CFA Level 1 - Financial Reporting and Analysis Session 9 - Reading 31

CFA Level 1 - Financial Reporting and Analysis Session 9 - Reading 31 (Notes, Practice Questions, Sample Questions) 1. Which of the following statements is CORRECT? Income tax expense: A)is the amount of taxes due to the government. B)is the reported net of deferred tax assets and liabilities. C)includes taxes payable and deferred income tax expense Explanation — C: Income tax expense is defined as expense resulting from current period pretax income. It includes taxes payable and deferred income tax expense. Taxes payable are the amount of taxes due the government 2. Which of the following statements about tax deferrals is NOT correct? A)A deferred tax liability is expected to result in future cash outflow. B)Income tax paid can include payments or refunds for other years. C)Taxes payable are determined by pretax income and the tax rate. Explanation — C: Taxes payable are the taxes due to the government and are determined by taxable income and the tax rate. Note that pretax income is income before tax expense and is used for financial reporting. Taxable income is the income based upon IRS rules that determines taxes due and is used for tax reporting 3. The difference between income tax expense and taxes payable is a: A)deferred income tax expense. B)deferred tax liability. C)timing difference. Explanation — A: Taxes payable is defined as the taxes due to the government as determined by taxable income and the tax rate, while income tax expense is the amount actually recognized on the income statement. Deferred income tax expense is defined as the difference in income tax expense and taxes payable. Each individual deferred item is expected to be paid (or recovered) in future years 4. A tax loss carryforward is best described as the: A)net taxable loss that can be used to reduce taxable income in the future. B)net taxable loss that can be used to refund paid taxes from the previous year. C)difference of deferred tax liabilities and deferred tax assets. Explanation — A: A tax loss carryforward is the net taxable loss that can be used to reduce taxable income in the future 5. If a firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting, which of the following results is least likely? A)Income tax expense will be greater than taxes payable. B)A permanent difference will result between tax and financial reporting. C)A temporary difference will result between tax and financial reporting. Explanation — B: A permanent difference between tax and financial reporting is a difference that is expected to not reverse itself. Under normal circumstances, the effects of the different depreciation methods will reverse 6. Which of the following best describes valuation allowance? Valuation allowance is a reserve: \ A)created when deferred tax assets are greater than deferred tax liabilities. B)against deferred tax assets based on the likelihood that those assets will not be realized. C)against deferred tax liabilities based on the likelihood that those liabilities will be paid Explanation — B: Valuation allowance is a reserve against deferred tax assets based on the likelihood that those assets will not be realized. Deferred tax assets reflect the difference in tax expense and taxes payable that are expected to be recovered from future operations 7. If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax: A)should be considered an increase in equity. B)must be reduced by a valuation allowance. C)should be considered an asset or liability. Explanation — A: If deferred tax liabilities are expected to reverse in the future, then they should be classified as liabilities. If, however, they are not expected to reverse in the future, then they should be classified as equity 8. Which of the following statements regarding deferred taxes is NOT correct? A)If deferred tax liabilities are not included in equity, debt-to-equity ratio will be reduced. B)Only those components of deferred tax liabilities that are likely to reverse should be considered a liability. C)If deferred taxes are not expected to reverse in the future then they should be classified as equity Explanation — A: When deferred tax liabilities are included in equity, it will reduce the debt-to-equity ratio (by increasing the denominator), in some cases considerably 9. When analyzing a company's financial leverage, deferred tax liabilities are best classified as: A)a liability. B)neither as a liability, nor as equity. C)a liability or equity, depending on the company's particular situation. Explanation — C: Depends on the "performance" of the timing difference 10. For analytical purposes, if a deferred tax liability is expected to not be reversed, it should be treated as a(n): A)immaterial amount and ignored. B)liability. C)an addition to equity Explanation — C: If deferred tax liabilities are expected to never reverse, they should be treated as equity for analytical purposes. This situation usually arises because of growth in capital expenditures 11. Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? A)Return on assets (ROA). B)Return on equity (ROE). C)Debt-to-total assets Explanation — A: The ROA will not be affected by the classification of the deferred taxes. The total assets will remain the same regardless of whether the deferred taxes are classified as a liability or equity 12. Which of the following factors will NOT impact the classification of deferred tax liabilities? A)Present value of the future payments. B)Growth of the firm. C)Changes in firm operations Explanation — A: The present value of the future payments will not impact the classification of deferred tax liabilities. Growth of the firm and the firm’s operations can each have an impact on classification of deferred tax liabilities. These can result in non-payment of deferred taxes even if they are reversed 13. For purposes of financial analysis, an analyst should: A)determine the treatment of deferred tax liabilities on a case-by-case basis. B)always consider deferred tax liabilities as stockholder's equity. C)always consider deferred tax liabilities as a liability Explanation — A: For financial analysis, an analyst must decide on the appropriate treatment of deferred taxes on a case-by-case basis. These can be classified as liabilities or stockholder’s equity, depending on various factors. Sometimes, deferred taxes are just ignored altogether 14. At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in the future on goods already sold. For tax purposes, warranty expense is not deductible until the work is actually performed. The firm believes that the warranty work will be required over the next two years. The tax base of the warranty liability at the end of 20X8 is: A)zero. B)$13,000. C)$26,000. Explanation — A: The carrying value of the warranty liability is $26,000 (the same amount is recorded as a liability on the balance sheet and as an expense on the income statement). The tax base is equal to the carrying value less any amounts deductible in the future. Therefore, the tax base is $0 ($26,000 − $26,000) since the warranty expense will be deductible when the work is performed next year 15. In 20X8, Oliver Ltd. received $80,000 cash from a customer for goods that it could not deliver until the next year and established a liability for unearned revenue. Oliver reports under U.S. GAAP, faces a 40% tax rate, and is located in a tax jurisdiction where unearned revenue is taxed as received. On their balance sheet for 20X8, what change in deferred tax should Oliver record as a result of this transaction? A)A deferred tax asset of $32,000. B)A deferred tax liability of $32,000. C)There is no effect on deferred tax items from this transaction. Explanation — A: Oliver has paid tax on the $80,000 revenue in 20X8, but has not recorded the revenue on it for financial statement purposes. This results in a temporary difference of $32,000, which is a deferred tax asset. The tax asset will be realized when the company recognizes the revenue on its financial statements in the subsequent period 16. Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of 20X8. Based on past experience, it recognizes an allowance for bad debt equal to 10% of its credit sales. The tax base of Alter’s accounts receivable at the end of 20X8 is closest to: A)$31,500. B)$3,500. C)$35,000. Explanation — C: For tax purposes, bad debt expense cannot be deducted until the receivables are deemed worthless. Therefore, the tax base is $35,000 since no bad debt expense has been deducted on the tax return. Note that the carrying value would be $31,500 since bad debt expense is reflected on the income statement 17. A firm buys an asset with an estimated useful life of five years for $100,000 at the beginning of the year. The firm will depreciate the asset on a straight-line basis with no salvage value on its financial statements and will use double declining balance depreciation for tax. The tax basis for this asset at the end of the first year is closest to: A)$60,000. B)$80,000. C)$40,000. Explanation — A: For tax, the asset’s basis is reduced by the DDB depreciation (2/5 × 100,000 = 40,000) from $100,000 to $60,000 18. Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate will be: A)a decrease in deferred tax liability and a decrease in tax expense. B)an increase in deferred tax liability and an increase in tax expense. C)a decrease in deferred tax liability and an increase in tax expense Explanation — B: An increase in tax rates will increase future deferred tax liability, and the impact of the increase in liability will be reflected in the income statement of the year in which the tax rate change is effected 19. On its financial statements for the year ended December 31, Jackson, Inc. listed $2,000,000 in post retirement benefits expense. Jackson, Inc. contributed $200,000 of the expense to its retirement plan during the year. Tax law recognizes cash contributions to a pension account as tax deductible, but not expense accruals. Jackson’s tax rate is 40%. For the year ended December 31, Jackson, Inc. should show, based on the above, an increase in its deferred tax: A)asset account of $720,000. B)liability account of $720,000. C)liability account of $80,000. Explanation — A: Jackson’s post-retirement benefits expense will decrease income tax expense by $2,000,000 × 0.40 = $800,000. The cash contribution will decrease income taxes payable by $200,000 × 0.40 = $80,000. Because taxes payable will exceed income tax expense, the difference of $800,000 − $80,000 = $720,000 is an increase in the deferred tax asset account 20. Corcoran Corp acquired an asset on 1 January 2004, for $500,000. For financial reporting, Corcoran will depreciate the asset using the straight-line method over a 10-year period with no salvage value. For tax purposes the asset will be depreciated straight line for five years and Corcoran’s effective tax rate is 30%. Corcoran’s deferred tax liability for 2004 will: A)decrease by $50,000. B)decrease by $15,000. C)increase by $15,000 Explanation — C: Straight-line depreciation per financial reports = 500,000 / 10 = $50,000 Tax depreciation = 500,000 / 5 = $100,000 Temporary difference = 100,000 − 50,000 = $50,000 Deferred tax liability will increase by $50,000 × 30% = $15,000 21. A company purchased a new pizza oven directly from Italy for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2, and 30% in year 3. For purposes of this exercise ignore all expenses other than depreciation.What is the net income and depreciation expense for year one for financial reporting purposes? Net Income Depreciation Expense A) $2,748 $2,535 B) $2,535 $3,169 C) $4,657 $2,748 Explanation — A: Net income in year 1 for financial reporting purposes will be $2,748 = [($7,192 − $2,535)(1 − 0.41)] The annual depreciation expense on financial statements will be $2,535 = ($12,676 / 5 years) 22. Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers are $476,000, and accrued revenue is only $376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred tax: A)asset of $48,960. B)liability of $17,000. C)asset of $17,000. Explanation — C: Since taxable income ($238,000) exceeds pretax income ($188,000), Kruger will have a deferred tax asset of $17,000 [($238,000 − $188,000)(0.34)] 23. Unit Technologies uses accrual basis for financial reporting purposes and cash accounting for tax purposes. So far this year, Unit Technologies has recorded $195,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $131,000. Assume expenses at 50 percent in both cases (i.e., $ 97,500 on accrual basis and $ 65,500 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax: A)liability of $16,320. B)liability of $10,880. C)asset of $10,880 Explanation — B: Since pretax income ($97,500) exceeds the taxable income ($65,500), United Technologies will have a deferred tax liability of $10,880 = [( $97,500 − $65,500)(0.34)] 24. This year, Blue Horizon has recorded $390,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $262,000. Assume expenses at 50% in both cases (i.e., $195,000 on accrual basis and $131,000 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax: A)liability of $21,760. B)liability of $16,320. C)asset of $21,760 Explanation — A: Since pretax income ($195,000) exceeds the taxable income ($131,000), Blue Horizon will have a deferred tax liability of $21,760 [($195,000 − $131,000)(0.34)] 25. Camphor Associates uses accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers is $238,000, and accrued revenue is only $188,000. Assume expenses at 50% in both cases (i.e., $119,000 on cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset/liability in this case? A deferred tax: A)asset of $48,960. B)liability of $8,500. C)asset of $8,500 Explanation — C: Since taxable income ($119,000) exceeds pretax income ($94,000), Camphor will have a deferred tax asset of $8,500 = [($119,000 − $94,000)(0.34)] 26. A firm purchased a piece of equipment for $6,000 with the following information provided: ● Revenue will increase by $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 balance is used for tax purposes. Calculate the incremental income tax expense for financial reporting for years 1 and 2. Year 1 Year 2 A) $3,300 $4,100 B) $3,900 $3,900 C) $600 -$200 Explanation — B: Using SL: Revenue Dep. Pretax income Tax Expense Yr. 1 15,000 2,000 13,000 3,900 Yr. 2 15,000 2,000 13,000 3,900 27. Laser Tech has net temporary differences between tax and book income resulting in a deferred tax liability of $30.6 million. According to U.S. GAAP, an increase in the tax rate would have what impact on deferred taxes and net income, respectively: Deferred Taxes Net Income A) Increase Decrease B) Increase No effect C) No effect Decrease Explanation — A: If tax rates rise then deferred tax liabilities will also rise. The increase in deferred tax liabilities will increase the current tax expense, and if expenses are increasing the net income will decrease 28.1 A dance club purchased new sound equipment for $25,352. It will work for 5 years and has no salvage value. Their tax rate is 41%, and their annual revenues are constant at $14,384. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2 and 30% in Year 3. For purposes of this exercise ignore all expenses other than depreciation.Assume that the tax rate changes for years 4 and 5 from 41% to 31%. What will be the deferred tax liability as of the end of year three? A)$1,039. B)$2,948. C)$3,144. Explanation — C: Straight-line depreciation = $25,352 / 5 = $5,070. Income using straight-line depreciation = $14,384 − $5,070 = $9,314. Accelerated depreciation (years 1 and 2) = 0.35($25,352) = $8,873. Income (years 1 and 2) = $14,384 − $8,873 = $5,511. Accelerated depreciation (year 3) = 0.3($25,352) = $7,606. Income (year 3) = $14,384 − $7,606 = $6,778. Deferred tax liability at the end of year three, after the change in the expected tax rate, will be $3,144: DTL for year 1 = $1,178.93 = [($9,314 − $5,511)(0.31)]. DTL for year 2 = $1,178.93 = [($9,314 − $5,511)(0.31)]. DTL for year 3 = $786.16 = [($9,314 − $6,778)(0.31)] $1,178.93 + $1,178.93 + $786.16 = $3,144 28.2 Because the tax rate changes for years 4 and 5 from 41% to 31%, net income will have to be adjusted for financial reporting purposes in year three. What is the amount of this adjustment? A)$1,030. B)$747. C)$1,014. Explanation — C: The deferred tax liability will decrease by $1,014 = ($4,158 − $3,144) due to the new lower tax rate. An adjustment of $1,014 in tax expense will result in an increase in net income by the same amount of $1,014. Deferred tax liability at the end of year 3 with tax rate of 41% = $4,158. Deferred tax liability at the end of year 3 with tax rate of 31% = $3,144 29.1 An analyst gathered the following data for Alice Company. ·Alice Company reported a pretax income of $400,000 in its income statement for the period ended December 31, 2002. ·Included in its pretax income are: (1) interest received on tax-free municipal bonds $50,000 and (2) rent expense of $20,000. (Only $10,000 was paid in cash for rent during 2002). ·Alice follows cash basis for tax reporting. ·Assume a tax rate of 40%. What is the income tax expense that Alice should report on its income statement for the year ended December 31, 2002? A)$160,000. B)$140,000. C)$132,000. Explanation — B: $400,000 – 50,000 = $350,000. $350,000 × 40% = $140,000 29.2 Based on the information provided, which of the following is most accurate with respect to deferred tax during 2002? Deferred tax: A)liability will increase by $4,000. B)will remain unchanged. C)asset will increase by $4,000. Explanation — C: Since only $10,000 of the rent expense will be allowed per tax returns, a deferred tax asset of $4,000 will result ($10,000 × 40%). 29.3 All else equal, when a company issues bonds at a premium, the debt/equity ratio will show: A)an increasing trend over the life of the bond. B)a decreasing trend over the life of the bond. C)stable trend over the life of the bond. Explanation — B: Net book value of debt decreases from amortization of the premium, while stockholders’ equity increases (due to increasing earnings). This decreases debt/equity ratio over the life of the bond 30. Indata Company sold a specially manufactured item for $5,000,000 on December 31, 20X6. The item was sold on an installment sale basis, with $1,000,000 paid on the date of the sale and $4,000,000 to be paid in four annual installments of $1,000,000 plus interest at the market rate of 6%. Indata’s tax rate is 40% and its costs to construct the item were $2,500,000. Indata recognizes the entire amount of the sale as income on the date the sale is made for accounting purposes, but not until cash is received for tax purposes.On its balance sheet dated December 31, 20X6, Indata will, as a result of the transaction described above, increase its deferred tax: A)asset by $800,000. B)liability by $800,000. C)liability by $200,000. Explanation — B: Accounting profit from the installment sale was $5,000,000 - $2,500,000 = $2,500,000. Income tax expense is calculated based on 40% of accounting profit, so tax expense from the transaction is $2,500,000 × 0.40 = $1,000,000. Revenue reported on the tax form is $1,000,000 and the year's costs for tax purposes are $2,500,000 × ($1,000,000 / $5,000,000) = $500,000. Income taxes payable, as of December 31, 2006, were ($1,000,000 – $500,000) × 0.40 = $200,000. The excess of income tax expense over income taxes payable is a deferred tax liability of $1,000,000 $200,000 = $800,000 31.1 A dance club purchased new sound equipment for $25,352. It will work for 5 years and has no salvage value. Their tax rate is 41%, and their annual revenues are constant at $14,384. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2 and 30% in Year 3. For purposes of this exercise ignore all expenses other than depreciation.What is the tax payable for year one? A)$2,259. B)$779. C)$1,909. Explanation — A: Tax payable for year one will be $2,259 = [{$14,384 − ($25,352 × 0.35)} × 0.41]. 31.2 What is the deferred tax liability as of the end of year one? A)$1,559. B)$1,909. C)$1,129. Explanation — A: The deferred tax liability for year 1 will be $780. Pretax Income = $9,314 ( $14,384 − $5,070). Taxable Income = $5,511 ($14,384 − $8,873). Deferred Tax liability = $1,559 [($9,314 − $5,511)(0.41)]. 31.3 What is the deferred tax liability as of the end of year three? A)$780. B)$1,029. C)$4,158. Explanation — C: The deferred tax liability at the end of year 3 will be $4,158 ($1,559 + $1,559 + $1,040). Pretax Income = $9,314 = ( $14,384 − $5,070). Taxable Income = $6,778 = [$14,384 − ($25,352 × 0.30)]. Deferred Tax liability for year 3 = $1,040 = [($9,314 − $6,778)(0.41)]. Deferred Tax liability for year 1 = $1,559 = [($9,314 − $5,511)(0.41)]. Deferred Tax liability for year 2 = $1,559 = [($9,314 − $5,511)(0.41)]. 32. Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it became more likely than not that $2,000,000 of the asset’s value may never be realized because of the uncertainty of future income. Graphics, Inc. should: A)not make any adjustments until it is certain that the tax benefits will not be realized. B)reduce the asset by establishing a valuation allowance of $2,000,000 against the asset. C)reverse the asset account permanently by $2,000,000. Explanation — B: If it becomes more likely than not that deferred tax assets will not be fully realized, a valuation allowance that reduces the asset and also reduces income from continuing operations should be established 33. An analyst gathered the following information about a company: ·Taxable income = $100,000. ·Pretax income = $120,000. ·Current tax rate = 20%. ·Tax rate when the reversal occurs will be 10%. What is the company's tax expense? A)$22,000. B)$24,000. C)$10,000. Explanation — A: Deferred tax liability = (120,000 − 100,000) × 0.1 = 2,000 Tax expense = current tax rate × taxable income + deferred tax liability 0.2 × 100,000 + 2,000 = 22,000 34.1 A company purchased a new pizza oven directly from Italy for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2, and 30% in year 3. For purposes of this exercise ignore all expenses other than depreciation. What is the tax payable for year one? A)$1,909. B)$1,130. C)$779. Explanation — B: Tax payable for year 1 will be $1,130 = [{$7,192 − ($12,676 × 0.35)} × 0.41] 34.2 What is the deferred tax liability as of the end of year one? A)$1,129. B)$1,909 C)$780. Explanation — C: The deferred tax liability for year 1 will be $780. Pretax Income = $4,657 = ( $7,192 − $2,535) Taxable Income = $2,755 = ($7,192 − $4,437) Deferred Tax liability = $780 = [($4,657 − $2,755)(0.41)] Alternative solution: The difference in depreciation at the end of year one is $12,676 × (0.35 − 0.20) = $1901. Deferred tax liability = difference in depreciation × tax rate = $1901 × 0.41 = $780. 34.3 What is the deferred tax liability as of the end of year three? A)$1,029. B)$2,079. C)$780. Explanation — B: The deferred tax liability at the end of year 3 will be $2,079 = ($780 + $780 + $519). Pretax Income = $4,657( $7,192 − $2,535) Taxable Income = $3,389[$7,192 − ($12,676 × 0.30)] Deferred Tax liability for year 3 = $519[($4,657 − $3,389)(0.41)] Deferred Tax liability for year 1 = $780[($4,657 − $2,755)(0.41)] Deferred Tax liability for year 2 = $780[($4,657 − $2,755)(0.41)] Alternative solution: For tax purposes the machine is 100% depreciated out at the end of year three, while for GAAP it is only 60% depreciated. The difference in depreciation is $12,676 × (1.00 − 0.60) = $5070. Deferred tax liability = difference in depreciation × tax rate = $5070 × 0.41 = $2079 35. For the year ended 31 December 2004, Pick Co's pretax financial statement income was $400,000 and its taxable income was $300,000. The difference is due to the following: Interest on tax-exempt municipal bonds $140,000 Premium expense on key person life insurance $(40,000) Total $100,000 Pick's statutory income tax rate is 30 percent. In its 2004 income statement, what amount should Pick report as current provision for tax payable? A)$102,000. B)$90,000. C)$120,000. Explanation — B: According to SFAS 109, Current provision = statutory rate × taxable income 30% = Taxes Payable / $300,000 = 0.30 × $300,000 = $90,000 36. Selected information from Kentucky Corp.’s financial statements for the year ended December 31 was as follows (in $ millions): Property, Plant & Equip. 10 Deferred Tax Liability 0.6 Accumulated Depreciation (4) The balances were all associated with a single asset. The asset was permanently impaired and has a present value of future cash flows of $4 million. After Kentucky writes down the asset, Kentucky’s tax accounts will be affected as follows (the tax rate is 40%): A)taxes payable will decrease $800,000. B)deferred tax liability will be eliminated and deferred tax assets will increase $200,000. C)deferred tax liability will be eliminated and deferred tax assets will increase $1.4 million. Explanation — B: A permanently impaired asset must be written down to the present value of its future cash flows. The asset’s carrying value of ($10 − $4 =) $6 million must be reduced by $2 million to $4 million. An impaired value write-down reduces net income for accounting purposes, but not for tax purposes until the asset is sold or disposed of, so taxes payable do not decrease. At a 40% tax rate, the eventual writedown for tax purposes of $2 million will cause $800,000 of changes in deferred tax items. The $600,000 deferred tax liability associated with this asset is eliminated and a deferred tax asset of $200,000 is established 37. 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%. Explanation — C: Reported effective tax rate = Income tax expense / pretax income = $3,000 / $10,000 = 30% 38. 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, current deferred tax asset, noncurrent deferred tax liability and noncurrent deferred tax asset are each disclosed separately. C)Current deferred tax liability and noncurrent deferred tax asset are netted, resulting in the disclosure of a net noncurrent deferred tax liability or asset. Explanation — B: Deferred tax assets and liabilities must be separated between current and noncurrent accounts 39. A tax rate that has been substantively enacted is used to determine the balance sheet values of deferred tax assets and deferred tax liabilities under: A)U.S. GAAP only. B)IFRS only. C)both IFRS and U.S. GAAP. Explanation — B: Under IFRS, a tax rate that has been enacted or substantively enacted is used to measure deferred tax items. Under U.S. GAAP, only a tax rate that has actually been enacted can be used 40. One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that: A)all deferred tax assets and liabilities are classified as noncurrent under IFRS. B)a valuation allowance is presented only under U.S. GAAP. C)under IFRS deferred tax assets and liabilities are not adjusted for changes in the the firm’s actual tax rate Explanation — A: Under U.S. GAAP, deferred tax assets and liabilities are classified as current or non-current according to the classification of the underlying asset or liability. Under IFRS, deferred tax assets and deferred tax liabilities are all classified as noncurrent, with footnote disclosure about the expected timing of reversals