Bakersfield College

ACG 2021

True/False Questions

1)A temporary difference originates in one period and reverses, or turns around, in one or more later periods.

 

 

 

 

2. Expenditures currently deducted in the tax return but not included with expenses in the income statement until subsequent years create deferred tax liabilities.

 

 

 

 

3. A deferred tax asset represents the tax effect of the temporary difference between the financial carrying value of an asset or liability and its tax basis.

 

 

 

 

4. Revenues from installment sales of property reported on financial statements in prior years and currently reported in the tax return create deferred tax assets.

 

 

 

5. Rent collected in advance results in deferred tax assets.

 

 

 

6. MACRS depreciation typically creates deferred tax liabilities early in the life of an asset.

 

 

 

7. An unrealized gain from marking an investment to fair value typically creates a deferred tax asset.

 

 

 

 

8. Future taxable amounts result in deferred tax assets.

 

 

 

 

9. The classification of deferred tax assets is sometimes dependent on when the benefit will be realized.

 

 

 

10. The basic issue in deciding whether to record a valuation allowance for a deferred tax asset is if probable taxable income is anticipated to be insufficient to realize the tax benefit.

 

 

 

 

11. Valuation allowances reduce deferred tax liabilities to the amount that is more likely than not to be payable in the future.

 

 

 

 

12. Changes in enacted tax rates that do not become effective in the current period affect deferred tax accounts only after the new rates take effect.

 

 

 

 

13. Changes in enacted tax rates only affect income tax expense in the years those changes affect tax payable.

 

 

 

 

14. A net operating loss (NOL) carryforward creates a deferred tax liability that should be classified as current to the extent that the NOL will be recovered in the following year.

 

 

 

 

15. The tax benefit of a net operating loss carried back two years represents a current receivable for income tax to be refunded.

 

 

 

 

16. Deferred tax assets and liabilities typically are classified as current or long term according to when the underlying temporary difference is expected to reverse.

 

 

 

 

Multiple Choice Questions

 

17. GAAP regarding accounting for income taxes requires the following procedure:
    1. Computation of deferred tax assets and liabilities based on temporary differences.
    2. Computation of deferred income tax based on permanent differences.
    3. Computation of income tax expense based on taxable income.
    4. Computation of deferred income tax based on temporary and permanent differences.

 

 

 

 

18. A result of inter-period tax allocation is that:
    1. Large fluctuations in a company's tax liability are eliminated.
    2. The income tax expense is allocated among the income statement items that caused the expense.
    3. The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year.
    4. The income tax expense shown in the income statement is equal to the deferred taxes for the year.

 

 

 

 

19. Which of the following causes a temporary difference between taxable and pretax accounting income?
    1. Investment expenses incurred to generate tax-exempt income.
    2. MACRS used for depreciating equipment.
    3. The dividends received deduction.
    4. Life insurance proceeds received due to the death of an executive.

 

 

 

 

20. Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?
    1. Interest income on municipal bonds.
    2. Proceeds from life insurance received due to death of an executive.
    3. Prepaid utilities.
    4. None of these answer choices are correct.

 

 

 

 

21. Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?
    1. Depreciation early in the life of an asset.
    2. Unrealized losses from recording investments at fair value.
    3. Rent collected in advance.
    4. None of these answer choices are correct.

 

 

 

 

22. Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?
    1. Depreciation early in the life of an asset.
    2. Unrealized gain from recording investments at fair value.
    3. Subscriptions collected in advance.
    4. None of these answer choices are correct.

 

 

 

 

23. Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?
    1. Unrealized loss from recording inventory impairments.
    2. Prepaid expenses.
    3. Installment sales for which taxable income recognized when cash is collected.
    4. None of these answer choices are correct.

 

 

 

 

24. Which of the following creates a deferred tax liability?
    1. An unrealized loss from recording inventory at lower of cost or market.
    2. Accelerated depreciation in the tax return.
    3. Estimated warranty expense.
    4. Subscriptions collected in advance.

 

 

 

 

25. Which of the following circumstances creates a future taxable amount?
    1. Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned.
    2. Accrued compensation costs for future payments.
    3. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting.
    4. Investment expenses incurred to obtain tax-exempt income (not tax deductible).

 

 

 

26. Which of the following usually results in an increase in a deferred tax liability?
    1. Accrual of estimated operating expenses.
    2. Revenue collected in advance.
    3. Prepaid operating expenses, currently deductible.
    4. All of these answer choices are correct.

 

 

Use the following to answer questions :

 

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows:

 

Pretax accounting income	$300,000
Permanent difference	(15,000)
	285,000
Temporary difference-depreciation	(20,000)
Taxable income	$265,000

 

Tringali's tax rate is 40%. Assume that no estimated taxes have been paid.

 

27. What should Tringali report as income tax payable for its first year of operations? a.         $120,000.

b.     $114,000.

c.     $106,000.

d.     $     8,000.

 

 

 

28. What should Tringali report as its deferred income tax liability as of the end of its first year of operations?

a.     $35,000.

b.     $20,000.

	c.     $14,000. d.     $ 8,000.
29.	Pretax accounting income	$300,000
	Permanent difference	(15,000)
		285,000
	Temporary difference-depreciation	(20,000)
	Taxable income	$265,000
	Tringali's tax rate is 40%.

 

29. What should Tringali report as its income tax expense for its first year of operations?

                   a.       $120,000.

b.     $114,000.

c.     $106,000.

d.     $8,000.

 

 

 

 

Use the following to answer questions:

Isaac Inc. began operations in January 2016. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.