MULTIPLE CHOICEConceptual 1 Taxable income of a corporation

MULTIPLE CHOICE-Conceptual 1. Taxable income of a corporation a. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. b. differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting. c. is based on generally accepted accounting principles. d. is reported on the corporation\'s income statement. Taxable income of a corporation differs from pretax financial income because of Permanent Temporary No No Yes Yes No Yes Yes No d. The deferred tax expense is the a. increase in balance of deferred tax asset minus the increase in balance of deferred 3. tax liability. b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. c. increase in balance of deferred tax liability from the beginning to the end of the accounting period. d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in 4. Future Future Taxable Amounts Yes Yes No No Deductible Amounts Yes No Yes No b.

Solution

1. b. Since Accounting income calculated using accrual method whereas taxable income calculated using modified cash basis where acrual system followed for long term balance sheet items and cash basis for short term balance sheet items.

2. c. Taxable income differs from pretax financial income because of bothe temporary differences and permanant differences. For permanant differences there will not be any deferred tax issue. But for temporary differences deferred tax issues will be there.

3. b. Deferred tax liability is created by debiting deferred tax expense and crediting deferred tax liability. In the same way deferred tax asset is created by debiting deferred tax asset and crediting deferred tax expense. So increase in DTL minus increase in DTA results in a figure termed as Deferred Tax expense since DTL is more.

4. a. Depreciation recorded will have both future taxable amounts and future deductible amouts. If depreciation as per tax purposes is more, then it will be taxable and if it is less then it is deductible. So it depends on the case to case.

5. a. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a deferred tax asset. Judgment must be used in considering the relative impact of negative and positive evidence.

6. a. A temporary deifference arises when a revenue is reported for tax purposes after or before it is reported in financial income.

7. b. Accrued receivable booked for fiancial reporting purposes but not for tax purposes leads to deferred tax liability in current year since they have to pay tax on that in future years. in 2018, it will taxed so whatever the liability created in 2017 will be reversed to some extent in 2018.

8. c. Deferred tax liability will comes into picture only when you are paying tax lesser than required as per financial reporting purpose. So revenue is deferred for tax not for financial reporting purpose leads to paying less tax as per tax purposes than required. so liability exists to pay in future. In the same way, expense is deferred for financial reporting purpose not for tax purpose, it means you claimed that expense while paying tax leading to paying lesser tax than required. So liability exists to pay in future.

9. d. Temporary differences are nothing but timing differences which will reverse in future not like permanant differences.

10. b. Product Waranty liabilities are deductible after they are recognized in financial income.