CHAPTER 18: ACCOUNTING FOR INCOME TAXES
1. The amount of income tax expense as determined by GAAP differs from amount determined under the Internal
Revenue Code due to measurement and timing.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.1 – LO: 18.1
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Bloom’s: Remembering
2. Permanent differences arise due to timing differences between the corporation’s pretax financial income and taxable
income.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.18.1 – LO: 18.1
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
Bloom’s: Remembering
3. A temporary difference will result in a deferred tax liability when future taxable income will be less than future pretax
financial income.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.18.2 – LO: 18.2
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Bloom’s: Remembering
4. A deferred tax asset arises when current taxable income is greater than pretax financial income.
a.
True
b.
False
True
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
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5. A corporation must recognize a valuation allowance if, based on available evidence, it is more likely than not that a
deferred liability will not be realized.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.18.2 – LO: 18.2
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6. The value of deferred tax assets and liabilities should be measured using the enacted tax rates that will be in existence
when the temporary differences reverse.
a.
True
b.
False
True
1
Easy
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7. Using accelerated depreciation for tax purposes and straight-line method for book purposes results in a deferred tax
asset.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
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Bloom’s: Remembering
8. The value of deferred tax assets and liabilities should be measured using the enacted tax rates that will be in existence
when the temporary differences initially occur.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
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Bloom’s: Remembering
9. A corporation’s deferred tax expense or benefit is the change in its deferred tax liabilities or assets during the year.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.3 – LO: 18.3
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10. When Congress makes a tax law or rate change, a corporation recognizes financial statement impact by adjusting the
deferred assets or liabilities as of the beginning of the year in which the change is made.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.3 – LO: 18.3
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Bloom’s: Remembering
11. Deductions that are allowed for income tax purposes but do not qualify as expenses under GAAP are permanent
differences.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.4 – LO: 18.4
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12. Temporary differences cause a company’s effective tax rate to be different from the enacted tax rate.
a.
True
b.
False
False
1
Easy
ACCT.WHAL. – 16.20.1 – LO 20.1
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13. An operating loss must be carried back two years, starting with the earliest of the two years, before it can be carried
forward.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.18.5 – LO: 18.5
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14. If a corporation recognizes an operating loss carryforward in the year of the loss, the corporation will deduct the tax
benefit from its operating loss.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.5 – LO: 18.5
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15. The intraperiod tax allocation involves separation of the income taxes on income from continuing operations from
income taxes on discontinued operations and other comprehensive income.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.6 – LO: 18.6
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16. GAAP requires intraperiod income tax allocation to income or loss as they relate to discontinued operations and other
comprehensive income but not to retrospective adjustments or prior period adjustments.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.18.6 – LO: 18.6
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17. A corporation must report its deferred tax liabilities and assets in two classifications: gross current amounts and gross
noncurrent amounts.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.18.7 – LO: 18.7
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18. Combining the net deferred tax asset and liability amounts in the current or noncurrent group is one of the few
situations in which GAAP allow offsetting assets and liabilities.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.7 – LO: 18.7
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19. A company determines whether to recognize an uncertain tax position by evaluating whether the tax position will
“more likely than not” be upheld during a tax audit by the IRS, based on the technical merits of the position.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.8 – LO: 18.8
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20. Under IFRS, valuation allowances for deferred tax assets are not recorded.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.18.8 – LO: 18.8
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21. Which of the following is not a timing difference that would cause pretax financial accounting income to differ from
taxable income?
a.
Investment revenue is recognized under the equity method for financial reporting purposes but in a later period
as dividends are received for income tax purposes.
b.
Life insurance proceeds are received by a corporation upon the death of an insured employee of the
corporation.
c.
Rent received in advance is taxable when received but is not reported as revenue for financial reporting
purposes until the service has actually been provided.
d.
MACRS depreciation is used for income tax purposes, and straight-line depreciation is used for financial
reporting purposes.
b
1
Easy
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22. What three groups are measuring and timing differences categorized?
a.
b.
c.
d.
c
1
Easy
ACCT.WHAL.16.18.1 – LO: 18.1
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23. Differences between pretax financial income and taxable income in an accounting period that will not reverse in a
later accounting period are called
a.
temporary differences.
b.
permanent differences.
c.
nondeductible temporary differences.
d.
deferred tax consequences.
b
1
ACCT.WHAL.16.18.2 – LO: 18.2
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24. Differences between pretax financial accounting and taxable income that are expected to reverse in one or more future
accounting periods are called
a.
temporary differences.
b.
permanent differences.
c.
material differences.
d.
partial differences.
a
1
Easy
ACCT.WHAL.16.18.2 – LO: 18.2
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
25. Temporary differences arise when revenues or gains are included in pretax financial income
Prior to the Time
After the Time
They Are Included in
They Are Included
Taxable Income
in Taxable Income
I.
Yes
Yes
II.
Yes
No
III.
No
Yes
IV.
No
No
a.
I
b.
II
c.
III
d.
IV
a
1
Moderate
ACCT.WHAL.16.18.2 – LO: 18.2
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Bloom’s: Understanding
26. A deferred tax asset would result if
a.
a company recorded a tax penalty in 2016 that it paid in 2017.
b.
a company recorded more taxable depreciation in 2016 for an asset acquired in 2008.
c.
a company recorded more warranty expense in 2016 than cash paid in 2016 for warranty repairs.
d.
a company recorded more interest revenue in 2016 than cash received in 2016 for interest.
c
1
Moderate
ACCT.WHAL.16.18.2 – LO: 18.2
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Bloom’s: Understanding
27. Temporary differences arise when expenses or losses are deducted to compute taxable income
Prior to the Time They
After the Time They Are
Are Deducted to Compute
Deducted to Compute
Pretax Financial Income
Pretax Financial Income
I.
Yes
Yes
II.
No
Yes
III.
Yes
No
IV.
No
No
a.
I
b.
II
c.
III
d.
IV
a
1
Moderate
ACCT.WHAL.16.18.2 – LO: 18.2
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Bloom’s: Understanding
28. Which of the following transactions would typically result in the creation of a deferred tax liability?
a.
Rents received in advance are taxable when received but are not recognized in pretax financial income until
earned.
b.
Gross profit on installment sales is recognized currently in pretax financial income but is not taxable for
income tax purposes until cash is received.
c.
Losses recognized in pretax accounting income from an investment in a subsidiary are accounted for by the
equity method but not deductible for income tax purposes until the investment is sold.
d.
A contingent liability is recognized as an expense currently in pretax financial income but not deductible for
income tax purposes until paid.
b
1
Moderate
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29. Each of the following can result in a temporary difference between pretax financial income and taxable income except
a.
depreciation expense.
b.
product warranty costs.
c.
percentage depletion in excess of cost depletion on wasting assets.
d.
contingent liabilities.
c
1
Easy
ACCT.WHAL.16.18.2 – LO: 18.2
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30. For the year ended December 31, 2016, the Bowling Green Company reported income of $350,000 before provision
for income tax. In arriving at taxable income for income tax purposes, the following differences were identified:
Bad debt expense (but not written off)
$ 8,000
Depreciation deducted for tax purposes in excess of
depreciation for accounting purposes
50,000
Income for installment sales reportable for income tax
purposes in excess of income reported for financial
reporting purposes
30,000
Assuming a corporate income tax rate of 30%, Huntsville’s current income tax liability as of December 31, 2016, is
a.
$ 83,400.
b.
$101,400.
c.
$113,400.
d.
$129,000.
b
1
Challenging
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31. The amount owed the IRS is recorded in the accounting records in which account?
a.
Income Tax Expense
b.
Income Tax Liability
c.
Deferred Tax Expense
d.
Deferred Tax Liability
b
1
Easy
ACCT.WHAL.16.18.3 – LO: 18.3
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Bloom’s: Remembering
32. When Congress changes the tax laws or rates, a corporation’s deferred tax liability and asset accounts
a.
are not adjusted.
b.
are adjusted as of the end of the year in which the change occurred.
c.
are adjusted as of the beginning of the year in which the change occurred.
d.
are adjusted using the average of the old and new tax rates.
c
1
Easy
ACCT.WHAL.16.18.3 – LO: 18.3
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33. As of December 31, 2016, the Williamsburg Company reported a deferred tax asset of $60,000 related to accrued,
unpaid warranty costs. However, since profits have been declining, Williamsburg decides that it is more likely than
not that $24,000 of the deferred tax asset will not be realized. The entry to record the valuation allowance would
include a
a.
debit to Income Tax Expense for $60,000.
b.
credit to Income Tax Expense for $24,000.
c.
debit to Allowance to Reduce Deferred Tax Asset to Realizable Value for $24,000.
d.
credit to Allowance to Reduce Deferred Tax Asset to Realizable Value for $24,000.
d
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
United States – BUSPORG: Analytic
Bloom’s: Analyzing
34. In 2016, its first year of operations, Wilber Company reported pretax accounting income of $60,000. Included in the
$60,000 was an expense for accrued, unpaid warranty costs of $8,000, which are not deductible until paid for income
tax purposes. Wilber’s income tax rate was 20%. The entry to record the income tax expense would include a
a.
credit to Income Tax Expense for $12,000.
b.
credit to Income Taxes Payable for $12,000.
c.
credit to Deferred Tax Liability for $1,600.
d.
debit to Deferred Tax Asset for $1,600.
d
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
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Bloom’s: Understanding
35. During its first year of operations, 2016, the Cocoa Company reported both a pretax financial and a taxable loss of
$300,000. The income tax rate is 30% for the current and future years. Due to a sufficient backlog of sales orders,
Cocoa did not establish a valuation allowance to reduce the $90,000 deferred tax asset. However, early in 2017, one
major customer, representing 60% of the 2017 year-end sales backlog, went bankrupt. Cocoa now believes that it is
more likely than not that 75% of the deferred tax asset will not be realized. The entry to record the valuation
allowance would be
a.
Income Tax Expense 67,500
Deferred Tax Asset 67,500
b.
Income Tax Benefit from Operating
Loss Carryforward 67,500
Deferred Tax Asset 67,500
c.
Income Tax Expense 67,500
Allowance to Reduce Deferred
Tax Asset to Realizable Value 67,500
d.
Allowance to Reduce Deferred Tax
Asset to Realizable Value 67,500
Income Tax Expense 67,500
c
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
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36. Bourne Company received rent in advance of $9,000 on December 31, 2016, which was taxable when received for
income tax purposes. The company’s effective tax rate was 30%, and this was the only temporary difference. Which of
the following should be reported on the December 31, 2016 balance sheet?
a.
$9,000 as a current deferred tax liability
b.
$2,700 as a current deferred tax liability
c.
$2,700 as a current deferred tax asset
d.
c
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
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$9,000 as a current deferred tax asset
Exhibit 18-1
On December 31, 2015, Fredericksburg, Inc. had no temporary differences that created deferred income taxes. On
January 2, 2016, a new machine was purchased for $30,000. Straight-line depreciation over a four-year life (no
residual value) was used for financial accounting. Depreciation expense for tax purposes was $11,000 in 2016, $9,000
in 2017, $6,000 in 2018, and $4,000 in 2015. In each year, the income tax rate was 20% and Fredericksburg had no
other items that created differences between pretax financial income and taxable income. Fredericksburg reported the
following pretax financial income for 2016 through 2019:
2016
$50,000
2017
40,000
2018
30,000
2019
60,000
37. Refer to Exhibit 18-1. The entry to record income taxes on December 31, 2017, would include a
a.
debit to Deferred Tax Liability for $300.
b.
credit to Income Taxes Payable for $8,000.
c.
debit to Income Tax Expense for $7,700.
d.
credit to Deferred Tax Liability for $300.
d
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
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38. Refer to Exhibit 18-1. The entry to record income taxes on December 31, 2018, would include a
a.
debit to Deferred Tax Asset for $300.
b.
credit to Income Taxes Payable for $7,700.
c.
debit to Income Tax Expense for $8,000.
d.
debit to Deferred Tax Liability for $300.
d
1
Challenging
ACCT.WHAL.16.18.3 – LO: 18.3
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39. In 2016, Waterford Corporation reported pretax financial income of $400,000. Included in that pretax financial
income was $150,000 of nontaxable life insurance proceeds received as a result of the death of an officer; $120,000 of
warranty expenses accrued but unpaid as of December 31, 2016; and $10,000 of bad debts estimated to be
uncollectible (but not written off as of December 31, 2016). Assuming that no income taxes were previously paid
during the year and an income tax rate of 30%, what is the amount of income taxes payable on December 31, 2016?
a.
$ 42,000
b.
$108,000
c.
$114,000
d.
$126,000
c
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
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40. Pruett Corporation began operations in 2015 and appropriately recorded a deferred tax liability at the end of 2015 and
2016 based on the following depreciation temporary differences between pretax financial income and taxable income:
Income Tax
Financial
Year
Depreciation
Depreciation
2015
$800
$400
2016
600
400
2017
400
400
2018
200
400
2019
0
400
The income tax rate for 2015 and 2016 was 30%. In February 2017, due to budget constraints, Congress enacted an
income tax rate of 35%. What is the journal entry required to adjust the Deferred Tax Liability account in February
2017?
a.
Loss on Adjustment of Deferred Taxes 30
Deferred Tax Liability 30
b.
Deferred Tax Liability 30
Gain on Change in Tax Rates 30
c.
Income Tax Expense 10
Deferred Tax Liability 10
d.
Income Tax Expense 30
Deferred Tax Liability 30
d
1
Challenging
ACCT.WHAL.16.18.3 – LO: 18.3
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Bloom’s: Applying
41. Which of the following statements regarding current and deferred income taxes is not correct?
a.
The amount of income tax expense must be allocated to various components of comprehensive income.
b.
The income tax obligation is determined by applying the historical tax rates to the taxable income for the year.
c.
The valuation allowance account is subtracted from the deferred tax asset account on the balance sheet.
d.
Rent received in advance that will be earned within the next 12 months results in the creation of a current
deferred tax asset.
b
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
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Bloom’s: Understanding
42. Lewes Company appropriately uses the installment sales method for tax purposes and the accrual method for revenue
recognition for accounting purposes. Pertinent data at December 31, 2016, the close of the first year of operations, are
as follows:
Revenue Recognized
Revenue Recognized
Customer
for Accounting Purposes
for Tax Purposes
Lowe’s Builders
$200,000
$100,000
Top Down Plumbing
500,000
350,000
Glass Plus Windows
600,000
350,000
Lewes’s tax rate is 30%. What amount should be included in the deferred tax account at December 31, 2016 for these
installment sales?
a.
$150,000 deferred tax asset
b.
$150,000 deferred tax liability
c.
$500,000 deferred tax asset
d.
$500,000 deferred tax liability
b
1
Challenging
ACCT.WHAL.16.18.3 – LO: 18.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
43. The Pink Diamonds Company installs fire alarm systems for large manufacturing enterprises and golf courses. Due to
the design of their systems, some projects frequently extend over a two-year period. Pink Diamonds uses the
percentage-of-completion method for financial accounting purposes and the completed-contract method for tax
purposes. As of December 31, 2016, all projects were completed. The following information relates to projects started
but not completed as of December 31, 2017:
Income Recognized in 2017
Customer
Contract Amount
for Accounting Purposes
The Mountain Golf Course
$150,000
$ 0
Forest Hills Golf Course
200,000
80,000
Geneva Farm Golf Course
300,000
220,000
Assuming an income tax rate of 30%, what amount should be included in the deferred tax liability account at
December 31, 2017?
a.
$70,000
b.
$90,000
c.
$105,000
d.
$350,000
b
1
Challenging
ACCT.WHAL.16.18.3 – LO: 18.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
44. Shane Company uses an accelerated depreciation method for income tax purposes and the straight-line depreciation
method for financial reporting purposes. As of December 31, 2016, Shane has a deferred tax liability balance related
to depreciation temporary differences of $80,000. In 2017, depreciation for income tax purposes was $360,000, while
depreciation for financial reporting purposes was $300,000. If the income tax rate is 30%, no other temporary or
permanent differences exist, and taxable income is $400,000,which of the following would be included in the entry to
record income tax expense on December 31, 2017?
a.
Debit to Income Tax Expense for $138,000
b.
Credit to Income Taxes Payable for $138,000
c.
Debit to Deferred Tax Asset for $120,000
d.
Credit to Deferred Tax Liability for $120,000
a
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Analyzing
45. In 2016, its first year of operations, Richmond Corporation reported pretax financial income of $80,000 for the year
ended December 31. Richmond depreciates its fixed assets using an accelerated cost recovery method for tax purposes
and straight-line depreciation for financial reporting. On assets acquired in 2016, the following are differences
between depreciation on the tax return and accounting income during the asset’s five-year life:
Tax Depreciation in Excess
Enacted
of Book Depreciation
Tax Rates
2016
$18,000
30%
2017
10,000
30%
2018
2,000
35%
2019
(13,000)
35%
2016
(17,000)
40%
Assuming no other temporary or permanent differences, which of the following combinations of noncurrent deferred
tax liability and income taxes payable would be included on Richmond’s December 31, 2016 balance sheet?
Noncurrent Deferred
Income Taxes
Income Tax Liability
Payable
I.
$5,400
$18,600
II.
$7,650
$18,600
III.
$7,650
$29,400
IV.
$5,400
$24,000
a.
I
b.
II
c.
III
d.
IV
b
1
Challenging
ACCT.WHAL.16.18.3 – LO: 18.3
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Analyzing
46. During its first year of operations ending on December 31, 2016, the Dakota Company reported pretax accounting
income of $600,000. The only difference between taxable income and accounting income was $80,000 of accrued
warranty costs. These warranty costs are expected to be paid as follows:
Enacted
Year
Amount
Tax Rate
2016
$ 0
30%
2017
60,000
35%
2018
20,000
40%
Assuming an income tax rate of 30% in 2016, what amount of income tax expense should Dakota report on its 2016
income statement?
a.
$175,000
b.
$180,000
c.
$185,000
d.
$204,000
a
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
United States – BUSPROG – Reflective Thinking; BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
47. The Flintstone Company incurred the following expenses in 2016, which are reported differently for financial
reporting purposes and taxable income:
Estimate of bad debts expense (but not written off)
$50,000
Estimated product warranty costs (but not paid)
20,000
If the tax rate is 40%, what is the total temporary difference?
a.
$20,000
b.
$28,000
c.
$70,000
d.
$150,000
c
1
Moderate
ACCT.WHAL.16.18.3 – LO: 18.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing