Income Taxes | Test Bank 9e

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Chapter 18 Testbank

1. Extensive disclosure requirements included within AASB 112 are stipulated to allow readers of the financial statements to understand and evaluate the effects of current and deferred tax on the future financial performance only of a reporting entity.

True   False

2. Tax expenses are to be included within profit or loss and also within other comprehensive income as per the 2019 Annual Report of the Commonwealth Bank of Australia (CBA).

True   False

3. A liability is defined in the Conceptual Framework as 'a present obligation of the entity to transfer an economic resource as a result of past events'.

True   False

4. The balance sheet approach recognises all deferred tax obligations.

True   False

5. A deferred tax asset or a deferred tax liability is essentially an estimate of a future tax saving or an estimate of a future tax amount owing to a taxation authority.

True   False

6. The amount of tax assessed by the ATO based on the entity's operations for the period will be reflected in which account?

A. Income tax expense

B. Deferred tax asset

C. Deferred tax liability

D. Income tax payable

7. Some items are typically not allowable tax deductions but are recognised as an expense for accounting purposes. Which of the following items are of that type?

A. Research and development costs

B. Warranty costs

C. Long-service leave

D. Goodwill impairment

8. A taxable temporary difference is one that will result in:

A. taxable amounts in determining taxable profits/tax loss of future reporting periods when the carrying amount of the asset or liability is recovered or settled.

B. amounts that are deductible in determining taxable profit/ tax loss of future reporting periods when the carrying amount of the asset or liability is recovered or settled.

C. taxable amounts in determining taxable profits/tax loss of the current reporting period when the asset or liability is recovered or settled.

D. amounts that are deductible in determining taxable profit/ tax loss of the current reporting period when the asset or liability is recovered or settled.

9. The correct method for calculating the amount of a deferred tax liability or asset may be expressed as which of the following formulas?

A. (Carrying amount of assets or liabilities − tax bases of assets or liabilities) × tax rate

B. Carrying amount of assets or liabilities − (tax bases of assets or liabilities × tax rate)

C. (Carrying amount of assets or liabilities × tax rate) − tax bases of assets or liabilities

D. Carrying amount of assets or liabilities − tax bases of assets or liabilities

10. Some items are typically not allowable tax deductions but are recognised as an expense for accounting purposes. Which of the following items are of that type?

A. Prepaid insurance

B. Government grants

C. Long-service leave

D. Entertainment expenses

11. The balance sheet approach adopted in AASB 112______.

A. is simple to use

B. is a complex method and requires very sophisticated financial readers to understand it

C. uses existing statement of financial position data, thus reducing record keeping costs

D. produces information regarding deferred tax liabilities which is not relevant for the decision making purposes of investors

12. Some items are treated as a deduction for tax purposes when they are paid but are recognised as expenses when they are accrued for accounting purposes. Which of the following items are of that type?

A. Warranty costs

B. Goodwill impairment

C. Fines

D. Entertainment expenses

13. The reversal of deductible temporary differences results in deductions in determining the_______.

A. income tax expense

B. future taxable profits

C. carrying amounts

D. income tax payable

14. When considering the recognition of assets and liabilities for tax purposes, reference is made to the:

A. depreciation rate

B. market value

C. tax base

D. historical cost

15. The accounting profit multiplied by the tax rate is known as ______:

A. income tax payable

B. income tax expense

C. the taxable amount

D. the assessable amount

16. Under which tax estimation method is tax expense equal to taxable income multiplied by the relevant tax rate?

A. Tax effect accounting

B. Taxes payable method

C. Tax deferred method

D. Tax consolidated accounting

17. A method whereby the amount that is payable to the ATO is also treated as the tax expense of the organisation is known as the taxes_________.

A. payable method

B. expense method

C. deferred liability method

D. None of the given answers are correct.

18. Deferred tax assets are generated as a result of deductible temporary differences and the benefits must pass which of the following tests before they may be treated as assets for accounting purposes?

A. Probable test

B. Deferred tax asset test

C. Deferred tax liability test

D. None of the given answers are correct.

19. Which of the following can be defined as action taken wherein accountants adopt particular accounting policies, or make particular accounting-based decisions, primarily to generate desired measures of profits/earnings?

A. Decision management

B. Policy management

C. Earnings management

D. None of the given answers are correct.

20. A tax that is payable on profits arising when an asset (typically a non-current asset) is sold at a price in excess of its cost is known as______.

A. capital gains tax

B. tax base

C. deferred tax asset

D. None of the given answers are correct.

21. According to AASB 112, an entity will normally have a legally enforceable right to set-off a current tax asset against a current tax liability when they relate to income taxes levied by the same taxation authority and:

A. the taxation authority permits the entity to make or receive a single net payment.

B. the current tax asset is equal to the current tax liability.

C. the current tax asset exceeds the current tax liability.

D. None of the given answers are correct.

22. The balance on the deferred tax account is calculated by multiplying the temporary difference by which of the following?

A. The tax rate in existence at the end of the reporting period

B. The tax rate in existence on the first day of the reporting period

C. The average tax rate during the reporting period

D. None of the given answers are correct.

23. When there are both deferred tax assets and deferred tax liabilities at the time of a change in tax rate, there will be both gains and losses (there will be a gain on the asset and a loss on the liability, or vice versa) and the net amount would be treated as________.

A. income

B. an expense

C. income or an expense

D. None of the given answers are correct.

24. The requirements pertaining to offsetting deferred tax assets and deferred tax liabilities are included in which of the following standards?

A. AASB 112

B. AASB 120

C. AASB 116

D. None of the given answers are correct.

25. Which of the following standards does not permit the gain on revaluation to be reclassified to profit or loss?

A. AASB 112

B. AASB 120

C. AASB 116

D. None of the given answers are correct.

26. Which of the following is the profit derived by the entity determined by applying the current taxation rules?

A. Both taxable and accounting profits

B. Taxable profit

C. Accounting profit

D. None of the given answers are correct.

27. Which of the following is derived by applying accounting standards and other generally accepted accounting principles?

A. Both taxable and accounting profits

B. Taxable profit

C. Accounting profit

D. None of the given answers are correct.

28. The view that deferred tax payments will be paid in the future could not be held without which of the following assumptions?

A. The organisation is a 'going concern' and will remain in business.

B. The organisation will not earn sufficient profits in the future.

C. The organisation is 'not a going concern' and will not remain to pay deferred tax payments.

D. None of the given answers are correct.

29. AASB 112 focuses on the tax consequences of recovering an asset to the extent of its______.

A. carrying amount

B. tax base

C. market value

D. None of the given answers are correct.

30. What is 'earnings management'?

______________________________________________________________________________

31. Why is it necessary to understand how tax losses are accounted for?

______________________________________________________________________________

32. What is capital gains tax?

______________________________________________________________________________

33. Discuss the tax implications of asset revaluations as per AASB 116.

______________________________________________________________________________

34. Discuss the 'legally enforceable right of set-off' in respect of offsetting current tax assets and current tax liabilities, according to AASB 112.

______________________________________________________________________________

35. Discuss the implications of an increase or decrease in tax rates on deferred tax liabilities.

______________________________________________________________________________

36. Discuss the issues addressed by the extensive disclosure requirements within AASB 112.

______________________________________________________________________________

37. Discuss the extracts from the 2019 Annual Report of the Commonwealth Bank of Australia (CBA) regarding disclosures being made with respect to tax expenses.

______________________________________________________________________________

38. Define 'asset'.

______________________________________________________________________________

39. Discuss the requirements pertaining to offsetting deferred tax assets and deferred tax liabilities as per AASB 112.

______________________________________________________________________________

40. What is meant by 'accounting profit'?

______________________________________________________________________________

Chapter 18 Testbank