CHAPTER 11
INCOME TAXES
SOLUTIONS
1. C is correct. Because the differences between tax and financial accounting will correct over time, the resulting deferred tax liability, for which the expense was charged to the income statement but the tax authority has not yet been paid, will be a temporary difference. A valuation allowance would only arise if there was doubt over the company’s ability to earn sufficient income in the future to require paying the tax.
2. A is correct. The taxes a company must pay in the immediate future are taxes payable.
3. C is correct. Higher reported tax expense relative to taxes paid will increase the deferred tax liability, whereas lower reported tax expense relative to taxes paid increases the deferred tax asset.
4. B is correct. If the liability is expected to reverse (and thus require a cash tax payment) the deferred tax represents a future liability.
5. A is correct. If the liability will not reverse, there will be no required tax payment in the future and the “liability” should be treated as equity.
6. C is correct. The deferred tax liability should be excluded from both debt and equity when both the amounts and timing of tax payments resulting from the reversals of temporary differences are uncertain.
7. C is correct. Accounting items that are not deductible for tax purposes will not be reversed and thus result in permanent differences.
8. C is correct. Tax credits that directly reduce taxes are a permanent difference, and permanent differences ...
