Reading 38: Income Taxes LOSi习题精选 regarding, following, effective, statements, 2010

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LOS i: Analyze disclosures relating to deferred tax items and the effective tax rate reconciliation, and discuss how information included in these disclosures affects a company’s financial statements and financial ratios.

Which of the following statements regarding the disclosure of deferred taxes in a company’s balance sheet is most accurate?

A) There should be a combined disclosure of all deferred tax assets and liablities.

B) Current deferred tax liability and noncurrent deferred tax asset are netted, resulting in the disclosure of a net noncurrent deferred tax liability or asset.

C) Current deferred tax liability, current deferred tax asset, noncurrent deferred tax liability and noncurrent deferred tax asset are each disclosed separately.

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Deferred tax assets and liabilities must be separated between current and noncurrent accounts.

 

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A firm purchased a piece of equipment for $6,000 with the following information provided:

• Revenue will be $15,000 per year.
• The equipment has a 3-year life expectancy and no salvage value.
• The firm's tax rate is 30%.
• Straight-line depreciation is used for financial reporting and double declining is used for tax purposes.

Calculate taxes payable for years 1 and 2.

Year 1

Year 2

A) 600 -200

B) 3,300 4,100

C) 3,900 3,900

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Using DDB:

	Yr. 1	Yr. 2
Revenue	15,000	15,000
Depreciation	4,000	1,333
Taxable Income	11,000	13,667
Taxes Payable	3,300	4,100

An asset with a 3-year life would have a straight line depreciation rate of 0.3333 per year. Using DDB the depreciation rate is twice this amount or 0.66667. $2,000 is the amount of depreciation left on the equipment in year 2 ($6,000 ? $4,000). Therefore, the amount of depreciation in the 2nd year is (0.66667)(2,000) = $1,333

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Year:		2002	2003	2004
Income Statement:
	Revenues after all expenses other than depreciation	$200	$300	$400
	Depreciation expense	50	50	50
	Income before income taxes	$150	$250	$350
Tax return:
	Taxable income before depreciation expense	$200	$300	$400
	Depreciation expense	75	50	25
	Taxable income	$125	$250	$375

Assume an income tax rate of 40%.

The company's income tax expense for 2002 is:

A) $50.

B) $0.

C) $60.

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Effective tax rate = Income tax expense / pretax income

Income tax expense = Effective tax rate × pretax income

= $150(0.40)

= $60

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An analyst gathered the following information about a company:

• Pretax income = $10,000.
• Taxes payable = $2,500.
• Deferred taxes = $500.
• Tax expense = $3,000.

What is the firm's reported effective tax rate?

A) 25%.

B) 5%.

C) 30%.

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Reported effective tax rate = Income tax expense / pretax income

 = $3,000 / $10,000

= 30%

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While evaluating the financial statements of Omega, Inc., the analyst observes that the effective tax rate is 7% less than the statutory rate. The source of this difference is determined to be a tax holiday on a manufacturing plant located in South Africa. This item is most likely to be:

A) sporadic in nature, but the effect is typically neutralized by higher home country taxes on the repatriated profits.

B) sporadic in nature, and the analyst should try to identify the termination date and determine if taxes will be payable at that time.

C) continuous in nature, so the termination date is not relevant.

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As the name suggests, a tax holiday is usually a temporary exemption from having to pay taxes in some tax jurisdiction. Because of the temporary nature, the key issue for the analyst is to determine when the holiday will terminate, and how the termination will affect taxes payable in the future.