Chapter 15—INCOME TAXES AND FINANCIAL ACCOUNTING
TRUE/FALSE
1. The income tax law of 1913 established accounting income as a basis for taxation.
2. Tax allocation is made necessary by the permanent differences in financial statement income and
tax income.
3. Under comprehensive allocation, the tax liability is equal to the income expense for the period.
4. Intraperiod and intrastatement allocation both refer to showing income statement items such as
extraordinary items and changes in accounting principle net of the tax effect.
5. Timing differences are now referred to as temporary differences.
6. Income tax allocation is grounded in the matching concept.
7. The tax liability would be greater than tax expense whenever revenues are recognized for tax
purposes in a different period than for published reporting purposes.
8. Income tax allocation may be used by management to smooth income.
9. SFAS No. 96 switched from the revenue-expense (matching) orientation of APB Opinion No. 11
to the asset-liability viewpoint.
10. The most important application of income tax allocation is the use of accelerated depreciation for
tax purposes and straight-line depreciation for financial reporting.
11. Deferred taxes were viewed as liabilities under APB Opinion No. 11.
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12. Under comprehensive allocation, only those deferred credits that can reasonably be expected to
reverse in the foreseeable future on an aggregate basis are recorded on the books.
13. Under partial allocation, income tax expense is equal to the tax liability.
14. With the new form of equities approach, the credit arising under income tax allocation represents
a subordinated equity investment in the firm by the federal government.
15. Partial allocation is an example of flexible uniformity.
16. From an economic standpoint, it appears reasonable that deferred tax liabilities should be shown
at their present value.
17. In partial tax allocation, resulting credits are interpreted as liabilities that mature beyond a year.
18. Consistency appears to dictate that neither tax liabilities nor deferred credits, under either the
comprehensive or partial allocation approaches, should be discounted.
19. Under SFAS No. 109, the deferred tax balance is to be classified as current or noncurrent in the
same manner as the assets and liabilities to which the deferred taxes relate.
20. Amounts recognized as revenue on the financial statements but not yet included in tax income
generate deferred tax assets.
21. Unused tax credits may generate deferred tax assets.
22. Most recent empirical research on income tax allocation has generally proved to be favorable to
the use of the asset-liability orientation.
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23. Comprehensive allocation is a form of rigid uniformity because the question of loan repayment is
ignored.
24. The main problem with partial allocation is the question of timeliness.
25. International Accounting Standards use deferred tax assets and liabilities for recognizing
temporary differences.
26. IAS 12 classifies deferred tax accounts as either current or noncurrent, depending on the account
to which they pertain. .
MULTIPLE CHOICE
1. The income tax law established which of the following as a basis for taxation?
a.
Economic income
b.
Increase in wealth
c.
Business income
d.
Accounting income
2. Which of the following statements was not made in ARB 43?
a.
Income taxes are an expense that should be allocated as other expenses are allocated.
b.
Income taxes should be allocated to income and other accounts as other expenses are
allocated.
c.
The income statement should reflect tax expense properly allocable to the income included
in the income statement for the year.
d.
Tax expense should equal the amount of tax payable based on taxable income for the year.
3. When is tax allocation necessary?
a.
When a revenue or expenses reaches the financial statements before it appears on the tax
return
b.
When a revenue or expense reaches the tax return before it appears on the financial
statements
c.
When the tax basis and book basis of assets and liabilities differ
d.
All of the above
4. Which of the following is not a true statement regarding comprehensive income tax allocation?
a.
Tax allocation is made necessary by the timing differences between when an item reaches
the income statement and when it appears on the tax return.
b.
The difference between the income tax expense and the income tax liability numbers
appears on the income statement.
c.
When timing differences arise, tax allocation must take place, despite the possibility of
relevant circumstantial differences.
d.
Permanent differences between financial statements and tax returns are not subject to the
allocation process.
5. Which of the following is not a true statement regarding SFAS No. 96?
a.
It required the comprehensive allocation approach.
b.
It was conservative in terms of recognizing deferred tax assets.
c.
It was issued in 1987 and continued the approach of APB Opinion No. 11.
d.
SFAS NO. 109 succeeded it in 1992.
6. Which of the following would create a permanent difference between published statements and
tax returns?
a.
Municipal bond interest income
b.
Deductible charitable contributions
c.
MACRS depreciation
d.
Bad debt expense
7. Which of the following statements does not apply to intrastatement tax allocation?
a.
It is also referred to as intraperiod tax allocation.
b.
It includes showing prior period adjustments net of tax effect.
c.
It includes showing extraordinary items, changes in accounting principle, and operations
of discontinued segments net of tax effect.
d.
It is difficult to employ, and its costs appear to outweigh its benefits.
8. Another term for a timing difference is:
a.
Permanent difference.
b.
Perpetual difference.
c.
Temporary difference.
d.
Interim difference.
9. Which of the following cases would cause the tax liability to be greater than tax expense?
a.
Receipt of cash for rent prior to the period in which services are performed
b.
Income from long-term construction contracts using the percentage–of-completion
approach for financial accounting and the completed-contract approach for income taxes
c.
Installment sale income recognized for financial purposes at the time of sale and when
cash is collected for taxes
d.
Accelerated depreciation for taxes and straight-line depreciation for income taxes
10. Comprehensive tax allocation is an example of:
a.
Finite uniformity.
b.
Rigid uniformity.
c.
Flexible uniformity.
d.
None of the above
11. Partial tax allocation is an example of:
a.
Finite uniformity.
b.
Rigid uniformity.
c.
Flexible uniformity.
d.
None of the above
12. Which of the following is not a true statement regarding SFAS No. 109?
a.
It maintained a comprehensive allocation orientation.
b.
It requires a matching orientation.
c.
It has an asset-liability viewpoint.
d.
It retained the mandatory nature of income tax allocation.
13. Which of the following is a true statement regarding deferred taxes under APB No. 11?
a.
They were adjusted for tax rate changes.
b.
They were viewed as deferred credits.
c.
They resulted in balance sheet taking precedence over the income statement in accounting
for income taxes.
d.
They were considered liabilities.
14. Under which of the following income tax allocation orientations are only those deferred credits
that can reasonably be expected to reverse in the foreseeable future recorded on the books?
a.
Comprehensive allocation
b.
The net-of-tax method
c.
Partial allocation
d.
The new form of equities method
15. Under which of the following methods must allocation take place as long as timing differences
arise, despite the possibility of relevant circumstantial differences?
a.
Comprehensive allocation
b.
The net-of-tax method
c.
Partial allocation
d.
The new form of equities method
16. Under which of the following methods is income tax expense equal to the income tax liability?
a.
Comprehensive allocation
b.
The net-of-tax method
c.
Partial allocation
d.
The new form of equities method
17. Which of the following is not a theoretical consideration relative to partial allocation?
a.
Agency theory
b.
Future events
c.
Financial statement articulation
d.
Verifiability
18. In SFAS No. 109, the current or noncurrent designation of deferred tax assets and liabilities is
determined by:
a.
Whether or not the items would reverse in the next tax year.
b.
The classification of the related asset or liability.
c.
The amount of aggregate deferred taxes.
d.
When the item originated.
19. Which of the following reflects SFAS No. 109’s position regarding tax-loss carryforwards?
a.
A tax-loss carryforward should not be recorded because future benefits are uncertain.
b.
Any excess of the tax-loss carryforward over deferred tax liabilities should not be booked.
c.
A tax-loss carryforward coming from an acquired corporation should not be recognized.
d.
A tax-loss carryforward should be booked as an asset in most cases.
20. Which of the following is not a finding of previous empirical research on income tax allocation?
a.
Income using income tax allocation had a higher degree of association with security price
behavior than income determined without income tax allocation.
b.
The net-of-tax method using a tax rate significantly higher than existing rates had a higher
association with security prices than income tax allocation using existing rates.
c.
There was a better association of net deferred tax liabilities to firm value under SFAS No.
109 than under its predecessor when tax rates increased under the Revenue Reconciliation
Act of 1993.
d.
Investors do not view deferred tax liabilities as real liabilities.
21. For which of the following accounts would the amount recorded under partial tax allocation be
equal to the amount recorded under comprehensive tax allocation?
a.
Income Tax Liability
b.
Deferred Tax Liability
c.
Income Tax Expense
d.
None of the above
22. In which of the following ways does SFAS No. 109 differ from its predecessors?
a.
It allows for the discounting of deferred tax assets and liabilities.
b.
It has a comprehensive tax allocation orientation.
c.
It provides a more liberal recognition policy for deferred tax assets and tax-loss
carryforwards.
d.
It has a revenue-expense (matching) orientation.
ESSAY
1. Explain why tax allocation is necessary.
2. Explain how comprehensive allocation differs from partial allocation.
3. Explain how the matching concept is applied in tax allocation and how this differs from other
applications of matching.
4. What are the arguments for discounting deferred tax liabilities?
5. Explain when a firm may recognize a deferred tax asset under SFAS No. 109. How should
deferred tax assets that are not expected to be realized be accounted for?
6. Describe the methods that are allowed to be used in accounting for the Investment Tax Credit.