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Questions and Answers
What is the primary purpose of income tax levied by the government?
What is the primary purpose of income tax levied by the government?
How is the income tax for a business calculated?
How is the income tax for a business calculated?
What does the term 'tax base' refer to?
What does the term 'tax base' refer to?
Using the given example, what is Mrs. Lucia's tax liability based on her taxable income?
Using the given example, what is Mrs. Lucia's tax liability based on her taxable income?
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What is meant by deferred tax?
What is meant by deferred tax?
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Why might deferred tax arise for a company?
Why might deferred tax arise for a company?
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Which of the following correctly defines taxable income?
Which of the following correctly defines taxable income?
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What information is primarily used by a company to report income and expenses to shareholders?
What information is primarily used by a company to report income and expenses to shareholders?
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What is the taxable income for the company?
What is the taxable income for the company?
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What is the amount of income tax payable calculated using tax rules?
What is the amount of income tax payable calculated using tax rules?
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What is the income tax expense for the year?
What is the income tax expense for the year?
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How much depreciation expense was allowed as a deduction under tax laws?
How much depreciation expense was allowed as a deduction under tax laws?
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What entry would be made to recognize the deferred tax liability?
What entry would be made to recognize the deferred tax liability?
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What is the journal entry to record income tax expense, income tax payable, and deferred income taxes?
What is the journal entry to record income tax expense, income tax payable, and deferred income taxes?
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When is a deferred tax asset typically recognized?
When is a deferred tax asset typically recognized?
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Which of the following affects the taxable income calculation?
Which of the following affects the taxable income calculation?
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What advantage does a net operating loss (NOL) provide to a company?
What advantage does a net operating loss (NOL) provide to a company?
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What is the maximum time frame a company can carry forward a net operating loss?
What is the maximum time frame a company can carry forward a net operating loss?
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What happens to any remaining net operating loss after 20 years?
What happens to any remaining net operating loss after 20 years?
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Which scenario is a common cause of incurring a net operating loss?
Which scenario is a common cause of incurring a net operating loss?
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If Groh Inc. incurs a net operating loss of $500,000 in 2014, what is the potential benefit in 2015?
If Groh Inc. incurs a net operating loss of $500,000 in 2014, what is the potential benefit in 2015?
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What is the first step a company should take when reporting a net operating loss?
What is the first step a company should take when reporting a net operating loss?
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How are net operating losses carried forward recorded on the balance sheet?
How are net operating losses carried forward recorded on the balance sheet?
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Which option is NOT an outcome when a company reports a net operating loss?
Which option is NOT an outcome when a company reports a net operating loss?
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What is the income tax refund receivable for XYZ Company when utilizing the $40 million NOL from 2017?
What is the income tax refund receivable for XYZ Company when utilizing the $40 million NOL from 2017?
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If XYZ Company has an NOL of $25 million remaining after carry backs for 2015 and 2016, what must it do with that loss?
If XYZ Company has an NOL of $25 million remaining after carry backs for 2015 and 2016, what must it do with that loss?
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What is the maximum duration for which a company can carry forward a net operating loss?
What is the maximum duration for which a company can carry forward a net operating loss?
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What effect does the carry back of a net operating loss have on a company's net income?
What effect does the carry back of a net operating loss have on a company's net income?
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How is the income tax refund calculated when using a net operating loss to revise previous tax returns?
How is the income tax refund calculated when using a net operating loss to revise previous tax returns?
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What is the total amount of income tax expense recorded by XYZ Company recognizing both carry backs?
What is the total amount of income tax expense recorded by XYZ Company recognizing both carry backs?
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What future financial aspect does the realization of a loss carry forward depend on?
What future financial aspect does the realization of a loss carry forward depend on?
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When can a company choose to not carry back a net operating loss?
When can a company choose to not carry back a net operating loss?
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What is the calculated deferred tax asset for the year 2018?
What is the calculated deferred tax asset for the year 2018?
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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?
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?
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What is the total deferred tax asset recognized?
What is the total deferred tax asset recognized?
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Which tax rate applied for calculating the deferred tax asset in 2020?
Which tax rate applied for calculating the deferred tax asset in 2020?
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How are deferred tax assets reported on the balance sheet?
How are deferred tax assets reported on the balance sheet?
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What accounts are involved in the journal entry recognizing the deferred tax asset?
What accounts are involved in the journal entry recognizing the deferred tax asset?
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In which scenario would a deferred tax asset be classified as unrelated to an asset or liability?
In which scenario would a deferred tax asset be classified as unrelated to an asset or liability?
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What does the deferred tax asset represent in this context?
What does the deferred tax asset represent in this context?
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Study Notes
Accounting for Income Taxes
- Income tax is a direct tax imposed on businesses by the government, calculated based on taxable income.
- Income tax funds public services, government obligations, and citizen goods.
Tax Base Concept
- Tax base is the total income (salary, investments, assets) that is taxable.
- Tax base formula: Tax Base = Tax Liability / Tax Rate.
- Example: If taxable income is $15,000 and the tax rate is 10%, then Tax Liability = $1,500 and Tax Base = $15,000.
Deferred Tax
- Deferred tax (DT) arises from discrepancies between book profits (as per company accounting methods) and taxable income (as per tax authorities' laws).
- Key distinction: Book income = reported to shareholders; taxable income = reported to tax authorities.
- Deferred tax reflects differences in treatment of income, expenses, assets, and liabilities.
Taxable Income and Income Taxes Payable Calculation
- Example for a company with EBITDA of $25 million, tax-exempt interest income of $1 million, and depreciation of $3 million using 40% tax rate.
- Financial accounting income = $22 million, Taxable income = $20 million, resulting in tax payable of $8 million.
- Journal entries for recording tax expenses:
- Income tax expense: $8,800,000
- Income tax payable: $8,000,000
- Deferred tax liability: $800,000.
Recognition of Deferred Tax Assets
- Deferred tax assets arise when the carrying amount of an asset is less than its tax base or when a liability’s carrying amount is greater.
- Losses can offset prior year taxes, benefiting future tax liability.
Common Reasons for Net Operating Loss (NOL)
- NOL typically occurs in start-up phases, with businesses spending more than they earn.
- Examples include cyclical profits in industries like mining.
Carry Backs and Carry Forwards of NOL
- NOL can be carried back to recover past taxes paid or carried forward for tax reduction for up to 20 years.
- Remaining NOL expires after 20 years, no longer usable.
Loss Carry Back Example
- In 2014, Groh Inc. reports a loss of $500,000 after two profitable years; it may recover past taxes based on previous incomes.
Tax Carry Back Exercise
- If a company incurs an NOL, it can revise tax returns from previous two years for refunds.
- Example: XYZ Company with $40 million NOL can adjust 2015 and 2016 taxes, leading to cash refunds.
Loss Carry Forward Example
- Companies can carry forward NOL if carry back is insufficient or not opted for, noting future tax savings.
- Example: In 2018, if taxable income changes and NOL is adjusted, deferred tax assets are identified based on future tax rates.
Financial Statement Presentation of Income Tax
- Balance sheets report deferred tax accounts as assets/liabilities, classified as current or noncurrent.
- Deferred tax assets related to losses are classified based on expected reversal dates of temporary differences.
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Description
Test your understanding of income taxes, including the tax base concept and deferred tax. This quiz covers essential calculations and the impact of different income scenarios on tax liability. Perfect for students learning accounting principles related to taxation.
