CFA Level I:FSA : Income taxes(Reading 31) 习题精选

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1. A firm reported higher deferred tax liabilities than deferred tax assets. Using the liability method of accounting for deferred taxes, a growing firm would expect an increase in the statutory tax rate to result in: A. Increase equity B. Decrease equity C. No change in equity

Ans: B the statutory tax rate↑→tax expense↓→net income and retained earnings↓→equity↓

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2. An analyst has correctly recognized the nature of a deferred tax liability under U.S.GAAP when he states that: A. A permanent difference arises from undistributed earnings of an affiliate. B. A temporary difference arises due to interest received from an investment in tax-exempt municipal bonds. C. A temporary difference results from the use of straight-line depreciation for book purposes and an accelerated method for tax purposes.

Ans: C This situation creates a temporary difference between pretax (book) income and taxable income which results in the recognition of a deferred tax liability in the early years of an asset’s useful life. A is incorrect. Undistributed earnings of an affiliate generally result in deferred tax liabilities when the investment is accounted for under the equity method. Under the equity method, the investor company reports its share of the net earnings of the affiliate (investee) for financial reporting (book) purposes, but is taxed on earnings only when they are paid (distributed as dividends. This results in a temporary difference between pretax (book) income and taxable income. B is incorrect. The interest received from an investment in tax-exempt municipal bonds results in a permanent difference that does not reverse.

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3. A company records $42,000 more in tax depreciation than in book depreciation. Assuming a 35% tax rate will apply in the future, how much will be record as a deferred tax liability during the year? A. $14,700. B. $27,300. C. $42,000.

Ans: A. Deferred tax liabilities are taxes that will be paid in the future when temporary differences reverse. Excess (tax) depreciation of $42,000 multiplied by the 35% tax rate shows that $14,700 will be recorded as a deferred tax liability.

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4. Ady Auto Group reported pretax income of $48,000 and taxable income of $60,000. The difference of $12,000 is attributed to warranty expenses. The statutory tax rate is 30% and the company reports income taxes payable of $18,000 on its balance sheet. What is the amount of income tax expense that Ady Auto Group should report on its income statement? A. $6,000. B. $14,400. C. 21,600.

Ans: B. The answer can be derived by creating the journal entry to record the tax expense for the period. The correct tax expense of $14,400 is the plug figure to make the entry balance. Income tax expense (Plug)                              14,400 Deferred tax asset ($12,000*30%)                    3,600     Income taxes payable ($60,000 TI*30%)              18,000 Logically, the answer makes sense as well. The estimated warranty expense is accrued for financial reporting purposes, resulting in a temporary difference that will reverse in a future period when the warranty payments are actually made and deducted on the tax return, thus creating a deferred tax asset. A is incorrect. This answer subtracted the $12,000 difference between pretax income and taxable income from taxes payable, rather than subtracting the $3,600 ($12,000*30%) wax effect of the difference. C is incorrect. This answer incorrectly reflects the deferred tax impact from the warranty expense as liability, rather than an asset.

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5. The following information is available about a company: (all figures in $ thousands) 2012 2011 Deferred tax assets 200 160 Deferred tax liabilities (450) (360) Net deferred tax liabilities (250) (200) Earnings before taxes 4,000 3,800 Income taxes at the statutory rate 1,200 1,140 Current income tax expense 1,000 900 The company’s 2012 income tax expense (in thousands) is closest to: A. $1,000. B. $1,050. C. $1,250.

Ans: B. Income tax expense reported on the income statement = Income tax payable + Net changes in the deferred tax assets and deferred tax liabilities =1,000+(250-200) =1,0000+50* =1,050 * The change in the net deferred tax liability is a $50 increase (indicating that the income tax expense is $50 in excess of the income tax payable [or current income tax expense] and representing an increase in the expense).

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6. A company purchased equipment for $50,000 on 1 January 2009. It is depreciating the equipment over a period of 10 years on a straight-line basis for accounting purposes, but for tax purposes, it is using the declining balance method at a rate of 20%. Given a tax rate of 30%, the deferred tax liability as at the end of 2011 is closest to: A. $420. B. $2,820. C. $6,720.

Ans: B. The deferred tax liability is equal to the tax rate times the difference between the carrying amount of the asset and the tax base. Value for accounting purposes after 3 years: 50,000 – [3 x (50,000 ÷ 10)]= $35,000 Value for tax purposes: Carrying amount = Start of year balance × (1 – 0.20) After three years: 50,000 × 0.8 × 0.8 × 0.8 = 25,600 Difference between accounting and tax values 9,400 Deferred tax liability @ 30%: 30% × 9,400 = 2,

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7. A company which prepares its financial statements in accordance with IFRS incurred and capitalized €2 million of development costs during the year. These costs were fully deductible immediately for tax purposes, but the company is depreciating them over two years for financial reporting purposes. The company has a long history of profitability which is expected to continue. Which is the most appropriate way for an analyst to incorporate the differential tax treatment in his analysis? He should include it in: A. liabilities when calculating the company’s current ratio. B. equity when calculating the company’s return on equity ratio. C. liabilities when calculating the company’s debt-to-equity ratio.

Ans: C. The different treatment for tax purposes and financial reporting purposes is a temporary difference and would create a deferred tax liability. Deferred tax liabilities should be classified as debt if they are expected to reverse with subsequent tax payments. The long history of profitability implies the company will likely be paying taxes in the following years and hence an analyst could reasonably expect the temporary difference to reverse. Under IFRS all deferred tax liabilities are non-current and therefore do not affect the current ratio.

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8. A company has recently revalued one of its depreciable properties and estimated that its remaining useful life would be another 20 years. The applicable tax rate for all years is 30% and the revaluation of the property is not recognized for tax purposes. Details related to this asset are provided in the table below, with all ￡-values in millions. Accounting Purposes Tax Purposes Original values and estimates, start of 2007 2007 Acquisition cost ￡8,000 ￡8,000 Depreciation, straight-line 20 years 8 years Accumulated depreciation end of 2009 ￡1,200 ￡3,000 Net balance end of 2009 ￡6,800 ￡5,000 Re-estimated values and estimates, start of 2010 Revaluation balance start of 2010 ￡10,000 Not applicable New estimated life 20 years The deferred tax liability (in millions) as at the end of 2010 is closest to: A. ￡690. B. ￡960. C. ￡1,650.

Ans: A. Accounting Purposes Tax Purposes Revaluation surplus (10,000 – 6,800) =3,200 no revaluation allowed Depreciation, straight-line 20 years 5 years remaining 2009 start of year balance after revaluation 10,000 5,000 Depreciation 2009 500 1,000 Net balance end of 2009 9,500 4,000 Less revaluation surplus (3,200) _____ Carrying value for purposes of deferred taxes 6,300 4,000 Deferred tax liability = 0.30 x (6,300 – 4,000) = 690 Only the portion of the difference between the tax base and the carrying amount that is not the result of the revaluation is recognized as giving rise to a deferred tax liability. The portion arising from the revaluation surplus is used to reduce the revaluation surplus in equity.

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9. Which of the following events will most likely result in a decrease in a valuation allowance for a deferred tax asset under U.S. GAAP (generally accepted accounting principles)? A(n): A. reduction in tax rates. B. decrease in interest rates. C. increase in the carry forward periods available under the tax law.

Ans: C. Under U.S. GAAP, deferred tax assets must be assessed at each balance sheet date. If there is any doubt whether the deferral will be recovered, the carrying amount should be reduced to the expected recoverable amount. The asset is reduced by increasing the valuation allowance. Should circumstances change, so that it is more probable that the deferred tax benefits will be recovered, the deferred asset account will be increased (and the valuation allowance decreased). An increase in the carry forward period for tax losses extends the possibility that benefits will be realized from the deferred tax asset and would likely result in a decrease in the valuation allowance and an increase in the deferred tax asset.

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10. Under U.S. GAAP what is the most likely effect of the reversal of a valuation allowance related to a deferred tax asset on net income? A. No effect B. A decrease C. An increase

Ans: C. The reversal of a valuation allowance increases the deferred tax assets and decreases the deferred tax expense, increasing net income.