Accounting for Income Taxes Quiz

Questions and Answers

What is the primary purpose of income tax levied by the government?

To regulate market prices

To provide revenue for public services (correct)

To impose financial penalties on individuals

To encourage business investments

How is the income tax for a business calculated?

By averaging the income over several years

By subtracting expenses from total income

By applying the applicable tax percentage to taxable income (correct)

By multiplying total assets by the tax rate

What does the term 'tax base' refer to?

The total income subject to tax by a authority (correct)

The total allowable deductions for a taxpayer

The total liabilities of a business

The tax percentage applied to income

Using the given example, what is Mrs. Lucia's tax liability based on her taxable income?

$1,500 Signup and view all the answers

What is meant by deferred tax?

The difference between book profits and taxable income Signup and view all the answers

Why might deferred tax arise for a company?

From differences in accounting methods and tax laws Signup and view all the answers

Which of the following correctly defines taxable income?

The income used to determine tax liability Signup and view all the answers

What information is primarily used by a company to report income and expenses to shareholders?

Book income Signup and view all the answers

What is the taxable income for the company?

$20 million Signup and view all the answers

What is the amount of income tax payable calculated using tax rules?

$8 million Signup and view all the answers

What is the income tax expense for the year?

$8.8 million Signup and view all the answers

How much depreciation expense was allowed as a deduction under tax laws?

$5 million Signup and view all the answers

What entry would be made to recognize the deferred tax liability?

Deferred tax liability $800,000 / Income tax expense $800,000 Signup and view all the answers

What is the journal entry to record income tax expense, income tax payable, and deferred income taxes?

Income tax expense $8,800,000 / Income tax payable $8,000,000 / Deferred tax liability $800,000 Signup and view all the answers

When is a deferred tax asset typically recognized?

When the carrying amount of an asset is lower than its tax base Signup and view all the answers

Which of the following affects the taxable income calculation?

MACRS depreciation Signup and view all the answers

What advantage does a net operating loss (NOL) provide to a company?

Allows recovery of past taxes paid Signup and view all the answers

What is the maximum time frame a company can carry forward a net operating loss?

20 years Signup and view all the answers

What happens to any remaining net operating loss after 20 years?

It expires and has no value Signup and view all the answers

Which scenario is a common cause of incurring a net operating loss?

High initial costs in a start-up phase Signup and view all the answers

If Groh Inc. incurs a net operating loss of $500,000 in 2014, what is the potential benefit in 2015?

Offset future taxable income Signup and view all the answers

What is the first step a company should take when reporting a net operating loss?

Carry it back to the previous two years Signup and view all the answers

How are net operating losses carried forward recorded on the balance sheet?

As deferred tax assets (DTA) Signup and view all the answers

Which option is NOT an outcome when a company reports a net operating loss?

Increasing current taxable income Signup and view all the answers

What is the income tax refund receivable for XYZ Company when utilizing the $40 million NOL from 2017?

$6 million Signup and view all the answers

If XYZ Company has an NOL of $25 million remaining after carry backs for 2015 and 2016, what must it do with that loss?

Carry forward the loss to future periods Signup and view all the answers

What is the maximum duration for which a company can carry forward a net operating loss?

20 Signup and view all the answers

What effect does the carry back of a net operating loss have on a company's net income?

It creates a tax benefit, increasing net income Signup and view all the answers

How is the income tax refund calculated when using a net operating loss to revise previous tax returns?

It is determined by applying the tax rate to the taxable income from past years Signup and view all the answers

What is the total amount of income tax expense recorded by XYZ Company recognizing both carry backs?

$6 million Signup and view all the answers

What future financial aspect does the realization of a loss carry forward depend on?

The company's future earnings Signup and view all the answers

When can a company choose to not carry back a net operating loss?

If future taxable income is uncertain Signup and view all the answers

What is the calculated deferred tax asset for the year 2018?

$3.50 million Signup and view all the answers

Which factor contributed to the total deferred tax asset being lower than the product of NOL balance at the start of 2018 and the 2017 tax rate?

Decreased statutory tax rate Signup and view all the answers

What is the total deferred tax asset recognized?

$8.8 million Signup and view all the answers

Which tax rate applied for calculating the deferred tax asset in 2020?

30% Signup and view all the answers

How are deferred tax assets reported on the balance sheet?

As a net current and net noncurrent amount Signup and view all the answers

What accounts are involved in the journal entry recognizing the deferred tax asset?

Deferred tax asset and Income tax expense Signup and view all the answers

In which scenario would a deferred tax asset be classified as unrelated to an asset or liability?

When related to a loss carry forward Signup and view all the answers

What does the deferred tax asset represent in this context?

Future tax benefits from NOL carry forwards Signup and view all the answers

Study Notes