Analysis of Income Taxes

Assertion (A): A reduction in the statutory corporate tax rate decreases the carrying value of both deferred tax assets and deferred tax liabilities on the balance sheet.
Reason (R): Deferred tax items are remeasured at the current statutory rate; a lower rate reduces the future tax benefit of deferred tax assets and simultaneously reduces the future tax obligation of deferred tax liabilities.

Consider the following relationships between an item's carrying amount and its tax base:

I. An asset whose tax base exceeds its carrying amount.
II. An asset whose carrying amount exceeds its tax base.
III. A liability whose tax base exceeds its carrying amount.

How many of the above items represent a deductible temporary difference that gives rise to a deferred tax asset?

A technology company reports income before taxes of USD 5,196 million. Its home country's federal statutory tax rate is 35%. What is the income tax provision at the statutory rate, as would appear at the top of a statutory-to-effective tax rate reconciliation disclosure?

Assertion (A): A company's income tax expense on the income statement can differ from the income taxes payable to tax authorities in the same period.
Reason (R): Permanent differences between accounting profit and taxable income create deferred tax items on the balance sheet that cause this divergence.

Consider the following statements regarding the treatment of uncertain deferred tax assets:

I. Under US GAAP, a valuation allowance is established to reduce the deferred tax asset to the amount more likely than not to be realized.
II. Under IFRS, a valuation allowance account is set up against a deferred tax asset when future economic benefits are uncertain.
III. Under US GAAP, if future economic benefits from a deferred tax asset are in doubt, the existing deferred tax asset is reversed outright.

How many of the above statements are correct according to the CFA Curriculum?

Consider the following scenarios where amounts are taxed on a cash basis but recognized for accounting purposes differently:

I. A company receives advance rent payments, records a deferred revenue liability, and the amount is included in taxable income at the time of receipt.
II. A company accrues a liability for employee vacation pay; the amount is deductible for tax only when vacation is actually taken.
III. A company recognizes a liability for interest received in advance; the amount is included in taxable income in the year of receipt.

How many of the above scenarios give rise to a deferred tax asset?

A company reports total income before taxes of USD 18,696 million. Its total income tax provision is USD 4,756 million and its total current tax provision is USD 5,515 million. The company's effective tax rate is closest to:

Reston Partners owns equipment purchased for GBP 20,000. For financial reporting, straight-line depreciation is used over 10 years; for tax purposes, straight-line depreciation is used over 7 years (GBP 2,857/year). Assuming a tax rate of 30%, what is the deferred tax liability on the balance sheet at the end of Year 1?

A company has a taxable temporary difference of USD 100 million. The deferred tax liability was initially recorded at a statutory tax rate of 35%. If the statutory tax rate is subsequently reduced to 21%, what is the revised deferred tax liability?

Neutrino earns USD 1,000 of profit before taxes in the United States (statutory rate 21%) and USD 1,000 in Ireland (statutory rate 12%) in Year 20X1. What is Neutrino's combined effective tax rate for 20X1?

Consider the following statements about how deferred tax liabilities should be treated for financial analysis purposes:

I. A deferred tax liability should be classified as a liability when it is expected to reverse, resulting in a future cash tax payment.
II. A deferred tax liability should be classified as equity when it is not expected to reverse.
III. A deferred tax liability should be excluded from both debt and equity when only the timing — but not the amount — of future tax payments is uncertain.

How many of the above statements are consistent with the CFA Curriculum's guidance?

Assertion (A): Under US GAAP, when sufficient doubt arises about realizing the future economic benefit of a deferred tax asset, the entire deferred tax asset is removed from the balance sheet.
Reason (R): US GAAP requires a valuation allowance to reduce the deferred tax asset to the amount that is more likely than not to be realized.

Consider the following differences between accounting profit and taxable income:

I. A regulatory fine recorded as an expense for financial reporting but explicitly disallowed as a tax deduction.
II. Equipment depreciated using the straight-line method for accounting over ten years but using an accelerated method for tax over seven years.
III. Research costs expensed immediately for accounting but capitalized and amortized over three years for tax purposes.

How many of the above represent permanent differences?

Consider the following balance sheet items and the relationship between their carrying amount and tax base:

I. An asset whose carrying amount exceeds its tax base.
II. A liability whose carrying amount exceeds its tax base.
III. A liability whose tax base exceeds its carrying amount.

How many of the above items give rise to a deferred tax liability?

A global company reports income before taxes of USD 22,776 million and a provision for income taxes of USD 1,898 million for the fiscal year. The company's effective tax rate is closest to:

Assertion (A): When a company uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting, it recognizes a deferred tax liability.
Reason (R): The asset's carrying amount exceeds its tax base, creating a taxable temporary difference that will reverse in future periods.

Assertion (A): When a company receives rent in advance that is taxable immediately but recognized as revenue for accounting purposes only when earned, a deferred tax liability is recorded on the balance sheet.
Reason (R): The carrying amount of the advance receipt liability exceeds its tax base of zero, creating a deductible temporary difference.

Consider the following descriptions of the three tax rates discussed in the CFA Curriculum:

I. The statutory tax rate is the corporate income tax rate in the jurisdiction where the company is domiciled.
II. The effective tax rate is computed as cash taxes paid divided by pre-tax income.
III. The cash tax rate is the most appropriate rate to use when forecasting a company's future operating cash flows.

How many of the above statements are correct?

Consider the following potential effects when a company's statutory tax rate decreases:

I. An existing deferred tax liability recorded on the balance sheet decreases in carrying value.
II. An existing deferred tax asset recorded on the balance sheet decreases in carrying value.
III. The remeasurement of deferred tax items due to the rate change flows through income tax expense on the income statement.

How many of the above effects are consistent with the CFA Curriculum?

Consider the following differences between accounting profit and taxable income:

I. Penalties and fines recorded as an accounting expense but explicitly disallowed as a deduction under tax law.
II. Revenue recognized under accrual accounting in the current period but taxable only when cash is received.
III. Tax credits that directly reduce taxes payable arising from eligible equipment purchases.

How many of the above items result in NO deferred tax asset or deferred tax liability?

Using the Reston Partners data, taxable income for Year 1 is GBP 3,843 and the deferred tax liability increases from GBP 0 to GBP 257 during Year 1. Assuming a 30% tax rate, what is the income tax expense reported on the income statement for Year 1?