C
88) Kate Corporation sold a truck resulting in a capital gain of $7,600. The amount to be reported for tax purposes is:
A) $0
B) $7,600
C) $5,700
D) $3,800
Answer: D
89) JMR Corporation sold a truck resulting in a capital gain of $11,000. $5,500 represents a:
A) Temporary difference
B) Permanent difference
C) Timing difference
D) None of these
Answer: B
90) KAR Company sold a building resulting in a capital gain of $15,000. Choose the statement below that best describes what the impact of this is:
A) There will be a permanent difference of $11,250.
B) There will be a temporary difference of $3,750.
C) Accounting income will be reduced by $7,500.
D) There will be a permanent difference of $7,500.
E) There will be a temporarydifference of $7,500.
Answer: D
91) ABC Inc. owns a single capital asset. At the end of its first year, the asset`s UCC is higher than its book value due to the company ` s choice of depreciation methods. What will be the effect of this difference over the life of the asset, assuming that this trend continues?
A) This will result in a reduction of the initial Deferred Tax Asset, and a corresponding Deferred Income Tax Expense amount on the Statement of Comprehensive Income in each year.
B) This will result in a reduction of the initial Deferred Tax Liability, and a corresponding Deferred Income Tax Benefit amount on the Statement of Comprehensive Income in each year.
C) This will result in a reduction of the initial Deferred Tax Asset, and a corresponding Deferred Income Tax Benefit amount on the Statement of Comprehensive Income in each year.
D) This will result in a reduction of the initial Deferred Tax Liability, and a corresponding Deferred Income Tax Expense amount on the Statement of Comprehensive Income in each year.
Answer: B
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
92) During 20014, JBC had pre-tax accounting income of $8,400, originating taxable amounts of $4,800 and originating deductible amounts of $2,400. Calculate JBC's taxable income for 2014.
Answer: $5,000 + $4,000 - $2,000 = $7,000 pre-tax accounting income
93) During 20014, JBC had pre-tax accounting income of $8,400, originating taxable amounts of $4,800 and originating deductible amounts of $2,400. Calculate JBC's taxable income for 2014.
Answer: $5,000 + $4,000 - $2,000 = $7,000 pre-tax accounting income
94) Explain the difference between a temporaryand permanent difference
Answer: A temporarydifference will, at some point in time reverse It is an amount that is deductible for accounting purposes at a different time than for tax purposes. A permanent difference never reverses. It is an item that is recorded for accounting purposes but will never be accounted for in the calculation of taxable income. The reverse is also true.
95) List five permanent differences.
Answer: 1. dividends received byCanadian corporations from other taxable Canadian corporations
2. 50% of capital gains
3. Equityin earnings of significantly influenced investors
4. Golf club dues
5. 50% of meals and entertainment expenses
6. Interest and penalties on taxes
7. Political contributions
96) List five items that are temporarydifferences.
Answer: 1. depreciation for accounting purposes, CCA for tax
2. Amortization for capitalized development costs; immediate deduction for tax
3. Gains and losses on inventories valued at market for accounting; taxed when realized.
4. Warranty costs accrued for accounting purposes in period of sale; tax deductible when incurred.
5. Bond discount or premium amortized for accounting but realized for tax purposes onlywhen the principle is settled at maturity.
6. Percentage-of-completion accounting for contracts; completed contract reporting for tax (for contracts lasting no more than two years).
97) Which tax rate should be used to measure a deferred income tax asset or liability?
Answer: The substantially enacted tax rate in effect in the year of reversal; otherwise the current tax rate may be used if future tax rates are not known.
98) What term is used to describe an amount that will eventually be tax deductible?
Answer: A Deferred income tax asset
99) What term is used to describe an amount that will eventually be taxable?
Answer: A Deferred income tax liability
100) Brieflyexplain the three basic issues with respect to inter-period income tax allocation.
Answer: 1. Extent of Allocation: There are discussions on whether the allocations of temporary differences should be full, partial or none at all. Comprehensive (full) allocation is recommend as it more closelymeets the matching principle.
2. The measurement method: Discusses whether the tax rate used should be the current tax rate or the enacted tax rate. The use of using enacted tax rates in the year of reversal is recommended.
3. Discounting: There are discussions on whether discounting should be used to measure the deferred tax amounts. Discounting is not recommended.
101) The following information is available to you: Income before tax; $80,000; depreciation, $15,000; CCA, $13,500; tax rate, 44%. Calculate the Deferred income tax asset (liability).
Answer: temporary difference = $1,500 44% = $660
102) A companyissues $1,000,000, 5-Year bonds on January1, Year 1. The yield to maturityis 8%, while the bonds provide a coupon rate of 10%, payable once annually on December 31st. The company's tax rate is assumed to be 20% for all years. Prepare the Year deferred tax entries required for Year 2.
Answer: It may first be helpful to create a bond amortization table as follows:
Date - Dec 31st, Year PMT Int exp Princ Red Principle $1,079,854.20
1 100000 $86,388.34 13611.66 $1,066,242.54
2 100000 $85,299.40 14700.6 $1,051,541.94
3 100000 $84,123.36 15876.64 $1,035,665.29
4 100000 $82,853.22 17146.78 $1,018,518.52
5 100000 $81,481.48 18518.52 $1,000,000.00
From the above we note that at the end of Year 2 there is premium amortization of $14,700. This would reduce the DTL that would be recognized when the bonds were issued as follows:
DTL 2,940 DIT Benefit 2,940 (I e. 14,700*20% (rounded))
This would leave a remaining DTL on the books of $10,308 (I e. 51,542*20% (rounded)) at the end of Year 2
103) The following information is available to you: Income before tax $1,230,000, depreciation, $350,000; CCA, $300,000; tax rate, 40%. Prepare the journal entry to record taxes for the year. (Assume there are no previous tax differences.)
Answer: Taxable income = 1,230,000 + 350,000 - $300,000 = 1,280,000 40% = $512,000 Deferred income tax asset = 350,000 - 300,000 = 50,000 40% = $20,000
104) The following information is available to you: Income before tax $1,540,000, depreciation, $309,000; CCA, $350,000; tax rate, 40%. Prepare the journal entry to record taxes for the year. (Assume there are no previous tax differences.)
Answer: Taxable income = 1,540,000 + 309,000 - $350,000 = 1, 40% = $599,600
Deferred income tax liability = 309,000 - 350,000 = (41,000) 40% = $16,400
Dr. current income tax expense
$599,600
Cr. Income tax payable $599,600
Dr. Income tax expense $16,400
Cr. Deferred income tax liability $16,400
105) JMR Corporation has income before tax of $500,000. Included in this amount are meals and entertainment amounting to $10,000, warranty costs of $80,000 ($20,000 in warranty claims), depreciation $78,000 and dividends from a taxable Canadian Corporation of $20,000. CCA for the year amounted to $90,000. Calculate taxable income
Answer: Taxable income: $500,000 + $5,000 + $80,000 - $20,000 + $78,000 - $90,000 - $20,000 = $533,000
106) JMR Corporation has income before tax of $800,000. Included in this amount are meals and entertainment amounting to $9,000, warranty costs of $100,000 ($65,000 in warranty claims), depreciation $94,000 and dividends from a taxable Canadian Corporation of $15,000. CCA for the year amounted to $90,000. Calculate taxable income.
Answer: Taxable income: $800,000 + $4,500 + $100,000 - $65,000 + $94,000 - $90,000 - $15,000 = $828,500
107) JMR Corporation has income before tax of $800,000. Included in this amount are meals and entertainment amounting to $9,000, warranty costs of $100,000 ($65,000 in warranty claims), depreciation $94,000 and dividends from a taxable Canadian Corporation of $15,000. CCA for the year amounted to $90,000 and the tax rate is 40%. Calculate income tax expense
Answer: Taxable income: $800,000 + $4,500 + $100,000 - $65,000 + $94,000 - $90,000 - $15,000 = $828,500 40% = $331,400
Deferred income tax asset = 100,000 - 65,000 + 94,000 - 90,000 = 39,000 40% = 15,600 Income tax expense = 331,400 - 15,600 = 315,800
108) JMR Corp. had one temporarydifference during the year. The carrying value of its capital assets for accounting purposes amounted to $350,000; the carrying value for CCA purposes was $380,000. What is the temporarydifference amount, what would it be called and where should it be presented on the balance sheet?
Answer: The temporary difference is $30,000, which would appear as a deferred tax asset and should be recorded as a non-current deferred tax asset on the balance sheet (tax rate is needed to determine the amount of the deferred tax asset).
109) EGR Companyprovided you with the following information:
2013 Net Income: $1,500,000
2014 Net Income: $900,000
2013 Tax rate: 35%
2014 Tax rate: 40%
In addition, the only difference between accounting and tax are warranty costs accrued of $100,000 i 2013. No actual warranty expenses were incurred in 2013 or 2014. Prepare journal entries for 2013 and 2014 to record income tax expense. 2013:
110) EGR Companyprovided you with the following information:
2013 Net Income: $1,500,000
2014 Net Income: $900,000
2013 Tax rate: 40%
2014 Tax rate: 35%
In addition, the only difference between accounting and tax are warranty costs accrued of $100,000 i 2013. No actual warranty expenses were incurred in 2013 or 2014. Prepare journal entries for 2013 and 2014 to record income tax expense.
Answer:
2013:
Dr. Income tax expense $600,000
Cr. Income tax payable $600,000
Dr. Deferred income tax asset $40,000
Cr. Income tax expense $40,000
2014:
Dr. Income tax expense $315,000
Cr. Income tax payable $315,000
Dr. Income tax expense $5,000
Cr. Deferred income tax asset $5,000
111) Define the effective tax rate.
Answer: The effective tax rate is the ratio of the income tax expense including those relating to temporarydifferences divided by the pre-tax net income.
112) RG Corporation has a temporarydifference of $40,000 in 2014. Its tax rate in 2014 is 40% and the government enacted tax rate known at the end of 2014 for 2000 and subsequent years is 45%. What tax rate should be used to calculate the deferred income tax asset or liability?
Answer: The enacted tax rate should be used (45%).
113) What is inter-period tax allocation?
Answer: Inter-period tax allocation is the process of allocating temporarydifferences between years. There are three approached. However the comprehensive allocation method is the one that promotes better matching.
114) KG Companyhad capital assets with a carrying value of $1,670,000 and a tax value of $1,560,000. In addition they had an accrued warranty liability of $80,000 of which $20,000 had actually been incurred and golf club dues in the amount of $3,000. Calculate the temporary difference deductible (taxable).
Answer: Temporarytaxable difference = 1,560,000 - 1,670,000 - 20,000 + 80,000 = (50,000)
115) KG Companyhad capital assets with a carrying value of $1,560,000 and a tax value of $1,670,000. In addition they had an accrued warranty liability of $80,000 of which $20,000 had actually been incurred and golf club dues in the amount of $3,000. Calculate the temporary difference deductible (taxable).
Answer: Temporarydeductible difference = 1,670,000 - 1,560,000 - 20,000 + 80,000 = 170,000
116) Explain the income tax disclosures required by the IASB.
Answer:
i) The amount of income tax expense (or benefit) on earnings from continuing operations must be reported separately in the income statement; it should not be combined with other expense items.
ii) Amount of current and deferred income tax expense is to be disclosed separately either on t face of the statements or in the notes.
iii) Discontinued operations and each item of OCI are to be reported net of tax, but the amount of actual tax relating to each of these items should be disclosed.
iv) Changes in deferred taxes due to temporarydifferences and tax rate changes should all be disclosed.
117) Explain the income tax disclosures required under ASPE.
Answer:
i) If the Taxes Payable Method is being used, this should be disclosed.
ii) Large corporations 'taxes should be disclosed.
iii) Non-deductible expenses should be disclosed.
iv) Non-taxable gains as well as non taxable portion of capital gains should all be disclosed.
v) The amount of deductible temporary differences for which a future tax asset has not been recorded.
118) CDE had taxable income of $7,500 during 2014. CDE used accelerated depreciation for tax purposes ($10,000) and straight-line depreciation for financial accounting purposes ($4,000). On December 30, 2014, CDE collected January2015's $3,000 rent on a lot it rents on a month-by-month basis to JCB. CDE's pre-tax accounting income for 2014 would be (show calculations):
Answer: $7,500 + $10,000 - $4,000 - $3,000 = $10,500 pre-tax accounting income
119) GFH had pre-tax accounting income of $5,600 during 2014 GFH used accelerated depreciation for tax purposes ($4,000) and straight-line depreciation for financial accounting purposes ($800)
During 2014 GFH accrued warranty expenses of $3,600 and paid $2,000 cash to honour warranties. GFH's taxable income for 2014 would be (show calculations):
Answer: $5,600 - $4,000 + $800 + $3,600 - $2,000 = $4,000 taxable income
120) ABC Inc. purchased new machinery for $2 million on January1st, 2014. For accounting purposes, the company depreciates all machineryon a straight-line basis (no salvage value) over a five year period For tax purposes, CCA on all machineryis taken at a rate of 20%, with half a year's CCA taken in the year of acquisition. The tax rate for 2014 is 40%. The tax rate for years 2015 and later is 35%. Assume that all rates are enacted in the year to which theypertain. Using the shortcut approach, determine the deferred income tax asset or liabilityat the end of 2014.
Answer: Tax Basis: $2,000,000 - 0.5*20%*$2,000,000 = $1,800,000
Accounting Basis: $2,000,000 - $400,000 = $1,600,000.
Difference: $1, 8 million-$1 6 million = $200,000*40% = $80,000 deferred income tax asset
Note that this is a deferred income tax asset since less CCA is taken than depreciation in the fir year, resulting in a larger future deductible amount. The 2015 rate is not known in 2014 so the temporarydifference will be valued at the 2014 rate of 40%.
121) ABC Inc. purchased new machinery for $2 million on January1st, 2014. For accounting purposes, the company depreciates all machineryon a straight-line basis (no salvage value) over a five year period. For tax purposes, CCA on all machineryis taken at a rate of 20%, with half a year's CCA taken in the year of acquisition. The tax rate for 2014 is 40%. The tax rate for years 2015 and later is 35% Assume that all rates are enacted in the year to which theypertain. Using the shortcut approach, determine the deferred income tax asset or liabilityat the end of 2014. How (if at all) would your answer change if the tax rate for all years 2014 and beyond were enacted in 2014?
Answer: In this case, the tax rates for years 2015 would be known in 2014. Since this temporary difference will reverse out after 2014, the deferred income tax asset would be valued at the rate that is expected to be in effect when the reversal is complete. In this case, the rate in effect will be 35%, thus, the difference between the tax and accounting bases calculated in question 120 above, which was $200,000, will be multiplied by35%. Thus the deferred income tax asset in this case will be valued at $70,000 ($200,000*35%).
122) Provide some arguments for and against the discounting of deferred tax amounts, and explain why these are not discounted.
Answer: Arguments for:
i) Manydeferred tax amounts will ultimatelybe realized.
ii) Companies taking advantage of the Income Tax Act`s deferral provisions are in effect receiving an interest free loan from the government.
Arguments against:
i) Choice of a discount rate is arbitraryand maybe subject to bias.
ii) Timing of reversals not always certain.
The sheer number of estimates that must be made would likelyresult in erroneous deferred tax amounts if discounting was to be used in practice.
123) Name two conditions necessaryfor a deferred tax liabilityto result in an actual cash outflow.
Answer:
i) The asset base must be shrinking (through the use/sale and/or non-replacement of assets).*
ii) The company must be earning taxable income.
N.B: Both conditions must occur simultaneously.
* Taxable Recapture mayoccur if too much CCA is taken resulting in a negative UCC.