Question 1

For most companies, tax expense equals tax payable.

Accepted Answer

Tax expense and tax payable can be different due to differences between accounting rules and tax rules. Tax expense is based on accounting rules and may include certain adjustments that are not allowed for tax purposes. Tax payable, on the other hand, is based on actual tax laws and regulations and may not include certain adjustments made for accounting purposes.

Question 2

Gains and losses on the sale of available-for-sale securities are used to compute comprehensive income.

Accepted Answer

Gains and losses on available-for-sale securities are reported as a component of other comprehensive income, which is used to compute comprehensive income. Therefore, the statement is true.

Question 3

The amount of tax to pay the government in the next period is known as:

Accepted Answer

Income tax payable represents the actual amount of tax that a company owes to the government for the current period, based on its taxable income. Income tax expense, on the other hand, represents the total income tax that a company owes for the current period, including any deferred taxes. Deferred tax assets and liabilities represent future tax amounts that will be paid or received due to temporary differences between financial and tax accounting.

Question 4

The most common difference between accounting income and taxable income is that a corporation uses straight-line depreciation in its financial statements and accelerated depreciation in its tax return.

Accepted Answer

Straight-line depreciation is used for financial reporting purposes because it allocates the cost of an asset evenly over its useful life. However, for tax purposes, the IRS allows corporations to use accelerated depreciation methods, such as Modified Accelerated Cost Recovery System (MACRS), which allow for larger deductions earlier in the asset's life. This results in lower taxable income for the corporation.

Question 5

Pretax accounting income is found on the:

Accepted Answer

Pretax accounting income is the income a company generates before taking into account any tax liabilities. This figure is typically only found on the income statement, as it represents the company's earnings from operations before taxes are applied. It is not typically included on the balance sheet or tax return.

Question 6

Corrections to the beginning balance of Retained Earnings for errors found within the current period are called prior-period adjustments.

Accepted Answer

The answer of Corrections to the beginning balance of Retained...

Question 7

Taxable income is found on the:

Accepted Answer

Taxable income is reported on the tax return. It is the amount of income that is subject to income taxes. This information is used to calculate the amount of income tax owed or the amount of the taxpayer's refund. It is not found on the income statement or the balance sheet as those financial statements report financial performance and position of a company, not tax information.

Question 8

The income tax return is prepared in accordance with GAAP.

Accepted Answer

The income tax return is prepared in accordance with tax laws and regulations, not GAAP (Generally Accepted Accounting Principles). GAAP is used for financial reporting purposes, while tax laws dictate how to calculate taxable income and the resulting tax liability.

Question 9

Which of the following statements is TRUE?

Accepted Answer

The income tax return is prepared using rules set by the IRS, not GAAP. The financial statements, on the other hand, are prepared using GAAP. Taxable income is not found on the income statement, it is found on the tax return. Therefore, option C is the only true statement.

Question 10

Income tax payable appears on the:

Accepted Answer

Income tax payable is a liability that represents the amount of income tax owed to the government at the end of an accounting period. As it is a liability, it appears on the balance sheet, not on the income statement or statement of stockholders' equity. It is also not reported on a tax return as it represents a current amount owed rather than an amount already paid.

Question 11

If income tax expense and income tax payable are the same amount, the journal entry to record the expense is:

Accepted Answer

When income tax expense and income tax payable are the same amount, it means that the company is going to pay the exact amount of tax it has incurred during the period. Therefore, the journal entry to record the expense will be a debit to income tax expense and a credit to income tax payable. This records the tax expense for the period and the liability of the company to pay the tax to the government in the future.

Question 12

The formula to determine income tax payable is:

Accepted Answer

The income tax payable is calculated based on the taxable income (as per the income tax return) multiplied by the applicable income tax rate. Hence, option C is the correct formula for determining income tax payable. Option A refers to the income before income tax expense from the income tax return, which is not the same as taxable income. Option B refers to income before income tax expense from the income statement, which is also not the same as taxable income. Option D refers to taxable income from the income statement, which is not the correct source for determining taxable income.

Question 13

For any given year, Income Tax Payable can never exceed Income Tax Expense.

Accepted Answer

Income Tax Payable can exceed Income Tax Expense if there are deferred tax liabilities or if the company has overpaid taxes in previous years, resulting in a credit.

Question 14

Income tax expense helps measure net income.

Accepted Answer

Income tax expense is subtracted from pre-tax income in the income statement to arrive at net income. Therefore, income tax expense is a component of net income and helps measure it.

Question 15

When pretax accounting income exceeds taxable income:

Accepted Answer

If pretax accounting income exceeds taxable income, it means the company has recognized more income on their books than what they will have to pay taxes on. This creates a difference between book income and taxable income, resulting in a deferred tax liability as the company will owe tax on the excess income in future years. Therefore, a deferred tax liability is credited.

Question 16

The basis for computing the amount of tax to pay the government is:

Accepted Answer

Taxable income is the basis for computing the amount of tax to pay the government. It is the amount of income subject to taxation after deductions and exemptions have been applied, as determined under the tax laws.

Question 17

Comprehensive income includes net income less unrealized gains or losses on available-for-sale investments.

Accepted Answer

Comprehensive income includes net income plus unrealized gains or losses on available-for-sale investments, not less.

Question 18

The formula to determine income tax expense is:

Accepted Answer

Income tax expense is calculated based on income before income tax expense (from the income statement) multiplied by the income tax rate. This will provide an estimate of the income taxes owed for the period.

Question 19

Income before tax on the income statement is:

Accepted Answer

Income before tax is also referred to as pretax accounting income, which is the company's income calculated before any taxes are deducted.

Question 20

Income tax expense appears on the:

Accepted Answer

Income tax expense represents the amount of taxes owed based on the taxable income of a business or individual during a specific accounting period. As such, it is a key component of the income statement, which reports revenues, expenses and net income for a given period. While tax returns may also include information about income taxes, tax expense itself is not reported on a tax return. And while taxes payable (i.e., the amount owed to tax authorities for the current period) are reported on the balance sheet, tax expense is a component of net income, which does not appear on the balance sheet. Finally, tax expense is not related to the stockholders' equity, which is a measure of the company's assets minus its liabilities.

Quiz 11: The Income Statement the Statement of Stockholders Equity