Chapter 19

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1. At the end of its first year of operations, Eagle D. Income 3. The division of income tax expense into D. either in the
Manufacturing has a deductible temporary Tax current expense and deferred expense income
difference of $100,000. Eagle has income taxes Expense should be reported statement or in
payable of $90,000 due to a tax rate of 40%. 15,000 the notes to the
Eagle also recorded a deferred tax asset. Later, Allowance A. neither in the income statement nor in financial
they determined that it is more likely than not to Reduce the notes to the financial statements statements
that $15,000 of the deferred tax asset will NOT Deferred
be realized. What entry should Eagle make to Tax Asset B. in the notes to the financial statements
record the reduction in asset value? to but not in the income statement
Expected
A. Allowance to Reduce Deferred Realizable C. in the income statement but not in the
Tax Asset to Expected Realizable Value notes to the financial statements
Value 15,000 15,000
Income Tax Expense 15,000 D. either in the income statement or in the
notes to the financial statements
B. Income Tax Expense 15,000
4. Federal law permits corporations to use A. 2 years' loss
Deferred Tax Asset 15,000
net operating losses of one year to offset carryback and
profits from other years. The period of 20 years' loss
C. Income Taxes Payable 15,000
time over which operating losses can be carryforward
Income Tax Expense 15,000
offset include

D. Income Tax Expense 15,000

A. 2 years' loss carryback and 20 years'
Allowance to Reduce Deferred
loss carryforward
Tax Asset to Expected Realizable
Value 15,000
B. 15 years' loss carryback and 3 years'
2. A difference that would result in future taxable A. loss carryforward
amounts includes expenses
or losses C. 10 years' loss carryback or carryforward
A. expenses or losses that are tax deductible that are tax
before they are recognized in financial income deductible D. 3 years' loss carryback and 15 years'
before loss carryforward
B. revenues or gains that are taxable before they are
5. For which of the following reasons are B. It helps
they are recognized in financial income recognized
companies required to disclose investors assess
in financial
information about their income taxes? the quality of
C. expenses or losses that are tax deductible income
the company's
after they are recognized in financial income
A. It helps creditors assess the net cash earnings.
available to the company.
D. revenues or gains that are recognized in
financial income but are never included in
B. It helps investors assess the quality of
taxable income
the company's earnings.

C. It helps investors assess pre- and post-

tax earnings per share.

D. It helps creditors assess the income-to-

tax ratio of the company.
6. How does a change in tax rate affect existing B. It is 9. Jewett Enterprises had a deferred tax liability C.
deferred income tax accounts? reported as balance due to a temporary difference at the Increase
an beginning of 2016 related to $200,000 of excess by
A. It is applied to all temporary or permanent adjustment depreciation. In December of 2016, a new income $5,000
differences that arise prior to the date of the to tax tax act is signed into law that raises the
enactment of the tax rate change, but not expense in corporate rate from 35% to 40%, effective
subsequent to the date of the change. the period January 1, 2018. If taxable amounts related to the
of change. temporary difference are scheduled to be
B. It is reported as an adjustment to tax reversed by $100,000 for both 2017 and 2018,
expense in the period of change. Jewett should increase or decrease deferred tax
liability by what amount?
C. It is handled retroactively in accordance
with the guidance related to changes in A. Decrease by $5,000
accounting principles.
B. Increase by $10,000
D. It is considered, but it should only be
recorded in the accounts if it reduces a C. Increase by $5,000
deferred tax liability or increases a deferred
tax asset. D. Decrease by $10,000
7. If a company expects to have lower taxes in a C. asset 10. Mahaffey Enterprises has a temporary difference A.
future year because of expected deductions resulting in future deductible amounts of $625,000
that it cannot record in the present year, it $500,000, income taxes payable of $800,000,
should record a deferred tax and a tax rate of 35 percent. What should they
record as their income tax expense for this
A. liability period?

B. expense A. $625,000

C. asset B. $105,000

D. revenue C. $300,000
8. In 2016, Troy Enterprises had revenues of B. $33,250.
D. $800,000
$250,000 for book purposes and $220,000 for
tax purposes. Troy also had expenses of 11. Mowery Enterprises reported accounts C.
$125,000 for both book and tax purposes. If receivable of $50,000 in 2016. They expect to deferred
Troy has a 35% tax rate, what are Troy's income recover the cash from these receivables in 2017 tax
taxes payable for 2016? and 2018. Because accounts receivable have a liability
zero tax basis, this will result in a ________ for
A. $87,500. 2016.

B. $33,250. A. deferred tax expense

C. $77,000. B. current tax liability

D. $43,750. C. deferred tax liability

D. current tax expense

12. One objective of using the asset-liability
method for accounting for income taxes is
to
A. recognize deferred tax liabilities and
assets for their future tax consequences.
B. identify permanent differences between
book values and tax values.
C. recognize the total income tax expenses
that should be deducted in the current
year.
D. identify temporary differences between
book values and tax values.
13. On their 2017 income statement, Leong
Electronics reported income before taxes
of $500,000. However, their taxable income
is only $200,000 due to timing differences.
If Leong has a tax rate of 45%, the
corporation should report a net income of
A. $225,000
B. $275,000
C. $110,000
D. $90,000
14. A permanent difference that is recognized
for tax purposes but NOT for financial
reporting purposes includes
A. a litigation accrual
B. compensation expenses associated with
certain employee stock options
C. the deduction for dividends received
from U.S. corporations
D. interest received on state and municipal
bonds
A. recognize 15. Temporary differences that are D. product warranty
deferred tax normally classified as expenses liabilities
liabilities and or losses that are deductible after
assets for their they are recognized in financial
future tax income include
consequences.
A. advance rental receipts
B. depreciable property
C. fines and expenses resulting
from a violation of law
D. product warranty liabilities
16. Which of the following is a major B. Temporary differences
distinction between permanent reverse themselves in
B. $275,000 differences and temporary subsequent accounting
differences in tax accounting? periods, whereas
permanent differences
A. Once an item is determined to do not reverse.
be a temporary difference, it
maintains that status; however, a
permanent difference can
change in status with the passage
of time.
B. Temporary differences reverse
themselves in subsequent
accounting periods, whereas
permanent differences do not
reverse.
C. the
deduction for
C. Permanent differences are not
dividends
representative of acceptable
received from
accounting practice.
U.S.
corporations
D. Temporary differences occur
frequently, whereas permanent
differences occur only once.
17. Which of the following statements
applies to the current amount of a
deferred tax liability?
A. It should be equal to the total of
all deferred tax consequences that
are not expected to reverse in the
operating period or one year,
whichever is greater.
B. It should be totally eliminated
from the financial statements if the
amount is related to a noncurrent
asset.
C. It should be based on the
classification of the related asset or
liability for financial reporting
purposes.
D. It should be equal to the net
deferred tax consequences of
temporary differences that will
result in net taxable amounts
during the next year.
18. Which of the following statements
is true about a deferred tax liability
according to GAAP?
A. It results from a past transaction
and represents a future sacrifice
but is not a present obligation.
B. It results from a past transaction
and is a present obligation but does
not represent a future sacrifice.
C. It results from a past transaction,
is a present obligation, and
represents a future sacrifice.
D. It is a present obligation and
represents a future sacrifice, but
does not result from a past
transaction.
C. It should be based 19.
on the classification of
the related asset or
liability for financial
reporting purposes.
C. It results from a
past transaction, is a
present obligation,
and represents a
future sacrifice.
20.
Which of the following will C. A larger amount of
result if a company uses depreciation expense will
accelerated depreciation for be shown on the income
tax purposes and straight-line statement than on the tax
depreciation for accounting return in the last year of the
purposes? asset's useful life.
A. A larger amount of
depreciation expense will be
shown on the tax return than
on the income statement, over
the asset's useful life.
B. The asset will be fully
depreciated for tax purposes
in half the time it takes to
become fully depreciated for
accounting purposes.
C. A larger amount of
depreciation expense will be
shown on the income
statement than on the tax
return in the last year of the
asset's useful life.
D. There will be a loss on the
sale of the asset in question if
it is sold for its book value
before its useful life expires.
Which order of steps is used C. 3,1,2
when classifying and totaling
the balances of deferred tax
accounts for the balance
sheet?
1. Determine net current
amount.
2. Determine net noncurrent
amount.
3. Classify amounts as current
or noncurrent.
A. 2,1,3
B. 1,2,3
C. 3,1,2
D. 2,3,1