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Ch 18 and 19 conceptual

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Ch 18
buggq
Quiz by buggq, updated more than 1 year ago More Less
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Created by eabrown6 over 8 years ago
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Resource summary

Question 1

Question
Companies should recognize revenue when it is realized and when cash is received.
Answer
  • True
  • False

Question 2

Question
Revenues are realized when a company exchanges goods and services for cash or claims to cash.
Answer
  • True
  • False

Question 3

Question
Trade loading is a practice through which manufacturers try to show sales, profits, and market share they don't actually have.
Answer
  • True
  • False

Question 4

Question
If a company sells its product but gives the buyer the right to return it, the company should not recognize revenue until the sale is collected.
Answer
  • True
  • False

Question 5

Question
Companies can recognize revenue prior to completion and delivery of the product under certain circumstances.
Answer
  • True
  • False

Question 6

Question
Once the separate units of accounting are determined under multiple-deliverable arrangement, the amount paid for the arrangement is allocated among the separate units based on cost of manufacturing the separate unit.
Answer
  • True
  • False

Question 7

Question
The most popular input measure used to determine the progress toward completion in long-term contracts is the cost-to-cost basis.
Answer
  • True
  • False

Question 8

Question
If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.
Answer
  • True
  • False

Question 9

Question
The Construction in Process account includes only construction costs under the percentage-of-completion method.
Answer
  • True
  • False

Question 10

Question
Under the completed-contract method, companies recognize costs only when the contract is completed.
Answer
  • True
  • False

Question 11

Question
The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.
Answer
  • True
  • False

Question 12

Question
Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method.
Answer
  • True
  • False

Question 13

Question
A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and completed-contract method.
Answer
  • True
  • False

Question 14

Question
Under the completion-of-production basis, companies recognize revenue when agricul-tural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution.
Answer
  • True
  • False

Question 15

Question
The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract.
Answer
  • True
  • False

Question 16

Question
Under the installment-sales method, companies defer revenue and income recognition until the period of cash collection.
Answer
  • True
  • False

Question 17

Question
The installment-sales method defers only the gross profit instead of both the sales price and cost of goods sold.
Answer
  • True
  • False

Question 18

Question
Deferred gross profit is generally treated as unearned revenue and classified as a current liability under the installment-sales method.
Answer
  • True
  • False

Question 19

Question
Under the cost-recovery method, a company recognizes no revenue until cash payments by the buyer exceed the cost of the merchandise sold.
Answer
  • True
  • False

Question 20

Question
Companies recognize profit under the cost-recovery method only when cash collections exceed the total cost of the goods sold.
Answer
  • True
  • False

Question 21

Question
The revenue recognition principle provides that revenue is recognized when
Answer
  • it is realized.
  • it is realizable.
  • it is realized or realizable and it is earned.
  • None of these answers are correct.

Question 22

Question
When goods or services are exchanged for cash or claims to cash (receivables), revenues are considered
Answer
  • earned.
  • realized.
  • recognized.
  • All of these answers are correct.

Question 23

Question
When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are considered
Answer
  • earned.
  • realized.
  • recognized.
  • All of these answers are correct.

Question 24

Question
Which of the following is not an accurate representation concerning revenue recognition?
Answer
  • Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.
  • Revenue from services rendered is recognized when cash is received or when services have been performed.
  • Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.
  • Revenue from disposing of assets other than products is recognized at the date of sale.

Question 25

Question
The process of formally recording or incorporating an item in the financial statements of an entity is
Answer
  • allocation.
  • articulation.
  • realization.
  • recognition.

Question 26

Question
Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as
Answer
  • service revenue.
  • deferred service revenue.
  • a reduction in installment accounts receivable.
  • a direct addition to retained earnings.

Question 27

Question
Which of the following is not a reason why revenue is recognized at the time of sale?
Answer
  • Realization has occurred.
  • The sale is the critical event.
  • Title legally passes from seller to buyer.
  • All of these are reasons to recognize revenue at the time of sale.

Question 28

Question
An alternative available when the seller is exposed to continued risks of ownership through return of the product is
Answer
  • recording the sale, and accounting for returns as they occur in future periods.
  • not recording a sale until all return privileges have expired.
  • recording the sale, but reducing sales by an estimate of future returns.
  • All of these answers are correct.

Question 29

Question
A sale should not be recognized as revenue by the seller at the time of sale if
Answer
  • payment was made by check.
  • the selling price is less than the normal selling price.
  • the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated.
  • None of these answers are correct.

Question 30

Question
The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions?
Answer
  • The amount of future returns can be reasonably estimated.
  • The seller's price is substantially fixed or determinable at time of sale.
  • The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.
  • The buyer is obligated to pay the seller upon resale of the product.

Question 31

Question
All units in a multiple-deliverable arrangement are considered separate units of accounting, provided that:
Answer
  • the customer can avail the unit from a third party.
  • the arrangement includes a general right of repurchase relative to the delivered item.
  • the seller is the sole manufacturer of the separate unit.
  • performance of the undelivered item is in the control of the buyer.

Question 32

Question
The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of these necessary conditions?
Answer
  • Estimates of progress toward completion, revenues, and costs are reasonably dependable.
  • The contractor can be expected to perform the contractual obligation.
  • The buyer can be expected to satisfy some of the obligations under the contract.
  • The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

Question 33

Question
In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
Answer
  • the terms of payment in the contract.
  • the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
  • the method commonly used by the contractor to account for other long-term construction contracts.
  • the inherent nature of the contractor's technical facilities used in construction.

Question 34

Question
How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract?
Answer
  • Progress billings as deferred income, construction in progress as a deferred expense.
  • Progress billings as income, construction in process as inventory.
  • Net balance, as a current asset if debit balance, and current liability if credit balance.
  • Net balance, as income from construction if credit balance, and loss from construction if debit balance.

Question 35

Question
In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the
Answer
  • total costs incurred to date.
  • total estimated cost.
  • unbilled portion of the contract price.
  • total contract price.

Question 36

Question
How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?
Answer
  • As construction in process in the current asset section of the balance sheet.
  • As construction in process in the noncurrent asset section of the balance sheet.
  • As a receivable in the noncurrent asset section of the balance sheet.
  • In a note to the financial statements until the customer is formally billed for the portion of work completed.

Question 37

Question
The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it
Answer
  • is unacceptable for income tax purposes.
  • gives results based upon estimates which may be subject to considerable uncertainty.
  • is likely to assign a small amount of revenue to a period during which much revenue was actually earned.
  • None of these answers are correct.

Question 38

Question
One of the more popular input measures used to determine the progress toward completion in the percentage-of-completion method is the
Answer
  • revenue-percentage basis.
  • cost-percentage basis.
  • progress completion basis.
  • cost-to-cost basis.

Question 39

Question
The principal advantage of the completed-contract method is that
Answer
  • reported revenue is based on final results rather than estimates of unperformed work.
  • it reflects current performance when the period of a contract extends into more than one accounting period.
  • it is not necessary to recognize revenue at the point of sale.
  • a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used.

Question 40

Question
Under the completed-contract method
Answer
  • revenue, cost, and gross profit are recognized during the production cycle.
  • revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed.
  • revenue, cost, and gross profit are recognized at the time the contract is completed.
  • None of these answers are correct.

Question 41

Question
Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be
Answer
  • recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.
  • recognized in the current period under the percentage-of-completion method, but the completed-contract method defers recognition of the loss to the time when the contract is completed.
  • recognized in the current period under the completed-contract method, but the percentage-of-completion method defers the loss until the contract is completed.
  • deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

Question 42

Question
Cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract. Which of the following statements is correct?
Answer
  • Under the completed-contract method, the loss is not recognized until the year the construction is completed.
  • Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed.
  • Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.
  • Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

Question 43

Question
The criteria for recognition of revenue at the completion of production of precious metals and farm products include
Answer
  • an established market with quoted prices.
  • low additional costs of completion and selling.
  • units are interchangeable.
  • All of these answers are correct.

Question 44

Question
In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true?
Answer
  • Examples involve precious metals or farm equipment.
  • The products possess immediate marketability at quoted prices.
  • No significant costs are involved in selling the product.
  • All of these statements are true.

Question 45

Question
For which of the following products is it appropriate to recognize revenue at the completion of production even though no sale has been made?
Answer
  • Automobiles
  • Large appliances
  • Single family residential units
  • Precious metals

Question 46

Question
When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct?
Answer
  • Under both the percentage-of-completion and the completed-contract methods, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
  • Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
  • Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.
  • No current period adjustment is required.

Question 47

Question
Deferred gross profit on installment sales is generally treated as a(n)
Answer
  • deduction from installment accounts receivable.
  • deduction from installment sales.
  • unearned revenue and classified as a current liability.
  • deduction from gross profit on sales.

Question 48

Question
The installment-sales method of recognizing profit for accounting purposes is acceptable if
Answer
  • collections in the year of sale do not exceed 30% of the total sales price.
  • an unrealized profit account is credited.
  • collection of the sales price is not reasonably assured.
  • the method is consistently used for all sales of similar merchandise.

Question 49

Question
The method most commonly used to report defaults and repossessions is
Answer
  • provide no basis for the repossessed asset thereby recognizing a loss.
  • record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
  • record the repossessed merchandise at book value, recording no gain or loss.
  • None of these answers are correct.

Question 50

Question
Under the installment-sales method,
Answer
  • revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product.
  • gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale.
  • gross profit is not recognized until the amount of cash received exceeds the cost of the item sold.
  • revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.

Question 51

Question
The realization of income on installment sales transactions involves
Answer
  • recognition of the difference between the cash collected on installment sales and the cash expenses incurred.
  • recording the net income related to installment sales and recognizing the income as cash is collected.
  • deferring gross profit while recognizing operating or financial expenses in the period incurred.
  • deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.

Question 52

Question
A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?
Answer
  • At the time of completion of the equipment (completion of production method)
  • At the date of delivery (sales method)
  • The installment-sales method
  • The cost–recovery method

Question 53

Question
A seller is using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct?
Answer
  • After all costs have been recovered, any additional cash collections are included in income.
  • Interest revenue may be recognized before all costs have been recovered.
  • The deferred gross profit is offset against the related receivable on the balance sheet.
  • Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

Question 54

Question
Under the cost-recovery method of revenue recognition,
Answer
  • income is recognized on a proportionate basis as the cash is received on the sale of the product.
  • income is recognized when the cash received from the sale of the product is greater than the cost of the product.
  • income is recognized immediately after the sale is made.
  • None of these answers are correct.

Question 55

Question
Under the deposit method
Answer
  • the seller recognizes revenue or income on the receipt of cash.
  • a company receives cash from the buyer before it transfers the goods or property.
  • the buyer reports the property as an asset on its balance sheet.
  • the seller has performed on the contract and a legitimate claim exists.

Question 56

Question
The deposit method of revenue recognition is used when
Answer
  • the product can be marketed at quoted prices and units are interchangeable.
  • cash is received before the sales transaction is complete.
  • the contract is short-term or the percentage-of-completion method can’t be used.
  • there are no significant costs of distribution.

Question 57

Question
The cost-recovery method
Answer
  • is prohibited under current GAAP due to its conservative nature.
  • requires a company to defer profit recognition until all cash payments are received from the buyer.
  • is used by sellers when there is a reasonable basis for estimating collectibility.
  • recognizes total revenue and total cost of goods sold in the period of sale.

Question 58

Question
Which of the following methods to account for sales is used when a high degree of uncertainty exists related to the collection of receivables?
Answer
  • Cost-recovery method.
  • Percentage-of-completion method.
  • Deposit method.
  • Completed-contract method.

Question 59

Question
In consignment sales, the consignee
Answer
  • records the merchandise as an asset on its books.
  • records a liability for the merchandise held on consignment.
  • recognizes revenue when it ships merchandise to the consignor.
  • prepares an “account report” for the consignor which shows sales, expenses, and cash receipts.

Question 60

Question
Types of franchising arrangements include all of the following except
Answer
  • service sponsor-retailer.
  • wholesaler-service sponsor.
  • manufacturer-wholesaler.
  • wholesaler-retailer.

Question 61

Question
Continuing franchise fees should be recorded by the franchisor
Answer
  • as revenue when earned and receivable from the franchisee.
  • as revenue when received.
  • in accordance with the accounting procedures specified in the franchise agreement.
  • as revenue only after the balance of the initial franchise fee has been collected.

Question 62

Question
Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should
Answer
  • increase revenue recognized from the initial franchise fee by the amount of the expected future purchases.
  • record a portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee subsequently makes the bargain purchases.
  • defer recognition of any revenue from the initial franchise fee until the bargain purchases are made.
  • None of these.

Question 63

Question
A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should
Answer
  • record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased outlet when the option is exercised.
  • record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is exercised.
  • record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the future amounts receivable from the franchisee.
  • None of these.

Question 64

Question
Taxable income is a tax accounting term and is also referred to as income before taxes.
Answer
  • True
  • False

Question 65

Question
Pretax financial income is the amount used to compute income taxes payable.
Answer
  • True
  • False

Question 66

Question
Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period.
Answer
  • True
  • False

Question 67

Question
A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.
Answer
  • True
  • False

Question 68

Question
Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.
Answer
  • True
  • False

Question 69

Question
A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.
Answer
  • True
  • False

Question 70

Question
A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.
Answer
  • True
  • False

Question 71

Question
Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.
Answer
  • True
  • False

Question 72

Question
A company should add a decrease in a deferred tax liability to income taxes payable in computing income tax expense.
Answer
  • True
  • False

Question 73

Question
Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered.
Answer
  • True
  • False

Question 74

Question
Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.
Answer
  • True
  • False

Question 75

Question
Permanent differences do not give rise to future taxable or deductible amounts.
Answer
  • True
  • False

Question 76

Question
Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.
Answer
  • True
  • False

Question 77

Question
When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.
Answer
  • True
  • False

Question 78

Question
Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.
Answer
  • True
  • False

Question 79

Question
The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.
Answer
  • True
  • False

Question 80

Question
A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.
Answer
  • True
  • False

Question 81

Question
An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.
Answer
  • True
  • False

Question 82

Question
Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities.
Answer
  • True
  • False

Question 83

Question
The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.
Answer
  • True
  • False

Question 84

Question
Taxable income of a corporation
Answer
  • differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.
  • differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.
  • is based on generally accepted accounting principles.
  • is reported on the corporation's income statement.

Question 85

Question
Taxable income of a corporation differs from pretax financial income because of Permanent Temporary Differences Differences
Answer
  • No No
  • No Yes
  • Yes Yes
  • Yes No

Question 86

Question
The deferred tax expense is the
Answer
  • increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
  • increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
  • increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
  • decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

Question 87

Question
Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Future Taxable Amounts Deductible Amounts
Answer
  • Yes Yes
  • Yes No
  • No Yes
  • No No

Question 88

Question
A temporary difference arises when a revenue item is reported for tax purposes in a period After it is reported Before it is reported in financial income in financial income
Answer
  • Yes Yes
  • Yes No
  • No Yes
  • No No

Question 89

Question
At the December 31, 2014 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2015, a future taxable amount will occur and
Answer
  • pretax financial income will exceed taxable income in 2015.
  • Unruh will record a decrease in a deferred tax liability in 2015.
  • total income tax expense for 2015 will exceed current tax expense for 2015.
  • Unruh will record an increase in a deferred tax asset in 2015.

Question 90

Question
Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes.
Answer
  • item II only
  • items I and II only
  • items II and III only
  • items I and IV only

Question 91

Question
A major distinction between temporary and permanent differences is
Answer
  • permanent differences are not representative of acceptable accounting practice.
  • temporary differences occur frequently, whereas permanent differences occur only once.
  • once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.
  • temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

Question 92

Question
Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?
Answer
  • Prepaid expenses that are deducted on the tax return in the period paid.
  • Product warranty liabilities.
  • Depreciable property.
  • Fines and expenses resulting from a violation of law.

Question 93

Question
Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?
Answer
  • Subscriptions received in advance.
  • Prepaid royalty received in advance.
  • An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.
  • Interest received on a municipal obligation.

Question 94

Question
Which of the following differences would result in future taxable amounts?
Answer
  • Expenses or losses that are tax deductible after they are recognized in financial income.
  • Revenues or gains that are taxable before they are recognized in financial income.
  • Revenues or gains that are recognized in financial income but are never included in taxable income.
  • Expenses or losses that are tax deductible before they are recognized in financial income.

Question 95

Question
Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be
Answer
  • a balance in the Unearned Rent account at year end.
  • using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
  • a fine resulting from violations of OSHA regulations.
  • making installment sales during the year.

Question 96

Question
An example of a permanent difference is
Answer
  • proceeds from life insurance on officers.
  • interest expense on money borrowed to invest in municipal bonds.
  • insurance expense for a life insurance policy on officers.
  • All of these answers are correct.

Question 97

Question
Which of the following will not result in a temporary difference?
Answer
  • Product warranty liabilities
  • Advance rental receipts
  • Installment sales
  • All of these will result in a temporary difference.

Question 98

Question
A company uses the equity method to account for an investment for financial reporting purposes. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax
Answer
  • Permanent Asset
  • Permanent Liability
  • Temporary Asset
  • Temporary Liability

Question 99

Question
A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax
Answer
  • Temporary Liability
  • Temporary Asset
  • Permanent Liability
  • Permanent Asset

Question 100

Question
Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates? I. Accrual for product warranty liability. II. Subscriptions received in advance. III. Prepaid insurance expense.
Answer
  • I and II only.
  • II only.
  • III only.
  • I and III only.

Question 101

Question
Which of the following is not considered a permanent difference?
Answer
  • Interest received on municipal bonds.
  • Fines resulting from violating the law.
  • Premiums paid for life insurance on a company’s CEO when the company is the beneficiary.
  • Stock-based compensation expense.

Question 102

Question
When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be
Answer
  • handled retroactively in accordance with the guidance related to changes in accounting principles.
  • considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.
  • reported as an adjustment to income tax expense in the period of change.
  • applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

Question 103

Question
Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if
Answer
  • it is probable that a future tax rate change will occur.
  • it appears likely that a future tax rate will be greater than the current tax rate.
  • the future tax rates have been enacted into law.
  • it appears likely that a future tax rate will be less than the current tax rate.

Question 104

Question
Recognition of tax benefits in the loss year due to a loss carryforward requires
Answer
  • the establishment of a deferred tax liability.
  • the establishment of a deferred tax asset.
  • the establishment of an income tax refund receivable.
  • only a note to the financial statements.

Question 105

Question
Recognizing a valuation allowance for a deferred tax asset requires that a company
Answer
  • consider all positive and negative information in determining the need for a valuation allowance.
  • consider only the positive information in determining the need for a valuation allowance.
  • take an aggressive approach in its tax planning.
  • pass a recognition threshold, after assuming that it will be audited by taxing authorities.

Question 106

Question
Uncertain tax positions I. Are positions for which the tax authorities may disallow a deduction in whole or in part. II. Include instances in which the tax law is clear and in which the company believes an audit is likely. III. Give rise to tax expense by increasing payables or increasing a deferred tax liability.
Answer
  • I, II, and III.
  • I and III only.
  • II only.
  • I only.

Question 107

Question
With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when
Answer
  • it is probable and can be reasonably estimated.
  • there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities.
  • it is more likely than not that the tax position will be sustained upon audit.
  • Any of the above exist.

Question 108

Question
Major reasons for disclosure of deferred income tax information is (are)
Answer
  • better assessment of quality of earnings.
  • better predictions of future cash flows.
  • predicting future cash flows for operating loss carryforwards.
  • All of these answer choices are correct.

Question 109

Question
Accounting for income taxes can result in the reporting of deferred taxes as any of the following except
Answer
  • a current or long-term asset.
  • a current or long-term liability.
  • a contra-asset account.
  • All of these are acceptable methods of reporting deferred taxes.

Question 110

Question
Deferred taxes should be presented on the balance sheet
Answer
  • as one net debit or credit amount.
  • in two amounts: one for the net current amount and one for the net noncurrent amount.
  • in two amounts: one for the net debit amount and one for the net credit amount.
  • as reductions of the related asset or liability accounts.

Question 111

Question
Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on
Answer
  • their expected reversal dates.
  • their debit or credit balance.
  • the length of time the deferred tax amounts will generate future tax deferral benefits.
  • the classification of the related asset or liability.

Question 112

Question
Tanner, Inc. incurred a financial and taxable loss for 2015. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2015 financial statements?
Answer
  • The reduction of the loss should be reported as a prior period adjustment.
  • The refund claimed should be reported as a deferred charge and amortized over five years.
  • The refund claimed should be reported as revenue in the current year.
  • The refund claimed should be shown as a reduction of the loss in 2015.

Question 113

Question
A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be
Answer
  • the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.
  • totally eliminated from the financial statements if the amount is related to a noncurrent asset.
  • based on the classification of the related asset or liability for financial reporting purposes.
  • the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

Question 114

Question
All of the following are procedures for the computation of deferred income taxes except to
Answer
  • identify the types and amounts of existing temporary differences.
  • measure the total deferred tax liability for taxable temporary differences.
  • measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks.
  • All of these are procedures in computing deferred income taxes.
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