CHAPTER 14--TAXES ON THE FINANCIAL STATEMENTS

1. If a corporation has no subsidiaries outside the U.S., its book and taxable income are identical. True False 2. Only U.S. corporations are included in a combined GAAP financial statement. True False 3. Foreign entities owned at least 80% by the parent are included in a consolidated group’s U.S. tax return. True False 4. Giant uses the “equity method” to account for the operations of its 40% owned subsidiary Little. A portion of Little’s profits for the year are included in Giant’s GAAP book income. True False 5. The operations of 80% or more owned domestic subsidiaries can be included in the parent corporation’s consolidated tax return, if a proper election is made. True False 6. Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. Yahr’s tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical. True False 7. “Temporary differences” are book-tax income differences that eventually appear in both the financial statements and the income tax return, but not in the same reporting period. True False 8. Schedule UTP of the Form 1120 reconciles financial statement net income after tax with a large corporation’s taxable income. True False 9. “Permanent differences” include items that appear in the Federal income tax return as income or deduction, and in the GAAP financial statements as revenue or expense, but in different reporting periods. True False 10. In general, the purpose of ASC 740 (SFAS 109) is to compute and disclose the actual taxes paid by a business entity to state, local, Federal, and foreign governments for the current year. True False 11. The current tax expense reported on the GAAP financial statement generally represents the taxes actually payable to domestic or foreign governmental authorities. True False 12. A deferred tax liability represents a potential future tax benefit associated with income reported in the current year GAAP financial statements. True False 13. A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements. True False 14. A deferred tax asset is the expected future tax benefit (savings) associated with income reported in the current year GAAP financial statements. True False 15. A deferred tax asset is the current tax benefit (savings) associated with income or expense to be reported in future year GAAP financial statements. True False 16. The valuation allowance can reduce either a deferred tax asset or a deferred tax liability. True False 17. If a valuation allowance is increased in the current year, the corporation’s effective tax rate is less than if the valuation allowance had not increased. True False 18. If a valuation allowance is decreased (released) in the current year, the corporation’s effective tax rate is less than if the valuation allowance had not increased. True False 19. Under GAAP, a corporation can defer reporting the U.S. tax expense related to the earnings of foreign subsidiaries, by taking into account its repatriation plans for these earnings. True False 20. One can describe the benefits of ASC 740-30 (APB 23) as “all or nothing.” If it is elected, APB 23 applies to the earnings from all foreign subsidiaries, in the current year and thereafter. True False 21. Repatriating prior year earnings from a foreign subsidiary located in a low-tax country where ASC 740-30 (APB 23) benefits were previously adopted will decrease a corporation’s current year effective tax rate. True False 22. The taxpayer should use ASC 740-30 (APB 23) income deferral only when the tax rates that apply to the subsidiary are less than those of the applicable U.S. income tax rate. True False 23. The income tax footnote to the GAAP financial statements includes a reconciliation of a corporation’s hypothetical tax on book income to its book tax expense as if it were taxed in full at the applicable U.S. income tax rates. True False 24. In the “rate reconciliation” of GAAP tax footnotes, temporary book-tax differences are reconciled between book income as if taxed at U.S. tax rates and the actual book income tax expense. True False 25. A $50,000 cash tax savings that is temporary has the same effect on a corporation’s current year effective tax rate as a $50,000 cash tax savings that is a permanent book-tax difference. True False 26. ASC 740 (FIN 48) addresses how an entity should report uncertain tax positions in their financial statements. True False 27. ASC 740 (FIN 48) is the GAAP equivalent of the Form 1120 Schedule M-3. True False 28. The major purpose of ASC 740 (SFAS 109) is to match current-year GAAP income with its corresponding tax expenses. True False 29. Current tax expense always totals the amount a taxpayer actually paid all Federal, state, and foreign tax authorities in a particular year. True False 30. Purple, Inc., a domestic corporation, owns 100% of Blue, Ltd., a foreign corporation and Yellow, Inc., a domestic corporation. Purple also owns 40% of Green, Inc., a domestic corporation. Purple receives no distributions from any of these corporations. Which of these entities’ net income are included in Purple’s GAAP income statement for current year financial reporting purposes? A. Purple, Blue, Yellow, and Green. B. Purple, Blue, and Yellow. C. Purple, Blue, and Green. D. Purple, Yellow, and Green.