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Questions and Answers
What is the primary purpose of income tax collected by governments?
What is the primary purpose of income tax collected by governments?
How is income tax liability calculated?
How is income tax liability calculated?
Which of the following best describes 'tax base'?
Which of the following best describes 'tax base'?
Using the tax base formula, if the tax liability is $2,500 and the tax rate is 5%, what is the tax base?
Using the tax base formula, if the tax liability is $2,500 and the tax rate is 5%, what is the tax base?
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What does deferred tax (DT) indicate?
What does deferred tax (DT) indicate?
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Which financial measures are impacted by the calculation of deferred tax?
Which financial measures are impacted by the calculation of deferred tax?
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In the context of income tax, what is 'taxable income'?
In the context of income tax, what is 'taxable income'?
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If a business earns $30,000 but only $20,000 is taxable, which of these statements is true?
If a business earns $30,000 but only $20,000 is taxable, which of these statements is true?
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Why are deferred tax assets recognized in relation to provisions recognized under IAS 37?
Why are deferred tax assets recognized in relation to provisions recognized under IAS 37?
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What financial reporting standard governs long-term employee benefits?
What financial reporting standard governs long-term employee benefits?
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How does the recognition of research and development costs affect taxable profit?
How does the recognition of research and development costs affect taxable profit?
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What impact does revaluation or impairment of assets have on taxable profit?
What impact does revaluation or impairment of assets have on taxable profit?
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In the case of Hunt Company, when will the deductible amount for pending litigation be realized for tax purposes?
In the case of Hunt Company, when will the deductible amount for pending litigation be realized for tax purposes?
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What is the tax rate applied to Hunt Company's taxable income?
What is the tax rate applied to Hunt Company's taxable income?
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What financial impact will the accrued loss of $50,000 have on Hunt's taxable income for 2019?
What financial impact will the accrued loss of $50,000 have on Hunt's taxable income for 2019?
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In the context of Hunt Company's 2020 operations, what will happen when the liability is settled?
In the context of Hunt Company's 2020 operations, what will happen when the liability is settled?
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What is the amount recorded as Income Tax Expense at the end of 2019?
What is the amount recorded as Income Tax Expense at the end of 2019?
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At the end of 2020, what is the amount recorded for Income Taxes Payable?
At the end of 2020, what is the amount recorded for Income Taxes Payable?
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What is the taxable income for Columbia Corporation in 2018?
What is the taxable income for Columbia Corporation in 2018?
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How much is the Deferred Tax Asset for the end of 2019?
How much is the Deferred Tax Asset for the end of 2019?
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What effect does the temporary difference have on future periods according to the definitions provided?
What effect does the temporary difference have on future periods according to the definitions provided?
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What is the current tax expense for a company with $30 million EBT and a statutory tax rate of 40%?
What is the current tax expense for a company with $30 million EBT and a statutory tax rate of 40%?
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What is the total pretax financial income reported by ABC Company over the three years?
What is the total pretax financial income reported by ABC Company over the three years?
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What is the excess tax paid in the current year that must be moved to future periods?
What is the excess tax paid in the current year that must be moved to future periods?
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What do you call the difference between the carrying amount of an asset or liability in the financial statement and its tax base?
What do you call the difference between the carrying amount of an asset or liability in the financial statement and its tax base?
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What is the income tax expense reported for each year under IFRS reporting for ABC Company?
What is the income tax expense reported for each year under IFRS reporting for ABC Company?
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What is the total income taxes payable for ABC Company over the three years?
What is the total income taxes payable for ABC Company over the three years?
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How much revenue was reported for tax purposes in 2016 by ABC Company?
How much revenue was reported for tax purposes in 2016 by ABC Company?
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What impact does upward revaluation of assets have on the taxable profit for the current period?
What impact does upward revaluation of assets have on the taxable profit for the current period?
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What type of expenditures are recognized as an item of PP&E for accounting purposes but treated differently for tax purposes?
What type of expenditures are recognized as an item of PP&E for accounting purposes but treated differently for tax purposes?
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In 2015, what was the taxable income calculated for ABC Company?
In 2015, what was the taxable income calculated for ABC Company?
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Which financial statement reflects different income due to variations in reporting rules between IFRS and tax purposes?
Which financial statement reflects different income due to variations in reporting rules between IFRS and tax purposes?
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What would be the total income tax expense for ABC Company over the three years combined?
What would be the total income tax expense for ABC Company over the three years combined?
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What was the difference in taxable income reported for ABC Company in 2016 compared to 2015?
What was the difference in taxable income reported for ABC Company in 2016 compared to 2015?
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What is the first step a company should take when dealing with a net operating loss (NOL)?
What is the first step a company should take when dealing with a net operating loss (NOL)?
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How long can a company carry forward its net operating losses?
How long can a company carry forward its net operating losses?
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What happens to any net operating losses (NOL) that remain after 20 years?
What happens to any net operating losses (NOL) that remain after 20 years?
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In the example provided, which year does Groh Inc. first apply its NOL?
In the example provided, which year does Groh Inc. first apply its NOL?
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How should Groh Inc. record its NOL carried forward as a deferred tax asset?
How should Groh Inc. record its NOL carried forward as a deferred tax asset?
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Which of the following is NOT a consequence of having a net operating loss?
Which of the following is NOT a consequence of having a net operating loss?
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What is the tax rate used for the carry forward calculations in the example?
What is the tax rate used for the carry forward calculations in the example?
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Based on Groh Inc.'s situation, how would its tax refund receivable be calculated?
Based on Groh Inc.'s situation, how would its tax refund receivable be calculated?
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Study Notes
Accounting for Income Taxes
- Income tax is a direct tax imposed on businesses to generate revenue for public services.
- Tax liability is determined by applying applicable tax rates to taxable income.
- Tax base represents the total income subject to taxation, including salaries and investments.
- Tax Base Formula: Tax Liability / Tax Rate allows for computation of the tax base.
Deferred Tax
- Deferred tax (DT) reflects discrepancies between book profits and taxable income.
- Different accounting methods for financial reporting can lead to underpayment or overpayment of taxes.
- Book income and taxable income are reported differently, impacting deferred tax assets and liabilities.
- Recognized expenses may differ for accounting vs tax purposes, influencing deferred tax calculations.
Financial Report vs. Tax Report
- Financial reporting income may not align with taxable income due to differences in accounting rules.
- Example: ABC Company reported uniform expenses under IFRS while varying revenues for tax purposes.
- Income tax expense reflects the tax on financial reporting income, while income tax payable is based on taxable income.
Income Tax Expense vs. Income Taxes Payable
- Income tax expense and taxes payable can diverge in reporting years but sum to the same total over time.
- Temporary differences can create deferred tax assets, which affect future tax liabilities.
- Examples of such differences include provisions for liabilities, employee benefits, and impairments.
Net Operating Loss (NOL) Carry Back and Carry Forward
- NOLs can be carried back to recover taxes from the previous two years, and any remaining can be carried forward for up to 20 years.
- Unused NOLs expire after 20 years and cannot be utilized afterward.
- NOLs carried forward are recorded as deferred tax assets on the balance sheet.
Illustrations and Exercises in Tax Accounting
- Columbia Corporation's temporary differences lead to computations for taxable income, tax payable, and necessary journal entries.
- Companies dealing with advance rental payments may have temporary discrepancies affecting tax calculations.
- Specific accounting entries demonstrate how to manage tax expenses and deferred taxes related to ongoing financial operations.
Key Tax Accounting Principles
- Deferred taxes arise from timing differences in recognizing income and expenses for accounting vs. tax purposes.
- Taxable temporary differences indicate future tax obligations when assets are settled or liabilities are recovered.
- A company can carry forward losses to offset future profits, maximizing tax savings in subsequent periods.
Recommendations
- Maintain clear records of both financial and tax reporting to manage deferred taxes effectively.
- Understand the implications of temporary differences for better financial forecasting and tax planning.
- Utilize NOL strategies to optimize tax benefits across taxable income periods.
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Description
This quiz focuses on the fundamental concepts of income taxes as outlined in Chapter One. Learn how governments levy income taxes on businesses and individuals, and understand the calculation and importance of these taxes in funding public services. Test your knowledge of taxation principles and their implications for business operations.
