QUESTION 1

A bright-line rule (or bright-line test) is a clearly defined rule or standard, composed of objective factors, which leaves little or no room for varying interpretation or for subjective assessment. For standards with bright-line rules, multiple accountants applying the standard to a set of facts will reach the same conclusion as to the appropriate accounting outcome.

Read ASC 740-10-25-5 to 740-10-25-17 and choose the best answer below.

ASC 740-10-25-5 to 740-10-25-17 establishes a bright-line rule for purposes of determining whether the tax benefits associated with an aggressive tax position can be recognized in the financial statements.

ASC 740-10-25-5 to 740-10-25-17 does not establish a bright-line rule for purposes of determining whether the tax benefits associated with an aggressive tax position can be recognized in the financial statements.

1 points

QUESTION 2

A company believes there is a 0% chance that the IRS will approve an aggressive tax position the company has taken in preparing its tax return. There is only a 1% chance the aggressive tax position will be reviewed by the IRS in an audit. The company is entitled to recognize the tax benefits from the aggressive tax position.

True

False

1 points

QUESTION 3

A company takes an aggressive tax position in preparing its tax return for the year ended 12/31/2016. That tax position creates tax benefits of $1 million. The company concluded that the "more-likely-than-not" threshold for recognition was NOT met, and thus recognized none of the $1 million tax benefit in 2016. During 2017, the IRS issues a Revenue Ruling stating that the aggressive tax position is acceptable. Choose the best answer.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year ended 12/31/2016.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year ended 12/31/2017.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year in which the statute of limitations for the 2016 tax return expires.

None of the above

1 points

QUESTION 4

A company takes an aggressive tax position (assume a deduction) in preparing its tax return for the year ended 12/31/2016. That tax position creates tax benefits of $1 million. The company assesses a 40% likelihood that the aggressive tax position will be accepted by the IRS if the IRS audits the return. During 2018, the IRS audits the 2016 tax return and disallows the deduction, which will require the company to pay the government $1 million plus penalty and interest. Choose the best answer.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year ended 12/31/2016.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year ended 12/31/2018.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year in which the statute of limitations for the 2016 tax return expires.

None of the above

1 points

QUESTION 5

A company takes an aggressive tax position (assume a deduction) in preparing its tax return for the year ended 12/31/2016. That tax position creates tax benefits of $1 million. The company assesses a 40% likelihood that the aggressive tax position will be accepted by the IRS if the IRS audits the return. During 2018, the IRS audits the 2016 tax return and does not challenge the deduction. Choose the best answer.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year ended 12/31/2016.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year ended 12/31/2018.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year in which the statute of limitations for the 2016 tax return expires.

None of the above

1 points

QUESTION 6

A company takes an aggressive tax position (assume a deduction) in preparing its 2016 tax return. During 2018 the IRS completes the examination of the 2016 tax return, allowing the deduction. The company does not intend to appeal or litigate the IRS decision and the company does not believe the IRS will subsequently reopen the audit of the 2016 return. The aggressive tax position is effectively settled in 2018.

True

False

1 points

QUESTION 7

A company takes an aggressive tax position (assume a deduction) in preparing its 2016 tax return. During 2018 the IRS completes the examination of the 2016 tax return, disallowing the deduction. The company intends to litigate the IRS decision in court. The company does not believe the IRS will subsequently reopen the audit of the 2016 return. The aggressive tax position is effectively settled in 2018.

True

False

1 points

QUESTION 8

A company takes an aggressive tax position (assume a deduction) in preparing its 2016 tax return. During 2018 the IRS completes the examination of the 2016 tax return. The IRS agent never asked about the deduction. The company does not intend to appeal or litigate the IRS decision and the company does not believe the IRS will subsequently reopen the audit of the 2016 return. The aggressive tax position is effectively settled in 2018.

True

False

1 points

QUESTION 9

A company takes an aggressive tax position (assume a deduction) in preparing its 2016 tax return. It also took the same deduction in preparing its 2017 tax return. During 2018 the IRS completes the examination of the 2016 tax return. The IRS agent never asked about the deduction. The company does not intend to appeal or litigate the IRS decision and the company does not believe the IRS will subsequently reopen the audit of the 2016 return. The 2017 tax return has not been audited by the IRS. The aggressive tax position taken in preparing the 2017 tax return is effectively settled in 2018.

True

False

1 points

QUESTION 10

A drug company claims an R&D credit in preparing its 2016 tax return, saving the company $1 million. There is no uncertainty about whether the company qualifies for some

R&D credit. However, it is not entirely clear the types of R&D -related costs that qualify for the credit. Management believes there is a 5% chance that, if audited, the IRS will allow the entire $1 million credit (i.e., won't challenge any of the costs that the company claims qualify for the credit). Management believes there is a 48% chance that, if audited, the IRS will disallow $200,000 of the credit (i.e., will allow the company to take an $800,000 credit). Finally, Management believes there is 47% chance that, if audited, the IRS will disallow $400,000 of the credit (i.e., will allow the company to take a $600,000 credit). Read ASC 740-10-30-7 and ASC 740-10-55-99 to ASC 740-10-55-116 and choose the best answer.

The company is allowed to recognize the $1 million tax benefit in its GAAP financials for the year ended 12/31/2016.

The company is allowed to recognize $800,000 of the tax benefit in its GAAP financials for the year ended 12/31/2016.

The company is allowed to recognize $600,000 of the tax benefit in its GAAP financials for the year ended 12/31/2016.

The company is not allowed to recognize any of the tax benefit in its GAAP financials for the year ended 12/31/2016.

1 points

QUESTION 11

In the Pay-No-Tax case, when is UTP1 effectively settled?

Q3 2012.

Q4 2012

Q1 2013

1 points

QUESTION 12

In the Pay-No-Tax case, when is UTP2 effectively settled?

Q3 2012.

Q4 2012

Q1 2013

1 points

QUESTION 13

In the Pay-No-Tax case, when is UTP3 effectively settled?

Q3 2012.

Q4 2012

Q1 2013

1 points

QUESTION 14

In the Pay-No-Tax case, when is UTP4 effectively settled?

Q3 2012.

Q4 2012

Q1 2013

1 points

QUESTION 15

In the Pay-No-Tax case, when is UTP5 effectively settled?

Q3 2012.

Q4 2012

Q1 2013

1 points

QUESTION 16

In the Pay-No-Tax case, when is UTP6 effectively settled?

Q3 2012.

Q4 2012

Q1 2013

1 points

QUESTION 17

Assume the amount of the tax benefit associated with UTP 1 was $100. Read ASC 740-10-25-16. Then, choose the best answer below concerning the journal entry to be booked at the time UTP 1 is deemed effectively settled. Ignore penalties and interest.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $80.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $20.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $80.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $20.

1 points

QUESTION 18

Assume the amount of the tax benefit associated with UTP 2 was $100. Read ASC 740-10-25-16. Then, choose the best answer below concerning the journal entry to be booked at the time UTP 2 is deemed effectively settled. Ignore penalties and interest.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $100.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $100.

No entry required.

None of the above.

1 points

QUESTION 19

Assume the amount of the tax benefit associated with UTP 3 was $100. Read ASC 740-10-25-16. Then, choose the best answer below concerning the journal entry to be booked at the time UTP 3 is deemed effectively settled. Ignore penalties and interest.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $100.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $100.

No entry required.

None of the above.

1 points

QUESTION 20

Assume the amount of the tax benefit associated with UTP 4 was $100. Read ASC 740-10-25-16. Then, choose the best answer below concerning the journal entry to be booked at the time UTP 4 is deemed effectively settled. Ignore penalties and interest.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $15.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $50.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $15.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $50.

1 points

QUESTION 21

Assume the amount of the tax benefit associated with UTP 5 was $100. Read ASC 740-10-25-16. Then, choose the best answer below concerning the journal entry to be booked at the time UTP 5 is deemed effectively settled. Ignore penalties and interest.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $30.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $70.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $30.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $70.

1 points

QUESTION 22

Assume the amount of the tax benefit associated with UTP 6 was $100. Read ASC 740-10-25-16. Then, choose the best answer below concerning the journal entry to be booked at the time UTP 6 is deemed effectively settled. Ignore penalties and interest.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $60.

debit "Liability for Unrecognized Tax Benefits", credit income tax expense for $40.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $60.

debit income tax expense , credit "Liability for Unrecognized Tax Benefits" for $40.

1 points

QUESTION 23

Assume that the 2011 tax return for Pay-No-Tax included UTP 1. The 2011 tax return has not been examined. Can Pay-No-Tax consider the 2011 UTP 2 effectively settled given the result of the audit of the 2010 return?

Yes

No