QB Income Taxes
QB Income Taxes
QB Income Taxes
1. In the current year, Michaels Company has a carrying amount of USD3,500,000 and
tax base of USD5,000,000 for accounts receivable. Michaels will most likely
recognize:
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.
2. James Company has received USD500,000 of tax credits from the recent installation
of solar panels that will directly reduce their taxes. Which of the following best
describes these tax credits?
A. Permanent difference
B. Taxable temporary difference
C. Deductible temporary difference
3. Please use the selected data in Exhibit 1 for the Samuels Corporation.
Assuming a 35 percent tax rate and the selected data below for the Samuels
Company, the company’s deferred tax liability in Year 3 is closest to:
A. USD450.
B. USD750.
C. USD900.
4. Which of the following is added to income tax payable to determine the company’s
income tax expense as reported on the income statement?
A. Deferred tax assets
B. Deferred tax liabilities
C. Changes in deferred tax assets and liabilities
5. Jamison Corp. is domiciled in the United States and has significant operations in the
United Kingdom and Australia. The statutory tax rates are 21 percent in the United
States, 19 percent in the United Kingdom, and 30 percent in Australia. The company
generates Profit before tax of USD2,000,000 in the United States, USD500,000 in
the United Kingdom, and USD750,000 in Australia. There are no other differences
between Jamison’s effective and statutory tax rates. Jamison’s combined effective
tax rate is closest to:
A. 21.0 percent.
Analysis of Income Taxes
B. 22.8 percent.
C. 23.3 percent.
8. Relative to Marcy’s effective tax rate on foreign income, the company’s effective tax
rate on US income was:
A. lower in each year presented.
B. higher in each year presented.
C. higher in some periods and lower in others.
9. In the current year, a company increased its deferred tax asset by $500,000. During
the year, the company most likely:
A. became entitled to a $500,000 tax refund.
B. reported a lower accounting profit than taxable income.
C. had permanent differences between accounting profit and taxable income.
10. The following information is available for a company that prepares its financial
statements according to US GAAP:
The overall effect on 2015 net income from the above changes in the company’s
deferred tax accounts is closest to a:
A. $200,000 increase.
B. $300,000 increase.
C. $200,000 decrease.
13. A deferred tax asset has been previously recognized. At the current balance sheet
date, the criteria for economic benefits are not met but the tax differences are still
expected to be temporary. As a result:
A. the existing deferred tax asset should be reversed.
14. A company incurred research costs which were all expensed in the current fiscal year
for financial reporting purposes. Applicable tax laws require research costs to be
expensed over a 5-year period. If taxable profit will be available against which the
deductible temporary differences can be utilized, in the current fiscal year the
company will most likely record:
A. a deferred tax asset.
B. a deferred tax liability.
C. neither a deferred tax asset nor a deferred tax liability.
15. The carrying amount of an asset being higher than its tax base may be considered a:
A. temporary difference resulting in a deferred tax asset.
B. permanent difference resulting in a deferred tax asset.
C. temporary difference resulting in a deferred tax liability.
16. Under US GAAP, the recognition of a valuation allowance for deferred tax assets
impacts:
A. the effective tax rate only.
B. the statutory tax rate only.
C. both the effective tax rate and statutory tax rate.
Solutions
1. A is correct. Because the carrying amount is less than the tax base for this asset,
this difference is a temporary difference that will result in a deferred tax asset. B
is incorrect because a deferred tax liability would apply if the carrying amount was
greater than the asset base. C is incorrect because this is not a permanent difference
thus there will be either a deferred tax asset or deferred tax liability.
2. A is correct. Permanent differences are differences between tax laws and accounting
standards that will not be reversed at some future date. Because they will not be
reversed at a future date, these differences do not give rise to deferred tax. These
items include tax credits for expenditures that directly reduce taxes, such as tax
credits related to the purchase of solar power. B is incorrect because taxable
temporary differences result in the recognition of deferred tax liabilities. C is
incorrect because deductible temporary differences result in a deferred tax asset.
4. C is correct. The changes in deferred tax assets and liabilities are added to income
tax payable to determine the company’s income tax expense (or credit) as it is
reported on the income statement. A and B are incorrect because it is the changes in
deferred tax assets and liabilities that are added to income tax payable.
The effective tax rate is a blend of the different tax rates of the countries in which
the activities take place in relation to the profit generated in each country. A is
incorrect because 21.0 percent is the statutory tax rate in the US and does not
incorporate statutory tax rates in the United Kingdom and Australia. C is incorrect
because 23.3 percent is the simple average of all three statutory tax rates.
6. C is correct. A company’s income tax expense equals the sum of current taxes (i.e.,
the amount currently payable) plus the change in deferred tax assets and liabilities.
A is incorrect because the cash tax rate is typically used for forecasting cash flows.
B is incorrect because the effective tax rate is relevant for projecting earnings on
the income statement.
8. C is correct. In Year 1, the effective tax rate on foreign operations was 37.6 percent
[(USD17,591 + USD262)/USD47,542], and the effective US tax rate was
[(USD31,143 − USD5,325)/USD97,321] = 26.5 percent. In Year 2, the effective tax
rate on foreign operations was 25.6 percent, and the US rate was 26.4 percent. In
Year 3, the foreign rate was 25.7 percent, and the US rate was 24.0 percent.
9. B is correct. Deferred tax assets represent taxes that have been paid (because of
the higher taxable income) but have not yet been recognized on the income statement
(because of the lower accounting profit).
10. A is correct. A valuation allowance reduces the value of the deferred tax assets
under US GAAP, so the total change in net income as a result of the changes in the
three accounts can be calculated as follows:
11. C is correct because deferred tax liabilities arise when a financial accounting income
tax expense exceeds income taxes payable.
12. A is correct because deferred tax assets, which appear on the balance sheet, arise
when an excess amount is paid for income taxes (taxable income higher than
accounting profit).
13. A is correct because if a deferred tax asset or liability resulted in the past, but the
criteria of economic benefits is not met on the current balance sheet date, then,
under IFRS, an existing deferred tax asset or liability related to the item will be
reversed.
14. A is correct because the carrying amount is zero due to the full amount having been
expensed for financial accounting, while the tax base of the asset was only reduced
by one-fifth of the total cost in the first year. In addition, taxable profit will be
available against which the deductible temporary differences can be utilized. As the
asset carrying amount is less than the tax base, it will result in a deferred tax asset.
15. C is correct because the carrying amount of an asset being higher than its tax base
is considered to be a temporary difference that results in a deferred tax liability.
Deferred tax liabilities, which also appear on the balance sheet, arise when a deficit
amount is paid for income taxes and the company expects to eliminate the deficit
over the course of future operations.
16. A is correct because, under US GAAP, a valuation allowance for deferred tax assets
increases the effective tax rate when recognized (because it increases income tax
expense). Under US GAAP, deferred tax assets are reduced by creating a valuation
allowance. Establishing a valuation allowance reduces the deferred tax asset and
income in the period in which the allowance is established. Also, Reported effective
tax rate = Income tax expense / Pretax income (Accounting profit).