Quiz 5
Name:
Student No.: 1.
Which of the following statements is TRUE? The difference between taxes payable for the period and the tax expense recognized on the financial statements results from differences: A. in management control.
B. between basic and diluted earnings. C. between financial and tax accounting. D. between stare and federal tax policies.
2.
Which of the following tax definitions is FALSE? A. Taxable income is income based upon IRS rules.
B. Taxes payable is the amount due to the government.
C. Pretax income is income tax expense divided by one minus the statutory tax rate. D. Income tax expense is the amount listed on the firm's financial statements.
3.
Use the following data to answer Questions 3 through 8.
A firm acquires an assetfor$120,000 with a 4-year useful life and no salvage value. The asset will generate $50,000 of cash flow for all four years.
The tax rate is 40% each year.
The firm will depreciate the asset over three years on a straight-line basis for tax purposes and over all four years on a SL basis for financial reporting purposes. Taxable income in year 1 is: A. $6,000. B. $10,000. C. $20,000. D. $50,000.
4.
Taxes payable in year 1 are: A. $4,000. B. $6,000. C. $8,000. D. $20,000.
5.
Pretax income in year 4 is: A. $6,000. B. $10,000. C. $20,000. D. $50,000.
1
6.
Income tax expense in year 4 is: A. $4,000. B. $6,000. C. $8,000. D. $20,000.
7.
Taxes payable in year 4 are: A. $4,000. B. $6,000. C. $8,000. D. $20,000.
8.
At the end of year2, the firm's balance sheet will report a deferred tax: A. asset of $4,000. B. asset of $8,000. C. liability of $4,000. D. liability of $8,000.
9.
An analyst is comparing a firm to its competitors. The firm has a deferred tax liability and is expected to continue to grow in the foreseeable future. How should the liability be treated for analysis purposes?
A. It should be treated as equity at its full value. B. It should be treated as a liability at its full value.
C. The present value should be treated as a liability with the remainder being treated as equity. D. It should be considered neither a liability nor equity.
10.
An analyst is reviewing a company with a large deferred tax asset on its balance sheet. In reviewing the company's performance over the last few years, the analyst has determined that the firm has had cumulative losses for the last three years and has a large amount of inventory that can only be sold at sharply reduced prices. Which of the following adjustments should the analyst make to account for the deferred tax assets?
A. Record a deferred tax liability to offset the effect of the deferred tax asset on the firm's balance sheet.
B. Recognize a valuation allowance to reflect the fact that the deferred tax asset is unlikely to be realized.
C. Do nothing. The difference between taxable and pretax income that caused the deferred tax asset is likely to reverse in the future.
D. Decrease tax expense by the amount of the deferred tax asset unlikely to be realized.
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