Intermediate Accounting II SB Ch. 16 LO 1-5 & Ch. 17 LO 1

provide useful information to investors and creditors.

Financial accounting standards are established to

Multiple Choice:

A) provide useful information to investors and creditors.

B) discourage violations of law.

C) allow Congress to raise funds in a socially acceptable manner.

temporary difference

A deduction that is allowed on the tax return in one year, but is not recognized in financial income until a later period is an example of a

Multiple Choice:

A) tax credit.

B) temporary difference.

C) permanent difference.

provide useful information to investors and creditors.

Financial accounting standards are established to

Multiple Choice:

A) provide useful information to investors and creditors.

B) discourage violations of law.

C) allow Congress to raise funds in a socially acceptable manner.

temporary difference

A deduction that is allowed on the tax return in one year, but is not recognized in financial income until a later period is an example of a

Multiple Choice:

A) tax credit.

B) temporary difference.

C) permanent difference.

the amount caused by that period's activities.

Income tax expense reported each period should be

Multiple Choice:

A) the amount caused by that period's activities.

B) the amount paid during the period.

C) the balance owed at the end of the period.

deferred tax liability

A __________ (fill in the blank) result(s) in future taxable amounts when the temporary difference reverses.

Multiple Choice:

A) deferred tax liability

B) deferred tax liability and deferred tax asset

C) deferred tax asset

Asset

A deferred tax __________ (fill in the blank) occurs when there is a future deductible amount.

temporary

A __________ (fill in the blank) difference originates in one period and reverses in a subsequent period.

Multiple Choice:

A) temporary

B) nontaxable

C) permanent

D) financial

A) current income tax payable

B) changes in deferred tax assets and liabilities

Income tax expense is calculated as the result of the combination of (select all that apply):

A) current income tax payable

B) changes in deferred tax assets and liabilities

C) total assets and liabilities

D) prior year income tax expense

deferred tax liability

If tax laws allow a company to postpone paying taxes on activities that are currently reported in the company's income statement, the company recognizes a __________ (fill in the blank) to reflect the anticipated future taxable amounts.

Multiple Choice:

A) deferred tax liability

B) current taxes payable

C) valuation allowance

D) deferred tax asset

Tax expense combines tax payable and changes in the deferred tax accounts.

Which of the following is true regarding income tax expense?

Multiple Choice:

A) Tax expense is calculated directly.

B) Tax expense combines tax payable and changes in the deferred tax accounts.

C) Tax expense is the amount of tax currently payable based on the current year's return.

Subscriptions collected in advance.

Which of the following items would create a deferred tax asset?

Multiple Choice:

A) Subscriptions collected in advance.

B) Accelerated depreciation on tax return in excess of depreciation on the income statement.

C) Prepaid expenses that are tax-deductible when paid.

D) Unrealized gain from revaluing investments to fair value.

increased; decreased

A future taxable amount means taxable income will be __________ (fill in the blank) relative to pretax accounting income, whereas a future deductible amount means taxable income will be __________ (fill in the blank) relative to accounting income.

Multiple Choice:

A) decreased; increased

B) increased; decreased

C) increased; increased

D) decreased; decreased

temporary

Deferred tax assets are recognized for the future tax benefits of __________ (fill in the blank) differences.

Multiple Choice:

A) permanent

B) both temporary and permanent

C) temporary

B) Depreciation deducted for tax in excess of depreciation expense.

D) Bad debt deductions in excess of bad debt expense.

Which of the following items are classified as deferred tax liabilities? (Select all that apply.)

A) Rent received in advance not included in financial income.

B) Depreciation deducted for tax in excess of depreciation expense.

C) Warranty expense in excess of warranty deductions.

D) Bad debt deductions in excess of bad debt expense.

Receipt of rental revenue in advance.

Which item creates a future deductible amount?

Multiple Choice:

A) Depreciation for tax in excess of depreciation for financial reporting.

B) Receipt of rental revenue in advance.

C) Bad debts deducted on the tax return in excess of bad debt expense on the income statement.

all differences that will result in taxable or deductible amounts in future periods.

Temporary differences are

Multiple Choice:

A) differences that will result in deductible but not taxable amounts in future periods.

B) differences that will result in taxable but not deductible amounts in future periods.

C) all differences that will result in taxable or deductible amounts in future periods.

A) Accelerated depreciation on the tax return in excess of depreciation on the income statement.

C) Unrealized gains from recording investments at fair value.

Which of the following items would create a deferred tax liability? (Select all that apply.)

A) Accelerated depreciation on the tax return in excess of depreciation on the income statement.

B) Estimated expenses on the income statement not deductible on the tax return.

C) Unrealized gains from recording investments at fair value.

D) Rent revenue collected in advance.

Depreciation for tax in excess of depreciation for financial reporting.

Which item creates a future taxable amount?

Multiple Choice:

A) Depreciation for tax in excess of depreciation for financial reporting.

B) Receipt of rental revenue in advance.

C) Warranty expense on the income statement in excess of warranties deducted on the tax return.

A) Expense being reported on the tax return before the income statement.

D) Revenue being reported on the tax return after the income statement.

Which of the following cause a deferred tax liability to occur? (Select all that apply.)

A) Expense being reported on the tax return before the income statement.

B) Expense being reported on the tax return after the income statement.

C) Revenue being reported on the tax return before the income statement.

D) Revenue being reported on the tax return after the income statement.

before

Depreciation is typically reported on the tax return __________ (fill in the blank) it is reported on the income statement.

Multiple Choice:

A) at the same time as

B) before

C) after

tax basis

An asset or liability's original value for tax purposes reduced by any amounts included to date on tax returns is referred to as the

Multiple Choice:

A) tax basis

B) historic cost

C) book value

A) Revenue included on the income statement but not on the tax return.

C) An amount that is deducted on the tax return but not included as an expense on the income statement.

Which of the following will create a deferred tax liability? (Select all that apply.)

A) Revenue included on the income statement but not on the tax return.

B) An amount that is included as an expense on the income statement but is not on the tax return.

C) An amount that is deducted on the tax return but not included as an expense on the income statement.

D) Revenue included on the tax return but not on the income statement.

Deferred tax liabilities arise when tax laws permit a company to delay paying taxes on income until a later date.

Which of the following is true related to deferred tax liabilities?

Multiple Choice:

A) Deferred tax liabilities arise from permanent differences between taxable income and financial reporting income.

B) Deferred tax liabilities arise when a company deducts costs in the tax return later than it recognizes them in the income statement.

C) Deferred tax liabilities help companies avoid paying taxes.

D) Deferred tax liabilities arise when tax laws permit a company to delay paying taxes on income until a later date.

credited; debited

When a deferred tax liability is created, the deferred tax liability account is __________ (fill in the blank); when the item reverses, the deferred tax account is __________ (fill in the blank).

Multiple Choice:

A) credited; credited

B) credited; debited

C) debited; debited

D) debited; credited

being paid in a subsequent year.

A deferred tax liability will result in tax

Multiple Choice:

A) being paid in advance.

B) being paid in a subsequent year.

C) not being paid.

credit

A deferred tax liability has a normal __________ (fill in the blank) balance.

Multiple Choice:

A) debit

B) credit

B) Warranty expense in excess of warranty amounts paid and deducted for tax.

D) Estimated compensation expense in excess of compensation deduction for tax.

Which of the following items would create a deferred tax asset? (select all that apply)

A) Depreciation deduction for tax in excess of depreciation expense.

B) Warranty expense in excess of warranty amounts paid and deducted for tax.

C) Deduction for rent paid in advance for tax in excess of rent expense.

D) Estimated compensation expense in excess of compensation deduction for tax.

The company is prepaying the income tax on the revenue.

When a company recognizes a deferred tax asset relative to revenue, what is the effect?

Multiple Choice:

A) The company will never pay income tax on the revenue.

B) The company is prepaying the income tax on the revenue.

C) The company is deferring payment of the income tax on the revenue.

temporary

Deferred tax assets are recognized for the future tax benefits of __________ (fill in the blank) differences.

Multiple Choice:

A) both temporary and permanent

B) permanent

C) temporary

currently / at a later date

A deferred tax asset arises when a revenue is taxed __________ (fill in the blank) and recognized in the income statement __________ (fill in the blank).

Multiple Choice:

A) currently / at a later date

B) currently / currently

C) at a later date / at a later date

D) at a later date / currently

Deferred tax asset

When estimated expenses are recognized in income statements when incurred, but deducted on tax returns in later years when paid, what is created?

Multiple Choice:

A) Deferred tax asset

B) Deferred tax revenue

C) Deferred tax liability

before

A deferred tax asset results from a revenue transaction when taxes are paid on those revenues __________ (fill in the blank) revenue is recognized in the income statement.

Multiple Choice:

A) after

B) at the same time as

C) before

deferred tax asset

When revenue is taxed when collected, but recognized in income statements in later years when the performance obligation is satisfied, what is created?

Multiple Choice:

A) Deferred tax asset

Deferred tax revenue

Deferred tax liability

When it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Under what circumstances is a deferred tax valuation account required?

Multiple Choice:

A) When deferred tax liabilities are greater than deferred tax assets.

B) When there is no deferred tax liability to offset the deferred tax assets.

C) When it is more likely than not that some portion or all of the deferred tax asset will not be realized.

D) Whenever there is a deferred tax asset.

True

True or false: A deferred tax asset valuation allowance is up to managerial judgment.

there is not sufficient estimated taxable income in the future to use future deductible amounts.

A valuation account for a deferred tax asset would likely be necessary if

Multiple Choice:

A) deferred tax assets are greater than deferred tax liabilities.

B) there is not sufficient estimated taxable income in the future to use future deductible amounts.

C) the company has experienced a net operating loss within the last 5 years.

D) taxable income is greater than financial income in the current year.

credit; debit

An entry to increase the valuation allowance includes a __________ (fill in the blank) to the valuation allowance and a __________ (fill in the blank) to income tax expense.

Multiple Choice:

A) debit; debit

B) credit; debit

C) credit; credit

D) debit; credit

U.S. GAAP only

Under which accounting standards are valuation allowances used for deferred tax assets?

Multiple Choice:

A) both U.S. GAAP and IFRS

B) U.S. GAAP only

C) IFRS only

B) it reduces the deferred tax asset account

D) It increases tax expense

Which of the following are effects of a valuation allowance account for deferred taxes? (Select all that apply.)

A) It increases the deferred tax liability account.

B) It reduces the deferred tax asset account.

C) It reduces tax expense.

D) It increases tax expense.

Only if future income is at least equal to the deferred deduction amount.

When can the benefit of future deductible amounts be realized?

Multiple Choice:

A) Future deductible amounts can always be realized in the following year.

B) Only if future income is at least equal to the deferred deduction amount.

C) Only if future income is less than the deferred deduction amount.

At the end of each reporting period.

How frequently is the valuation allowance for deferred tax assets reevaluated?

Multiple Choice:

A) Any time a deferred tax asset is created.

B) At the end of each reporting period.

C) Any time a deferred tax asset reverse.

Under IFRS, companies only record deferred tax assets if it is probable they will be realized.

What is the primary reason that there exist more valuation allowances for deferred tax assets under US GAAP than under IFRS?

Multiple Choice:

A) Accounting for deferred income taxes under US GAAP is more conservative than IFRS.

B) Companies that use IFRS do not record deferred tax assets.

C) Under IFRS, companies only record deferred tax assets if it is probable they will be realized.

between pretax accounting income and taxable income that never reverses.

A permanent difference is a difference

Multiple Choice:

A) that is always included on the tax return.

B) deducted each year on the tax return.

C) between pretax accounting income and taxable income that never reverses.

D) that is included at different times in financial reporting income and taxable income.

A) life insurance proceeds on an insured executive

D) interest on municipal bonds

Which of the following items are permanent differences? (Select all that apply.)

A) life insurance proceeds on an insured executive

B) bad debt expense

C) depreciation deducted on tax return in excess of depreciation expense

D) interest on municipal bonds

A) Differences between taxable income and pretax accounting income.

D) Caused by transactions that will never affect taxable income.

E) Affect the effective tax rate.

Which of the following statements are true with respect to permanent differences? (select all that apply)

A) Differences between taxable income and pretax accounting income.

B) Lead to the creation of deferred tax assets and liabilities.

C) Recognized only on the balance sheet.

D) Caused by transactions that will never affect taxable income.

E) Affect the effective tax rate.

tax expense

The effective tax rate equals __________ (fill in the blank) divided by pretax accounting income.

Multiple Choice:

A) taxable temporary differences

B) taxable income

C) market rate

D) tax expense

A difference is created when there is a timing difference of when an item is included in pretax accounting income and taxable income, whereas a difference is one in which the amount is different between pretax accounting income and taxable income and never reverses.

temporary; permanent

A __________ (fill in the blank) difference is created when there is a timing difference of when an item is included in pretax accounting income and taxable income, whereas a __________ (fill in the blank) difference is one in which the amount is different between pretax accounting income and taxable income and never reverses.

A) Higher tax expense

C) Higher effective tax rate

F) Higher tax bill

Which of the following occur when a company repatriates foreign earnings and repatriates cash? (Select all that apply.)

A) Higher tax expense

B) Lower tax bill

C) Higher effective tax rate

D) Lower effective tax rate

E) Lower tax expense

F) Higher tax bill

A) interest on municipal bonds

B) premiums paid for life insurance on key officers

C) life insurance proceeds on the death of insured executive

Which of the following items are permanent differences? (Select all that apply.)

A) interest on municipal bonds

B) premiums paid for life insurance on key officers

C) life insurance proceeds on the death of insured executive

D) bad debt expense in excess of amount deducted for tax purposes

E) warranty expense in excess of amount deducted for tax purposes

A) The approaches for accounting for deferred taxes are similar under IFRS and U.S. GAAP

C) Deferred tax differences are among the most common differences between IFRS and U.S. GAAP based financial statements

Which of the following statements are correct with respect to accounting for deferred taxes under IFRS and U.S. GAAP? (Select all that apply.)

A) The approaches for accounting for deferred taxes are similar under IFRS and U.S. GAAP

B) If U.S. companies were to switch to IFRS, few differences would arise with respect to deferred taxes

C) Deferred tax differences are among the most common differences between IFRS and U.S. GAAP based financial statements

D) The approaches for accounting for deferred taxes differ significantly between IFRS and U.S. GAAP

The effective tax rate is lower than the statutory rate.

Clerc Corp. has a permanent difference of $100,000 for interest on municipal bonds. What effect does this have on the effective tax rate?

Multiple Choice:

A) The effective tax rate is the same as the statutory rate.

B) The effective tax rate is higher than the statutory rate.

C) The effective tax rate is lower than the statutory rate.

True

True or false: Despite the similar approaches for accounting for taxation between U.S. GAAP and IFRS, differences in reported amounts for deferred taxes are among the most frequent.

employer

In an employer pension plan, some or all of the contributions to the retirement fund are often provided by the

Multiple Choice:

A) employer.

B) government.

C) employee.

Pension

__________ (fill in the blank) plans often enhance productivity and reduce employee turnover in companies.

qualified

Pension plans that are established according to tight guidance and provide important tax advantages are called __________ (fill in the blank) plans.

it must not discriminate in favor of highly compensated employees.

For a pension plan to be qualified for special tax treatment,

Multiple Choice:

A) it must not cover employees who are not highly compensated.

B) it must cover all highly compensated employees.

C) it extends favorable cover to highly compensated employees.

D) it must not discriminate in favor of highly compensated employees.

defined contribution pension plan.

Vogel Company contributes 6% of its employees' annual salary to a pension plan. Vogel sponsors a

Multiple Choice:

A) defined benefit pension plan.

B) defined contribution pension plan.

pension expense on the income statement.

At the company level, the size of a pension fund is typically reflected in the sponsoring company's

Multiple Choice:

A) pension asset on the balance sheet.

B) pension expense on the income statement.

C) pension liability on the balance sheet.

A) To enhance employees' loyalty to the company and reduce employee turnover.

B) To fulfill a moral obligation.

D) To enhance the company's competitiveness in the labor market.

Which of the following factors may motivate employers to sponsor a pension plan? (Select all that apply.)

A) To enhance employees' loyalty to the company and reduce employee turnover.

B) To fulfill a moral obligation.

C) To meet legal requirements that companies sponsor pension plans.

D) To enhance the company's competitiveness in the labor market.

B) Employers' increasing unwillingness to bear the risk of defined benefit plans.

C) The cost of administering defined benefit plans.

Which of the following factors may contribute to the recent popularity of defined contribution pension plans and decreasing popularity of defined benefit plans? (Select all that apply.)

A) The desire to build long-term employee loyalty.

B) Employers' increasing unwillingness to bear the risk of defined benefit plans.

C) The cost of administering defined benefit plans.

They provide tax advantages for the employer and employee.

Which of the following is true regarding qualified pension plans?

Multiple Choice:

A) They provide tax advantages for the employee only.

B) They provide tax advantages for the employer only.

C) They provide tax advantages for the employer and employee.

A) Benefits must vest after a specific period of time.

B) The plan cannot favor highly compensated employees.

C) The plan must cover at least 70% of the company's employees.

E) The plan must be funded before retirement and assets must be held by an irrevocable trust.

Which of the following conditions must be met for a pension plan to qualify for special tax treatment? (Select all that apply.)

A) Benefits must vest after a specific period of time.

B) The plan cannot favor highly compensated employees.

C) The plan must cover at least 70% of the company's employees.

D) The plan must cover at least 90% of a company's employees.

E) The plan must be funded before retirement and assets must be held by an irrevocable trust.

employer; employees

In a defined benefit plan, the __________ (fill in the blank) bear(s) the risk of achieving the retirement objective. In a defined contribution plan, the __________ (fill in the blank) bear(s) the risk of achieving the retirement objective.

Multiple Choice:

A) employer; employer

B) employees; employees

C) employer; employees

D) employees; employer

The employer promises to contribute a specified percentage of its employees' pay to a pension plan.

Which of the following statements is correct regarding a defined contribution pension plan?

Multiple Choice:

A) The employees are required to contribute a specified percentage of their pay to a pension plan.

B) The employer promises that its employees will receive a specific percentage of their current pay after retirement.

C) The employer promises to contribute a specified percentage of its employees' pay to a pension plan.

Defined benefit pension plan

Which type of pension fund guarantees a set amount will be available at retirement?

Multiple Choice:

A) Defined benefit pension plan

B) Defined contribution pension plan

Defined benefit pension plans

Which type of pension plan requires considerably more complex accounting treatment?

Multiple Choice:

A) Defined benefit pension plans

B) Defined contribution pension plans

Defined contribution plan

Which type of pension plan has less paperwork and is less costly to maintain?

Multiple Choice

A) Defined benefit plan

B) Defined contribution plan

They provide income to employees during their retirement years.

Which of the following is a similarity shared by defined benefit and defined contribution pension plans?

Multiple Choice:

A) They provide income to employees during their retirement years.

B) The employers bear the risk of achieving the retirement objective.

C) The employees bear the risk of achieving the retirement objective.

D) The plans are easy to administer.

A) Thrift plans

C) Savings plans

E) 401(k) plans

Which of the following are common examples of defined contribution pension plans? (Select all that apply.)

A) Thrift plans

B) Mortgage REITs

C) Savings plans

D) Traditional IRA plans

E) 401(k) plans

F) Roth IRA plans

A) the sponsoring company

D) the employees

Which of the following parties contribute to a "contributory" pension plan? (Select all that apply.)

A) the sponsoring company

B) the federal government

C) the state government

D) the employees

Incentive savings plans

Which of the following is a common title for a pension tied to company performance?

Multiple Choice:

A) Incentive savings plans

B) Thrift plans

C) Vested benefit plans

A) debit pension expense $60,000

F) credit cash $60,000

Smith Corp. sponsors a 401(k) plan for all its full-time employees. The company contributes 3% of each employee's salary to the plan. Total payroll for the year was $2 million. When recognizing the employer's annual contribution, Smith should (Select all that apply.)

A) debit pension expense $60,000

B) debit OCI $60,000

C) credit pension expense $60,000

D) debit cash $60,000

E) debit PBO $60,000

F) credit cash $60,000

A) Return on plan assets

B) Employee turnover

C) Retirement age

D) Life expectancy

Which of the following are uncertainties related to funding a defined benefit pension plan? (Select all that apply.)

A) Return on plan assets

B) Employee turnover

C) Retirement age

D) Life expectancy

E) Net income

F) Stock price

link the amount of contributions to company performance.

401(k) profit-sharing plans and incentive savings plans

Multiple Choice:

A) are based solely on a percentage of salary.

B) base the amount of contributions on length of employment.

C) link the amount of contributions to company performance.

D) are solely employee contribution plans.

estimate the company's pension obligation.

A company may hire an actuary to help it

Multiple Choice:

A) reduce the risk associated with a pension plan.

B) administer the pension fund assets.

C) estimate the company's pension obligation.

cash

Smith Corp. sponsors a 401(k) plan for all its full-time employees. The company contributes 5% of each employee's salary to the plan. Total payroll for the year was $1 million. When recognizing the employer's annual contribution, Smith should credit

Multiple Choice

A) salaries payable.

B) wages payable.

C) pension liability.

D) cash.

inherently subjective

Estimates made by actuaries with respect to defined benefit pension plans are

Multiple Choice:

A) inherently subjective.

B) very accurate.

C) inherently objective.

benefit

The employer's obligation, the plan assets, and the periodic expense of having the pension plan are key elements of a defined __________ (fill in the blank) pension plan.

expense

The pension __________ (fill in the blank) reported in the income statement is made up of changes that occur in the pension obligation and the plan assets.

the pension obligation and the plan assets.

In a defined benefit pension plan, the annual pension expense reflects changes in

Multiple Choice:

A) only the plan assets.

B) only the pension obligation.

C) the pension obligation and the plan assets.

gains and losses on pension asset or liability.

Deviations from actuary estimates are referred to as

Multiple Choice:

A) gains and losses on pension asset or liability.

B) pension revenues and expenses.

C) correction of errors when accounted for.

in the disclosure notes.

The pension obligation balance and the plan asset balance are reported

Multiple Choice:

A) in the disclosure notes.

B) in the income statement.

C) in the statement of cash flows.

D) in the balance sheet.

A) amortization of prior service cost

B) service cost during the current period

C) amortization of gains or losses

F) interest cost accrued on pension liability

G) expected return on plan assets

Identify the components of pension expense in a defined benefit plan. (Select all that apply.)

A) amortization of prior service cost

B) service cost during the current period

C) amortization of gains or losses

D) pension benefits paid to employees

E) contributions made to pension plan

F) interest cost accrued on pension liability

G) expected return on plan assets