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Self Study Quiz 19 With Answers

Self Study Quiz 19 With Answers

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Published by: Emily Jones on Dec 09, 2009
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Chapter 19 Self Study Quiz with Answers
1.(L.O. 2, 3,) A temporary difference arises when a revenue item is reported for taxpurposes in a period
After it is reportedBefore it is reportedin financial incomein financial income
a. Yes Yesb. Yes Noc. No Yesd. No NoExplanation:Revenue that is taxable after it is recognized in financial income creates adifference between the tax basis of an asset (zero) and its reported amount in thefinancial statements. This difference will result in a taxable amount in a future period(s)when the reported amount of the asset is settled. (An example situation is when revenueis earned and accrued to a period in advance of the period in which the related cash iscollected and taxed. A receivable is reported on a GAAP basis balance sheet until theperiod in which the cash collection occurs. The cash collection
a taxable event.)Revenue that is taxable before it is recognized in financial income creates a differencebetween the tax basis of a liability (zero) and its reported amount in the financialstatements. This difference will result in a deductible amount in a future period(s) whenthe reported amount of the related liability is settled. (An example~ situation is whenrevenue is collected-in a period
advance of the period it is earned. The cash collectiontriggers a taxable event. Unearned2.(L.O. 2, 3) Which of the following should be recognized for the amount of deferredtaxconsequences attributable to temporary differences that will result in deductibleamounts in future years?Deferred Tax AssetDeferred Tax Liabilitya. Yes Yesb. Yes Noc. No Yesd. No NoExplanation:A temporary difference giving rise to future deductible amounts requiresthe recognition of a deferred tax asset for the amount of the future tax consequencesrelated to the existing temporary difference. A temporary difference giving rise to futuretaxable amounts requires the recognition of a deferred tax liability for the amount of thefuture tax consequences related to the existing temporary difference. (Solution
b.)3.(L.O. 2, 6) Assuming a 40% statutory tax rate applies to all years involved, whichof the following situations will give rise to reporting a deferred tax liability on thebalance sheet?I.A revenue is deferred for financial reporting purposes but not for taxpurposes.II.A revenue is deferred for tax purposes but not for financial reportingpurposes.III.An expense is deferred for financial reporting purposes but not for tax purposes.
An expense is deferred for tax purposes but not for financialreporting purposes.
a.item II onlyb.items I and II onlyc.items II and Ill onlyd.items I and IV onlyApproach and Explanation: Notice that each situation described involves a difference inthe timing of revenue or expense recognition for financial reporting purposes (accountingpurposes or book purposes) and tax purposes (tax reporting purposes). Thus, eachsituation involves a temporary difference. For each, determine if future taxable or deductible amounts will occur. Because a flat tax rate applies to all periods involved, atemporary difference resulting in net future taxable amounts will give rise to reporting adeferred tax liability, and a temporary difference giving rise to net future deductibleamounts will result in reporting a deferred tax asset. Items II and Ill will give rise to futuretaxable amounts; items I and IV will give rise to future deductible amounts. (Solution
c.)4.(L.O. 2, 5) At the December 31, 2007 balance sheet date, Garth BrooksCorporationreports an accrued receivable for financial reporting purposes but not for taxpurposes.When this asset is recovered in 2008, a future taxable amount will occur and:a.pretax financial income will exceed taxable income in 2008.b.Garth will record a decrease in a deferred tax liability in 2008.c.total income tax expense for 2008 will exceed current tax expense fo2008.d.Garth will record an increase in a deferred tax asset in 2008.
The receivable stems from a revenue earned but not received; therevenue has been booked for accounting purposes but not for tax purposes. When thisasset (receivable) is recovered through collection of the receivable in 2008, it will resultin a taxable amount (taxable revenue on the 2008 income tax return). Thus, in 2008,pretax financial income will be less than taxable income because of the elimination(reversal) of the temporary difference. Also in 2008, Garth will record a decrease in thedeferred tax liability, resulting in a deferred tax benefit on the 2008 income statement(which causes current tax expense in 2008 to exceed total tax expense for 2008).(Solution
b.)5.(L.O. 3) The Mary Colson Corporation collects rent revenue in advance fromtenants. The collection of $50,000 in 2007 is reported as revenue for taxpurposes; it will be reported on the income statement in 2008 when it is earned.This situation will:a.result in future deductible amounts.b.result in reporting a deferred tax liability on the balance sheet at the end of 2007.
cause total income tax expense to be less than income tax payable in2008.d.cause pretax financial income to exceed taxable income in 2007.Explanation: The collection and reporting of revenue for tax purposes in a period beforeit is earned and recognized for book purposes will result in future deductible amounts. Adeferred tax asset is to be recognized for the deferred tax consequences of the revenuealready reflected in the income tax return. In a later period, the unearned revenue per books (a liability) will be settled by delivering goods or services to the customers or byrefunding the customers’ money; the related outlays are, therefore, tax deductible in thelater period in which the revenue is earned. In that later period, pretax financial incomewill exceed taxable income. Also, in that later period, total income tax expense willexceed income tax payable (current tax expense) by the amount of the decrease in therelated Deferred Tax Asset account due to the reversal of the temporary difference.(Solution
6.(L.O. 2, 3, 5) Kaminsky Company reported deferred tax expense of $70,000 on itsincome statement for the year ended December 31, 2007. This could be the resultof an increase in a:Deferred Tax Asset
Deferred Tax Liability
a. Yes Yesb. No Noc. Yes Nod. No Yes
Approach and Explanation: Think about the
 journal entry to record deferred taxexpense. The entry involves a debit to Income Tax Expense and a credit to a balancesheet account for deferred taxes. Thus, this credit is either an increase in the DeferredTax Liability account or a decrease in the Deferred Tax Asset account. (Solution
d.)7.(L.O. 2, 7) Mixner Corporation reported $50,000 in revenues in its 2007 financialstatements, of which $22,000 will not be included in the tax return until 2008. Theenacted tax rate is 40% for 2007 and 35% for 2008. What amount should Mixner reportfor deferred income tax liability in its balance sheet at December 31, 2007?a.$7,700b.$8,800c.$9,800d.$11,200
Approach and Explanation:
At the balance sheet date, December 31, 2007, there is atemporary difference of $22,000. That temporary difference will result in a taxableamount of $22,000 in 2008. The taxes payable on that amount will be $7,700 ($22,000 x35%). The deferred tax consequences are to be reflected in the financial statements for 2007. The journal entry to record these consequences (assuming no balance of deferredtaxes at the beginning of the period) would include a credit to Deferred Tax Liability anda debit to Income Tax Expense for $7,700. Therefore: (1) revenue of $50,000; and (2) acurrent tax expense of $11,200 ($28,000 x 40%) and a deferred tax expense of $7,700($22,000 x 35%) will be reflected on the 2007 income statement. Thus, the taxconsequences of the full $50,000 appear on the same income statement as the $50,000revenue, regardless of when the taxes are to be paid. (Solution
a.)8.(L.O. 2, 7) Garver Inc. uses the accrual method of accounting for financialreportingpurposes and appropriately uses the installment method of accounting for incometax purposes. Profits of $500,000 recognized for books in 2007 will be collected inthefollowing years:
Collection of Profits
The enacted tax rates are: 40% for 2007, 35% for 2008, 30%for 2009
and 2010, and 25% for 2011. Taxable income is expected in all futureyears. What amount should be included in the December 31, 2007, balance sheetfor the deferred tax liability related to the above temporary difference?a.$0b.$17,500
c.$125,000 d. $142,500 e. $200,000Explanation: The temporary difference will
cause future taxable amounts.

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