Fed. Tax Exam 4 Review

What is a temporary difference?

A difference that reverses in future periods.

What is a permanent difference?

A difference that never reverses.

What does excess tax depreciation over book depreciation create?

A deferred tax liability.

What does warranty expense accrued for books but deducted later for tax create?

A deferred tax asset.

When does a deferred tax asset arise?

When pretax financial income is greater than taxable income.

When is a valuation allowance required?

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

If tax depreciation is $80,000 and book depreciation is $60,000, what is the temporary difference?

$20,000 taxable temporary difference.

What results from a taxable temporary difference?

A deferred tax liability.

What results from a deductible temporary difference?

A deferred tax asset.

What does a company with pretax income of $300,000 and taxable income of $250,000 have?

A deductible temporary difference.

What is the enacted tax rate used for deferred taxes?

The rate enacted for the year the temporary difference reverses.

What does a net operating loss carryforward create?

A deferred tax asset.

If a company has a deferred tax asset of $50,000 and concludes 40% will not be realized, what is the valuation allowance?

$20,000.

What does income tax expense equal?

Current tax plus deferred tax.

If taxable income is $100,000 and tax rate is 20%, what is the income taxes payable?

$20,000.

What does a permanent difference affect?

Current taxes only.

What is municipal bond interest classified as?

A permanent difference.

What are fines and penalties classified as?

Permanent differences.

When does a company record a deferred tax liability?

When taxable income is greater than pretax income.

If a temporary difference reverses in 2027, what tax rate is used?

The 2027 enacted rate.

How is a deferred tax asset classified on the balance sheet?

Current or noncurrent based on the underlying asset/liability.

How is a deferred tax liability classified?

Always noncurrent.

What happens if a company has a deferred tax asset of $100,000 and no valuation allowance?

It will decrease income tax expense.

What happens if a company has a deferred tax liability of $100,000?

It will increase income tax expense.

What is a temporary difference that increases taxable income in the future?

DTL

What is a temporary difference that decreases taxable income in the future?

Deductible.

What is the total tax expense for a company with pretax income of $200,000 and a deferred tax liability increase of $10,000?

$50,000.

What is the total tax expense for a company with pretax income of $200,000 and a deferred tax asset increase of $10,000?

30,000 (200,000 x .20 = 40,000 - 10,000 = 30,000)

What must a company with a net operating loss carryforward disclose?

Amount and expiration.

Why do deferred taxes arise?

Because GAAP and tax rules differ in timing.

How is a change in depreciation method treated?

As a change in estimate.

How is a change from FIFO to average-cost treated?

Retrospective.

How is a change from LIFO to FIFO treated?

Retrospective.

How is a change in the useful life of equipment treated?

As a change in estimate.

How is a change from an unacceptable to an acceptable principle treated?

As an error correction.

How is a change in salvage value treated?

As an estimate.

What is error correction?

The process of fixing a mistake made in previously issued financial statements. NOT changes in estimate or changes in principle.

What is a change in salvage value?

Estimate

How is a change in reporting entity accounted for?

Retrospectively

How is a prior period error corrected?

Retrospective restatement

What are counterbalancing errors?

Correct themselves in two periods

What are non-counterbalancing errors?

Do not correct themselves

What is failure to record depreciation?

Error

What is a change from cost-recovery to percentage-of-completion?

Principle

What is a change in warranty rate?

Estimate

What is a change from unconsolidated to consolidated statements?

Change in entity

What is a change from straight-line to double-declining balance?

Estimate

What does a prior period adjustment affect?

Retained earnings

What does a retrospective change require adjusting?

Prior years and beginning retained earnings

What does a prospective change affect?

Current and future years only

What is a change in amortization period of a patent?

Estimate

What is a change from FIFO to LIFO?

Prospective

What does a correction of overstated ending inventory increase?

Prior year income

What does a correction of understated ending inventory decrease?

Prior year income

What does a change in reporting entity require?

Retrospective application

What does a change in inventory method from LIFO to FIFO require?

Retrospective restatement

What does a correction of an error require?

Restating prior financial statements

What does a change in estimate affect?

Current and future years

What does a change in principle require?

Retrospective application

What does a change in entity require?

Retrospective application

When must a non-counterbalancing error be corrected?

Immediately

What does the full disclosure principle require?

All information that could influence decisions

What is a Type I subsequent event?

Requires adjustment

What is a Type II subsequent event?

Requires disclosure only

What is a major customer bankruptcy after year-end?

Type I

What is a fire destroying a plant after year-end?

Type II

Who is segment reporting required for?

Public companies

What is the revenue test for segment reporting?

10%

What does the profit/loss test compare segment profit/loss to?

Greater of total profits or total losses

What is the asset test threshold?

10%

What are intersegment sales included in?

Revenue test

What do enterprise-wide disclosures include?

Major customers

What percentage of revenue does a major customer account for?

10%

What does interim reporting require?

Estimated annual effective tax rate

Who is MD&A required for?

Public companies

What is a forecast?

Based on expected conditions

What is a projection?

Based on hypothetical assumptions

What must segment profit disclose?

External + intersegment revenue

What do geographic disclosures include?

Revenues and long-lived assets by region

What is a subsequent event that provides evidence of conditions existing at year-end?

Type I

What is a subsequent event that relates to conditions arising after year-end?

Type II