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Chapter 12
Multiple Choice
1. With respect to the difference between taxable income and pretax accounting income, the tax
effect of the undistributed earnings of a subsidiary included in consolidated income should
normally be
2. Income tax allocation procedures are not appropriate when
3. Which of the following would cause a deferred tax expense?
4. Differences between taxable income and pretax accounting income arising from transactions that,
under applicable tax laws and regulations, will not be offset by corresponding differences or “turn
around” in future periods is a definition of
5. The tax effect of a difference between taxable income and pretax accounting income attributable
to losses of a subsidiary is normally recognized for
6. Which of the following is not affected by tax allocation within a period?
7. Under the comprehensive deferred interperiod method of tax allocation, deferred taxes are
determined on the basis of
8. The accounting recognition of the benefit from a tax loss carryforward in most situations should
be reported as
9. Intraperiod tax allocation arises because
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10. Assuming no prior period adjustments, would the following affect net income?
Interperiod Intraperiod
Income tax Income tax
Allocation Allocation
11. A machine with a 10-year useful life is being depreciated on a straight-line basis for financial
statement purposes, and over 5 years for income tax purposes under the accelerated recovery cost
system. Assuming that the company is profitable and that there are and have been no other timing
differences, the related deferred income taxes would be reported in the balance sheet at the end of
the first year of the estimated useful life as a
12. Smith Corporation owns only 25 percent of the voting stock of Jones Corporation, but exercises
significant influence over its operating and financial policies. The tax effect of differences
between taxable income and pretax accounting income attributable to undistributed earnings of
Jones Corporation should be
13. A company has four “deferred income tax” accounts arising from timing differences involving (1)
current assets, (2) noncurrent assets, (3) current liabilities, and (4) noncurrent liabilities. The
presentation of these four “deferred income tax “ accounts in the statement of financial position
should be shown as
14. A company’s only temporary difference results from using double declining balance depreciation
for tax purposes and straight-line depreciation for financial reporting. The company purchases
new plant assets each year. If currently enacted tax law will result in a higher tax rate for all
future tax years, which accounting approach for deferred taxes will result in the lowest net
income for this current year?
15. Which of the following is not an argument that an advocate of nonallocation of deferred taxes
might use to support his/her position?
16. Which of the following is an argument that an advocate of interperiod income tax allocation
might use to support his/her position?
17. A net operating loss carryover that occurs in a company’s second year of operations
18. Which of the following will result in a deferred tax asset?
19. Which of the following will result in a deferred tax liability?
20. Which of the following causes a permanent difference between taxable income and financial
accounting income?
21. Which of the following approaches to interperiod tax allocation best represents an example of the
matching principle?
22. A company that has both short-term deferred tax assets of $22,000, long-term deferred tax
liabilities of $36,000, short-term deferred tax liabilities of $51,000 and short-term deferred tax
assets of $60,000 should report
23. An increase in the deferred income tax asset valuation allowance
Essay
1. What are the objectives of accounting for income taxes?
2. Define the following types of differences between financial accounting income and taxable
income:
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3. Describe the three types of permanent differences.`
4. List and give examples of the f our types of differences that cause financial accounting income to
be either greater than or less than taxable income.
5. Describe the accounting treatment for net operating losses.
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6. Discuss the arguments for and against interperiod tax allocation.
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8. The accounting recordkeeping and procedures involving interperiod tax allocation are too
costly for the purported benefits.
7. Discuss the arguments for comprehensive vs. partial allocation of interperiod taxes.
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9. Define the following:
10. Discuss how SFAS No. 109, now FASB ASC 740, changed the accounting for deferred tax
assets.
11. Describe the use of the valuation allowance for deferred tax assets.
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12. Describe accounting for uncertain tax positions under FIN No. 48, now FASB ASC 740-10-25.
13. How is the earnings conservatism ratio calculated? Discuss the rationale behind the calculation of
a company’s earnings conservatism ratio.