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Ch 18

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Ch 18 and 19 conceptual

Question 1 of 114

1

Companies should recognize revenue when it is realized and when cash is received.

Select one of the following:

  • True
  • False

Explanation

Question 2 of 114

1

Revenues are realized when a company exchanges goods and services for cash or claims to cash.

Select one of the following:

  • True
  • False

Explanation

Question 3 of 114

1

Trade loading is a practice through which manufacturers try to show sales, profits, and market share they don't actually have.

Select one of the following:

  • True
  • False

Explanation

Question 4 of 114

1

If a company sells its product but gives the buyer the right to return it, the company should not recognize revenue until the sale is collected.

Select one of the following:

  • True
  • False

Explanation

Question 5 of 114

1

Companies can recognize revenue prior to completion and delivery of the product under certain circumstances.

Select one of the following:

  • True
  • False

Explanation

Question 6 of 114

1

Once the separate units of accounting are determined under multiple-deliverable arrangement, the amount paid for the arrangement is allocated among the separate units based on cost of manufacturing the separate unit.

Select one of the following:

  • True
  • False

Explanation

Question 7 of 114

1

The most popular input measure used to determine the progress toward completion in long-term contracts is the cost-to-cost basis.

Select one of the following:

  • True
  • False

Explanation

Question 8 of 114

1

If the difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset.

Select one of the following:

  • True
  • False

Explanation

Question 9 of 114

1

The Construction in Process account includes only construction costs under the percentage-of-completion method.

Select one of the following:

  • True
  • False

Explanation

Question 10 of 114

1

Under the completed-contract method, companies recognize costs only when the contract is completed.

Select one of the following:

  • True
  • False

Explanation

Question 11 of 114

1

The principal advantage of the completed-contract method is that reported revenue reflects final results rather than estimates.

Select one of the following:

  • True
  • False

Explanation

Question 12 of 114

1

Companies must recognize the entire expected loss on an unprofitable contract in the current period under the percentage-of-completion method but not the completed-contract method.

Select one of the following:

  • True
  • False

Explanation

Question 13 of 114

1

A loss in the current period on a profitable contract must be recognized under both the percentage-of-completion and completed-contract method.

Select one of the following:

  • True
  • False

Explanation

Question 14 of 114

1

Under the completion-of-production basis, companies recognize revenue when agricul-tural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution.

Select one of the following:

  • True
  • False

Explanation

Question 15 of 114

1

The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion but not completed-contract.

Select one of the following:

  • True
  • False

Explanation

Question 16 of 114

1

Under the installment-sales method, companies defer revenue and income recognition until the period of cash collection.

Select one of the following:

  • True
  • False

Explanation

Question 17 of 114

1

The installment-sales method defers only the gross profit instead of both the sales price and cost of goods sold.

Select one of the following:

  • True
  • False

Explanation

Question 18 of 114

1

Deferred gross profit is generally treated as unearned revenue and classified as a current liability under the installment-sales method.

Select one of the following:

  • True
  • False

Explanation

Question 19 of 114

1

Under the cost-recovery method, a company recognizes no revenue until cash payments by the buyer exceed the cost of the merchandise sold.

Select one of the following:

  • True
  • False

Explanation

Question 20 of 114

1

Companies recognize profit under the cost-recovery method only when cash collections exceed the total cost of the goods sold.

Select one of the following:

  • True
  • False

Explanation

Question 21 of 114

1

The revenue recognition principle provides that revenue is recognized when

Select one of the following:

  • it is realized.

  • it is realizable.

  • it is realized or realizable and it is earned.

  • None of these answers are correct.

Explanation

Question 22 of 114

1

When goods or services are exchanged for cash or claims to cash (receivables), revenues are considered

Select one of the following:

  • earned.

  • realized.

  • recognized.

  • All of these answers are correct.

Explanation

Question 23 of 114

1

When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are considered

Select one of the following:

  • earned.

  • realized.

  • recognized.

  • All of these answers are correct.

Explanation

Question 24 of 114

1

Which of the following is not an accurate representation concerning revenue recognition?

Select one of the following:

  • Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.

  • Revenue from services rendered is recognized when cash is received or when services have been performed.

  • Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.

  • Revenue from disposing of assets other than products is recognized at the date of sale.

Explanation

Question 25 of 114

1

The process of formally recording or incorporating an item in the financial statements of an entity is

Select one of the following:

  • allocation.

  • articulation.

  • realization.

  • recognition.

Explanation

Question 26 of 114

1

Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as

Select one of the following:

  • service revenue.

  • deferred service revenue.

  • a reduction in installment accounts receivable.

  • a direct addition to retained earnings.

Explanation

Question 27 of 114

1

Which of the following is not a reason why revenue is recognized at the time of sale?

Select one of the following:

  • Realization has occurred.

  • The sale is the critical event.

  • Title legally passes from seller to buyer.

  • All of these are reasons to recognize revenue at the time of sale.

Explanation

Question 28 of 114

1

An alternative available when the seller is exposed to continued risks of ownership through return of the product is

Select one of the following:

  • recording the sale, and accounting for returns as they occur in future periods.

  • not recording a sale until all return privileges have expired.

  • recording the sale, but reducing sales by an estimate of future returns.

  • All of these answers are correct.

Explanation

Question 29 of 114

1

A sale should not be recognized as revenue by the seller at the time of sale if

Select one of the following:

  • payment was made by check.

  • the selling price is less than the normal selling price.

  • the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated.

  • None of these answers are correct.

Explanation

Question 30 of 114

1

The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions?

Select one of the following:

  • The amount of future returns can be reasonably estimated.

  • The seller's price is substantially fixed or determinable at time of sale.

  • The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.

  • The buyer is obligated to pay the seller upon resale of the product.

Explanation

Question 31 of 114

1

All units in a multiple-deliverable arrangement are considered separate units of accounting, provided that:

Select one of the following:

  • the customer can avail the unit from a third party.

  • the arrangement includes a general right of repurchase relative to the delivered item.

  • the seller is the sole manufacturer of the separate unit.

  • performance of the undelivered item is in the control of the buyer.

Explanation

Question 32 of 114

1

The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of these necessary conditions?

Select one of the following:

  • Estimates of progress toward completion, revenues, and costs are reasonably dependable.

  • The contractor can be expected to perform the contractual obligation.

  • The buyer can be expected to satisfy some of the obligations under the contract.

  • The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

Explanation

Question 33 of 114

1

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

Select one of the following:

  • the terms of payment in the contract.

  • the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.

  • the method commonly used by the contractor to account for other long-term construction contracts.

  • the inherent nature of the contractor's technical facilities used in construction.

Explanation

Question 34 of 114

1

How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract?

Select one of the following:

  • Progress billings as deferred income, construction in progress as a deferred expense.

  • Progress billings as income, construction in process as inventory.

  • Net balance, as a current asset if debit balance, and current liability if credit balance.

  • Net balance, as income from construction if credit balance, and loss from construction if debit balance.

Explanation

Question 35 of 114

1

In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the

Select one of the following:

  • total costs incurred to date.

  • total estimated cost.

  • unbilled portion of the contract price.

  • total contract price.

Explanation

Question 36 of 114

1

How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?

Select one of the following:

  • As construction in process in the current asset section of the balance sheet.

  • As construction in process in the noncurrent asset section of the balance sheet.

  • As a receivable in the noncurrent asset section of the balance sheet.

  • In a note to the financial statements until the customer is formally billed for the portion of work completed.

Explanation

Question 37 of 114

1

The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it

Select one of the following:

  • is unacceptable for income tax purposes.

  • gives results based upon estimates which may be subject to considerable uncertainty.

  • is likely to assign a small amount of revenue to a period during which much revenue was actually earned.

  • None of these answers are correct.

Explanation

Question 38 of 114

1

One of the more popular input measures used to determine the progress toward completion in the percentage-of-completion method is the

Select one of the following:

  • revenue-percentage basis.

  • cost-percentage basis.

  • progress completion basis.

  • cost-to-cost basis.

Explanation

Question 39 of 114

1

The principal advantage of the completed-contract method is that

Select one of the following:

  • reported revenue is based on final results rather than estimates of unperformed work.

  • it reflects current performance when the period of a contract extends into more than one accounting period.

  • it is not necessary to recognize revenue at the point of sale.

  • a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used.

Explanation

Question 40 of 114

1

Under the completed-contract method

Select one of the following:

  • revenue, cost, and gross profit are recognized during the production cycle.

  • revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed.

  • revenue, cost, and gross profit are recognized at the time the contract is completed.

  • None of these answers are correct.

Explanation

Question 41 of 114

1

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be

Select one of the following:

  • recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.

  • recognized in the current period under the percentage-of-completion method, but the completed-contract method defers recognition of the loss to the time when the contract is completed.

  • recognized in the current period under the completed-contract method, but the percentage-of-completion method defers the loss until the contract is completed.

  • deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

Explanation

Question 42 of 114

1

Cost estimates at the end of the second year indicate that a loss will result on completion of the entire contract. Which of the following statements is correct?

Select one of the following:

  • Under the completed-contract method, the loss is not recognized until the year the construction is completed.

  • Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed.

  • Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability.

  • Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

Explanation

Question 43 of 114

1

The criteria for recognition of revenue at the completion of production of precious metals and farm products include

Select one of the following:

  • an established market with quoted prices.

  • low additional costs of completion and selling.

  • units are interchangeable.

  • All of these answers are correct.

Explanation

Question 44 of 114

1

In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true?

Select one of the following:

  • Examples involve precious metals or farm equipment.

  • The products possess immediate marketability at quoted prices.

  • No significant costs are involved in selling the product.

  • All of these statements are true.

Explanation

Question 45 of 114

1

For which of the following products is it appropriate to recognize revenue at the completion of production even though no sale has been made?

Select one of the following:

  • Automobiles

  • Large appliances

  • Single family residential units

  • Precious metals

Explanation

Question 46 of 114

1

When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct?

Select one of the following:

  • Under both the percentage-of-completion and the completed-contract methods, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.

  • Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.

  • Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods.

  • No current period adjustment is required.

Explanation

Question 47 of 114

1

Deferred gross profit on installment sales is generally treated as a(n)

Select one of the following:

  • deduction from installment accounts receivable.

  • deduction from installment sales.

  • unearned revenue and classified as a current liability.

  • deduction from gross profit on sales.

Explanation

Question 48 of 114

1

The installment-sales method of recognizing profit for accounting purposes is acceptable if

Select one of the following:

  • collections in the year of sale do not exceed 30% of the total sales price.

  • an unrealized profit account is credited.

  • collection of the sales price is not reasonably assured.

  • the method is consistently used for all sales of similar merchandise.

Explanation

Question 49 of 114

1

The method most commonly used to report defaults and repossessions is

Select one of the following:

  • provide no basis for the repossessed asset thereby recognizing a loss.

  • record the repossessed merchandise at fair value, recording a gain or loss if appropriate.

  • record the repossessed merchandise at book value, recording no gain or loss.

  • None of these answers are correct.

Explanation

Question 50 of 114

1

Under the installment-sales method,

Select one of the following:

  • revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product.

  • gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale.

  • gross profit is not recognized until the amount of cash received exceeds the cost of the item sold.

  • revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.

Explanation

Question 51 of 114

1

The realization of income on installment sales transactions involves

Select one of the following:

  • recognition of the difference between the cash collected on installment sales and the cash expenses incurred.

  • recording the net income related to installment sales and recognizing the income as cash is collected.

  • deferring gross profit while recognizing operating or financial expenses in the period incurred.

  • deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.

Explanation

Question 52 of 114

1

A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?

Select one of the following:

  • At the time of completion of the equipment (completion of production method)

  • At the date of delivery (sales method)

  • The installment-sales method

  • The cost–recovery method

Explanation

Question 53 of 114

1

A seller is using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct?

Select one of the following:

  • After all costs have been recovered, any additional cash collections are included in income.

  • Interest revenue may be recognized before all costs have been recovered.

  • The deferred gross profit is offset against the related receivable on the balance sheet.

  • Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.

Explanation

Question 54 of 114

1

Under the cost-recovery method of revenue recognition,

Select one of the following:

  • income is recognized on a proportionate basis as the cash is received on the sale of the product.

  • income is recognized when the cash received from the sale of the product is greater than the cost of the product.

  • income is recognized immediately after the sale is made.

  • None of these answers are correct.

Explanation

Question 55 of 114

1

Under the deposit method

Select one of the following:

  • the seller recognizes revenue or income on the receipt of cash.

  • a company receives cash from the buyer before it transfers the goods or property.

  • the buyer reports the property as an asset on its balance sheet.

  • the seller has performed on the contract and a legitimate claim exists.

Explanation

Question 56 of 114

1

The deposit method of revenue recognition is used when

Select one of the following:

  • the product can be marketed at quoted prices and units are interchangeable.

  • cash is received before the sales transaction is complete.

  • the contract is short-term or the percentage-of-completion method can’t be used.

  • there are no significant costs of distribution.

Explanation

Question 57 of 114

1

The cost-recovery method

Select one of the following:

  • is prohibited under current GAAP due to its conservative nature.

  • requires a company to defer profit recognition until all cash payments are received from the buyer.

  • is used by sellers when there is a reasonable basis for estimating collectibility.

  • recognizes total revenue and total cost of goods sold in the period of sale.

Explanation

Question 58 of 114

1

Which of the following methods to account for sales is used when a high degree of uncertainty exists related to the collection of receivables?

Select one of the following:

  • Cost-recovery method.

  • Percentage-of-completion method.

  • Deposit method.

  • Completed-contract method.

Explanation

Question 59 of 114

1

In consignment sales, the consignee

Select one of the following:

  • records the merchandise as an asset on its books.

  • records a liability for the merchandise held on consignment.

  • recognizes revenue when it ships merchandise to the consignor.

  • prepares an “account report” for the consignor which shows sales, expenses, and cash receipts.

Explanation

Question 60 of 114

1

Types of franchising arrangements include all of the following except

Select one of the following:

  • service sponsor-retailer.

  • wholesaler-service sponsor.

  • manufacturer-wholesaler.

  • wholesaler-retailer.

Explanation

Question 61 of 114

1

Continuing franchise fees should be recorded by the franchisor

Select one of the following:

  • as revenue when earned and receivable from the franchisee.

  • as revenue when received.

  • in accordance with the accounting procedures specified in the franchise agreement.

  • as revenue only after the balance of the initial franchise fee has been collected.

Explanation

Question 62 of 114

1

Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should

Select one of the following:

  • increase revenue recognized from the initial franchise fee by the amount of the expected future purchases.

  • record a portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee subsequently makes the bargain purchases.

  • defer recognition of any revenue from the initial franchise fee until the bargain purchases are made.

  • None of these.

Explanation

Question 63 of 114

1

A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should

Select one of the following:

  • record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased outlet when the option is exercised.

  • record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is exercised.

  • record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the future amounts receivable from the franchisee.

  • None of these.

Explanation

Question 64 of 114

1

Taxable income is a tax accounting term and is also referred to as income before taxes.

Select one of the following:

  • True
  • False

Explanation

Question 65 of 114

1

Pretax financial income is the amount used to compute income taxes payable.

Select one of the following:

  • True
  • False

Explanation

Question 66 of 114

1

Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period.

Select one of the following:

  • True
  • False

Explanation

Question 67 of 114

1

A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

Select one of the following:

  • True
  • False

Explanation

Question 68 of 114

1

Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.

Select one of the following:

  • True
  • False

Explanation

Question 69 of 114

1

A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.

Select one of the following:

  • True
  • False

Explanation

Question 70 of 114

1

A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.

Select one of the following:

  • True
  • False

Explanation

Question 71 of 114

1

Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.

Select one of the following:

  • True
  • False

Explanation

Question 72 of 114

1

A company should add a decrease in a deferred tax liability to income taxes payable in computing income tax expense.

Select one of the following:

  • True
  • False

Explanation

Question 73 of 114

1

Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered.

Select one of the following:

  • True
  • False

Explanation

Question 74 of 114

1

Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.

Select one of the following:

  • True
  • False

Explanation

Question 75 of 114

1

Permanent differences do not give rise to future taxable or deductible amounts.

Select one of the following:

  • True
  • False

Explanation

Question 76 of 114

1

Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.

Select one of the following:

  • True
  • False

Explanation

Question 77 of 114

1

When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.

Select one of the following:

  • True
  • False

Explanation

Question 78 of 114

1

Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.

Select one of the following:

  • True
  • False

Explanation

Question 79 of 114

1

The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.

Select one of the following:

  • True
  • False

Explanation

Question 80 of 114

1

A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.

Select one of the following:

  • True
  • False

Explanation

Question 81 of 114

1

An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.

Select one of the following:

  • True
  • False

Explanation

Question 82 of 114

1

Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities.

Select one of the following:

  • True
  • False

Explanation

Question 83 of 114

1

The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

Select one of the following:

  • True
  • False

Explanation

Question 84 of 114

1

Taxable income of a corporation

Select one of the following:

  • differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.

  • differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.

  • is based on generally accepted accounting principles.

  • is reported on the corporation's income statement.

Explanation

Question 85 of 114

1

Taxable income of a corporation differs from pretax financial income because of
Permanent Temporary
Differences Differences

Select one of the following:

  • No No

  • No Yes

  • Yes Yes

  • Yes No

Explanation

Question 86 of 114

1

The deferred tax expense is the

Select one of the following:

  • increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.

  • increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.

  • increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.

  • decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

Explanation

Question 87 of 114

1

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in
Future Future
Taxable Amounts Deductible Amounts

Select one of the following:

  • Yes Yes

  • Yes No

  • No Yes

  • No No

Explanation

Question 88 of 114

1

A temporary difference arises when a revenue item is reported for tax purposes in a period
After it is reported Before it is reported
in financial income in financial income

Select one of the following:

  • Yes Yes

  • Yes No

  • No Yes

  • No No

Explanation

Question 89 of 114

1

At the December 31, 2014 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2015, a future taxable amount will occur and

Select one of the following:

  • pretax financial income will exceed taxable income in 2015.

  • Unruh will record a decrease in a deferred tax liability in 2015.

  • total income tax expense for 2015 will exceed current tax expense for 2015.

  • Unruh will record an increase in a deferred tax asset in 2015.

Explanation

Question 90 of 114

1

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.

Select one of the following:

  • item II only

  • items I and II only

  • items II and III only

  • items I and IV only

Explanation

Question 91 of 114

1

A major distinction between temporary and permanent differences is

Select one of the following:

  • permanent differences are not representative of acceptable accounting practice.

  • temporary differences occur frequently, whereas permanent differences occur only once.

  • once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.

  • temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

Explanation

Question 92 of 114

1

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

Select one of the following:

  • Prepaid expenses that are deducted on the tax return in the period paid.

  • Product warranty liabilities.

  • Depreciable property.

  • Fines and expenses resulting from a violation of law.

Explanation

Question 93 of 114

1

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

Select one of the following:

  • Subscriptions received in advance.

  • Prepaid royalty received in advance.

  • An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.

  • Interest received on a municipal obligation.

Explanation

Question 94 of 114

1

Which of the following differences would result in future taxable amounts?

Select one of the following:

  • Expenses or losses that are tax deductible after they are recognized in financial income.

  • Revenues or gains that are taxable before they are recognized in financial income.

  • Revenues or gains that are recognized in financial income but are never included in taxable income.

  • Expenses or losses that are tax deductible before they are recognized in financial income.

Explanation

Question 95 of 114

1

Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be

Select one of the following:

  • a balance in the Unearned Rent account at year end.

  • using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.

  • a fine resulting from violations of OSHA regulations.

  • making installment sales during the year.

Explanation

Question 96 of 114

1

An example of a permanent difference is

Select one of the following:

  • proceeds from life insurance on officers.

  • interest expense on money borrowed to invest in municipal bonds.

  • insurance expense for a life insurance policy on officers.

  • All of these answers are correct.

Explanation

Question 97 of 114

1

Which of the following will not result in a temporary difference?

Select one of the following:

  • Product warranty liabilities

  • Advance rental receipts

  • Installment sales

  • All of these will result in a temporary difference.

Explanation

Question 98 of 114

1

A company uses the equity method to account for an investment for financial reporting purposes. This would result in what type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax

Select one of the following:

  • Permanent Asset

  • Permanent Liability

  • Temporary Asset

  • Temporary Liability

Explanation

Question 99 of 114

1

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax

Select one of the following:

  • Temporary Liability

  • Temporary Asset

  • Permanent Liability

  • Permanent Asset

Explanation

Question 100 of 114

1

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.

Select one of the following:

  • I and II only.

  • II only.

  • III only.

  • I and III only.

Explanation

Question 101 of 114

1

Which of the following is not considered a permanent difference?

Select one of the following:

  • Interest received on municipal bonds.

  • Fines resulting from violating the law.

  • Premiums paid for life insurance on a company’s CEO when the company is the beneficiary.

  • Stock-based compensation expense.

Explanation

Question 102 of 114

1

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

Select one of the following:

  • handled retroactively in accordance with the guidance related to changes in accounting principles.

  • considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset.

  • reported as an adjustment to income tax expense in the period of change.

  • applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

Explanation

Question 103 of 114

1

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

Select one of the following:

  • it is probable that a future tax rate change will occur.

  • it appears likely that a future tax rate will be greater than the current tax rate.

  • the future tax rates have been enacted into law.

  • it appears likely that a future tax rate will be less than the current tax rate.

Explanation

Question 104 of 114

1

Recognition of tax benefits in the loss year due to a loss carryforward requires

Select one of the following:

  • the establishment of a deferred tax liability.

  • the establishment of a deferred tax asset.

  • the establishment of an income tax refund receivable.

  • only a note to the financial statements.

Explanation

Question 105 of 114

1

Recognizing a valuation allowance for a deferred tax asset requires that a company

Select one of the following:

  • consider all positive and negative information in determining the need for a valuation allowance.

  • consider only the positive information in determining the need for a valuation allowance.

  • take an aggressive approach in its tax planning.

  • pass a recognition threshold, after assuming that it will be audited by taxing authorities.

Explanation

Question 106 of 114

1

Uncertain tax positions
I. Are positions for which the tax authorities may disallow a deduction in whole or
in part.
II. Include instances in which the tax law is clear and in which the company believes
an audit is likely.
III. Give rise to tax expense by increasing payables or increasing a deferred
tax liability.

Select one of the following:

  • I, II, and III.

  • I and III only.

  • II only.

  • I only.

Explanation

Question 107 of 114

1

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

Select one of the following:

  • it is probable and can be reasonably estimated.

  • there is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities.

  • it is more likely than not that the tax position will be sustained upon audit.

  • Any of the above exist.

Explanation

Question 108 of 114

1

Major reasons for disclosure of deferred income tax information is (are)

Select one of the following:

  • better assessment of quality of earnings.

  • better predictions of future cash flows.

  • predicting future cash flows for operating loss carryforwards.

  • All of these answer choices are correct.

Explanation

Question 109 of 114

1

Accounting for income taxes can result in the reporting of deferred taxes as any of the following except

Select one of the following:

  • a current or long-term asset.

  • a current or long-term liability.

  • a contra-asset account.

  • All of these are acceptable methods of reporting deferred taxes.

Explanation

Question 110 of 114

1

Deferred taxes should be presented on the balance sheet

Select one of the following:

  • as one net debit or credit amount.

  • in two amounts: one for the net current amount and one for the net noncurrent amount.

  • in two amounts: one for the net debit amount and one for the net credit amount.

  • as reductions of the related asset or liability accounts.

Explanation

Question 111 of 114

1

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

Select one of the following:

  • their expected reversal dates.

  • their debit or credit balance.

  • the length of time the deferred tax amounts will generate future tax deferral benefits.

  • the classification of the related asset or liability.

Explanation

Question 112 of 114

1

Tanner, Inc. incurred a financial and taxable loss for 2015. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2015 financial statements?

Select one of the following:

  • The reduction of the loss should be reported as a prior period adjustment.

  • The refund claimed should be reported as a deferred charge and amortized over five years.

  • The refund claimed should be reported as revenue in the current year.

  • The refund claimed should be shown as a reduction of the loss in 2015.

Explanation

Question 113 of 114

1

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

Select one of the following:

  • the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.

  • totally eliminated from the financial statements if the amount is related to a noncurrent asset.

  • based on the classification of the related asset or liability for financial reporting purposes.

  • the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

Explanation

Question 114 of 114

1

All of the following are procedures for the computation of deferred income taxes except to

Select one of the following:

  • identify the types and amounts of existing temporary differences.

  • measure the total deferred tax liability for taxable temporary differences.

  • measure the total deferred tax asset for deductible temporary differences and operating loss carrybacks.

  • All of these are procedures in computing deferred income taxes.

Explanation

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