EX5 1. During its first year of operations a company recorded accrued expenses totaling $375,000 for book purposes. For tax purposes, $175,000 of the expenses are deductible during the first year of operations and $200,000 are deductible during the second year of operations. The enacted income tax rate was 40% during the first year of operations and 45% during the second year of operations. The balance sheet at the end of the first year of operations will report a deferred tax: A. asset of $80,000. B. liability of $80,000. C. liability of $90,000. D. asset of $90,000. 2. Analysts can use the deferred tax portion of the income tax note to the financial statements to undo differences in financial reporting choices across firms and thereby: A. denigrate interfirm comparisons. B. improve interfirm comparisons. C. make interfirm comparisons impossible. D. make intracompany comparisons meaningful 3. The two broad categories of differences that result from determining financial income and taxable income are: A. temporary differences and originating differences. B. temporary differences and reversing differences. C. temporary differences and permanent differences. D. permanent differences and deferred differences. 4. The accounting principle violated if temporary differences are not taken into account is the _____ principle. A. historical cost B. matching C. conservatism D. cost/benefit 5. During 2015, its first year of operations, a company recorded depreciation expense of $50,000 for book purposes. For tax purposes during 2015, $100,000 of depreciation expense was deducted. The temporary difference created during 2015 will reverse equally during 2016 and 2017. Book income from operations during the first year was $570,000. The income tax rate is 40%. The income tax expense to be reported in the income statement for the first year of operations is: A. $228,000. B. $208,000. C. $248,000. D. $188,000. 6. The GAAP solution for avoiding distortions that would result from setting income tax expense equal to taxes owed is called: A. intraperiod tax allocation. B. interperiod tax allocation. C. book income allocation. D. intraperiod book allocation of income. 7. A temporary difference created this year causes book income to be greater than taxable income; in future years book income will be less than taxable income. The temporary difference in the future years incomes is referred to as _____ difference. A. reversing temporary B. originating temporary C. permanent D. minor 8. Which of the following cant be assessed by analyzing a companys deferred tax note to the financial statements? A. Earnings quality B. The effective income tax rate C. Future income tax expense D. The impact of economic changes on deferred taxes 9. Divergence between the statutory rate and the effective rate arise for all of the following reasons EXCEPT: A. temporary differences. B. state and local taxes. C. various credits offered by the government. D. differential tax rates in foreign jurisdictions in which the firm operates. 10. A corporation that incurs a pre-tax operating loss must: A. carryback the loss for tax purposes. B. carryforward the loss for tax purposes. C. choose to both carryback and carryforward the loss or to only carryback the loss. D. choose to both carryback and carryforward the loss or to only carryforward the loss. 11. If it is more likely than not that future benefits from a deferred tax asset will NOT be realized in its entirety, a/an _____ is established. A. revenue B. valuation allowance C. expense allowance D. equity account 12. At December 31, 2015, the Rare Corporation reported a $40,000 deferred tax liability pertaining to a $100,000 temporary difference, which will reverse equally during the next four years. On December 31, 2015, after determining the deferred tax liability, Rares management was informed that the income tax rate for years subsequent to 2015 had been changed to 42%. As a result of the tax rate change, Rares 2015 income tax expense will: A. not change. B. increase $800. C. increase $2,000. D. increase $1,200. 13. GAAP specifies that when the tax rates change, the _____ approach be adopted. A. asset B. liability C. retained earnings D. income 14. A corporation which incurs a net operating loss may carry the loss back 2 years and forward: During its first three years of operations a company reported income before taxes of $1,000,000 in year 1, ($1,800,000) in year 2, and $3,000,000 in year 3. The income tax rate applicable to each of the years was 40%. Assume that there werent any temporary differences and a valuation allowance was not necessary. A. 10 years. B. 12 years. C. 20 years. D. 25 years. 15. Under IFRS, deferred tax assets: A. are not recognized. B. require a valuation allowance if its more likely than not that the deferred tax asset will not be realized. C. are recognized only to the extent it is deemed probable that they will be realized. D. are reported as current or noncurrent based on the expected date of the reversal of the temporary difference 16. An analyst has reviewed Blunt Companys note disclosures for its deferred taxes and noted a large increase in Blunts deferred tax liability. This increase could be caused by: A. growth in capital expenditures. B. tax law changes that limit accelerated depreciation. C. GAAP warranty expenses that exceed tax warranty expenses. D. shortening the estimated useful lives of its fixed assets. 17. Which one of the following is a permanent difference between book and taxable income? A. Interest received on municipal bonds B. Installment sales C. Bad debts expense D. Warranty expense 18. Smith Company reported $350,000 in book income before income tax during 2015, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2015 and all future years was 40%. Income tax expense reported on the income statement for the year ending December 31, 2015 would be: A. $100,000. B. $120,000. C. $128,000. D. $140,000. 19. Which of the following results in an increase in income tax expense for a particular time period? A. An increase in the deferred tax asset account during the period. B. An increase in the income tax rate for future years that was enacted during the time period for a company reporting a deferred tax asset at the end of the period. C. A decrease in the deferred liability account during the period. D. An increase in the income tax rate for future years that was enacted during the time period for a company reporting a deferred tax liability at the end of the period. 20. During 2015, a company reported an increase in the deferred tax liability account of $77,990, an increase in the deferred tax asset account of $35,325, and an income tax liability as per the 2015 income tax return of $398,555. What is the income tax expense to be reported on the income statement for the year ending December 31, 2015? A. $398,555 B. $441,220 C. $511,870 D. $285,555 21. Changes in the discount rate on pension plans cause material differences in: A. pension expense and pension obligations. B. interest expense and pension expense. C. pension expense and trust fund recorded on the sponsors balance sheet. D. interest expense and the plan assets. 22. Pona, Inc. has a defined benefit pension plan for its employees. The plan assets and projected benefit obligation at the beginning of the year were $608,000. The accumulated benefit obligation at the beginning of the year was $456,000. The expected return on plan assets was 8% while the actual return was 9%. The service cost for the year was $130,841. The actuarially assumed discount rate was 7% and amortization of prior service costs was $17,750. The total pension expense for the year is: A. $124,761. B. $131,451. C. $136,431. D. $142,511. 23. Postretirement benefits are computed based upon _____ amounts. A. current salary B. current benefit C. future salary D. future benefit 24. Smith, Inc. has a pension plan with the following data available for 2014 and 2015: 2014 2015 Service cost $30,000 $34,000 Interest cost $18,000 $20,000 Actual return on plan assets $15,000 $21,600 Beginning of year plan assets $200,000 $240,000 Settlement rate 8% 8% Expected return on plan assets 8 % 8 % The deferred gain or loss from the return on plan assets for 2014 is: A. $0. B. $1,000 deferred gain. C. $1,000 deferred loss. D. unknown from information provided. 25. The service cost component of a defined benefit pension plan is computed as the: A. present value of the change in the accrued pension liability. B. actual value of the change in the accrued pension liability. C. present value of the change in pension liability from additional employee service. D. undiscounted change in pension liability from additional employee service. 26. Which of the following is NOT a required disclosure pertaining to defined benefit pension plans? A. A reconciliation of the beginning and ending projected benefit obligation balances B. The retirement benefits that are expected to be paid in the next five years C. The amount of pension expense and its components D. The contributions to be made into the pension fund for each of the next ten years 27. When accounting for funded postretirement benefit plans, which one of the following is subtracted in the calculation of postretirement benefit expense? A. Interest cost B. Actual return on plan assets C. Expected return on plan assets D. Service cost 28. A company contributes to its defined contribution plan. Which one of the following journal entries properly records this transaction? A. DR Pension asset CR Cash B. DR Projected minimum liability CR Cash C. DR Pension expense CR Cash D. DR Minimum pension liability CR Cash 29. If the fair value of the plan assets is $260,000 at the beginning of 2015, the beginning of the year projected benefit obligation is $250,000, the cumulative unrecognized gains are $30,000 at the beginning of 2014 and $28,250 at the beginning of 2015, and the average remaining service period of active employees is 10 years, then the amortization of accumulated unrecognized gains for 2015 is: A. $ 0. B. $ 200. C. $ 225. D. $ 2,600. 30. If the beginning unrecognized gains are $30,000, the fair value of the plan assets is $200,000 at the beginning of 2014, and the average remaining service period of active employees is 10 years, the amortization of accumulated unrecognized gains for 2014 is: A. $ 0. B. $ 750. C. $ 1,000. D. $ 2,000 31. Smith, Inc. has a pension plan with the following data available for 2014 and 2015: 2014 2015 Service cost $30,000 $34,000 Interest cost $18,000 $20,000 Actual return on plan assets $15,000 $21,600 Beginning of year plan assets $200,000 $240,000 Settlement rate 8% 8% Expected return on plan assets 8 % 8 % Smiths pension expense for 2014 is: A. $30,000. B. $32,000. C. $33,000. D. $48,000. 32. At the beginning of 2014, Moony, Inc. has a cumulative unrecognized loss of $50,000 in its pension plan. The estimated remaining service period of active employees is 12 years for both years. 2014 2015 Beginning plan asset value $ 335,000 $ 350,000 Beginning projected benefit obligation 325,000 385,000 Current year gain or (loss) (37,500) 25,000 The amortization of accumulated unrecognized losses for 2014 is: A. $ 0. B. $ 1,375. C. $ 3,350. D. $ 4,500. 33. Changes in the discount rate on pension plans cause material differences in: A. pension expense and pension obligations. B. interest expense and pension expense. C. pension expense and trust fund recorded on the sponsors balance sheet. D. interest expense and the plan assets. 34. Which of the following statements pertaining to defined benefit pension plans is NOT correct? A. The funded status of a pension plan is an indicator of potential cash flow problems. B. Pension plan sponsors must make an annual contribution to the pension fund for an amount equal to the service cost regardless of the funded status of the pension plan. C. A small change in the pension discount rate can shift the funded status of the pension from year to year. D. Research provides evidence that firms with underfunded pension plans have lower current cash flows and are likely to have lower future cash flows relative to firms with overfunded pension plans. 35. Pona, Inc. has a defined benefit pension plan for its employees. The plan assets and projected benefit obligation at the beginning of the year were $608,000. The accumulated benefit obligation at the beginning of the year was $456,000. The expected return on plan assets was 8% while the actual return was 9%. The service cost for the year was $130,841. The actuarially assumed discount rate was 7% and amortization of prior service costs was $17,750. The interest cost for the year is: A. $42,560. B. $31,920. C. $36,480. D. $41,040. 36. The income statement reporting for other postretirement benefits is based on the: A. cash basis of accounting. B. accrual basis of accounting. C. cash or accrual basis of accounting. D. regulations established by the tax code 37. Smith, Inc. has a pension plan with the following data available for 2014 and 2015: 2014 2015 Service cost $30,000 $34,000 Interest cost $18,000 $20,000 Actual return on plan assets $15,000 $21,600 Beginning of year plan assets $200,000 $240,000 Settlement rate 8% 8% Expected return on plan assets 8 % 8 % Smiths pension expense for 2015 is: A. $32,400. B. $34,000. C. $34,800. D. $54,000. 38. For income tax purposes, pension plan sponsors deduct the amount of the: A. pension expense. B. service cost. C. plan contribution. D. service cost plus net amortization and deferral. 39. The Brand Corporations December 31, 2014 balance sheet reports a pension liability of $243,000. On December 31, 2014, the projected benefit obligation was $4,975,000, the fair value of the plan assets was $4,679,000, and the accumulated benefit obligation was $3,482,500. The December 31, 2014 balance sheet should report a pension liability totaling: A. $243,000. B. $296,000. C. $4,975,000. D. $3,482,500. 40. Differences between IFRS and U.S. GAAP in accounting for pensions include all of the following EXCEPT: A. under U. S. GAAP the asset (liability) on the balance sheet differs from the plans actual funded status, while under IFRS the asset (liability) on the balance sheet equals the plans actual funded status. B. under IFRS past service costs are recognized immediately as part of pension expense.. C. under IFRS actuarial gains and losses are recognized in OCI without subsequent amortization to pension expense. D. pension expense computed using U.S. GAAP is likely to be higher because it allows firms to use an expected rate of return that exceeds the discount rate.