Question 1
L1R31TB-AC016-1605
LOS: LOS-3210
Lesson Reference: Lesson 3: Recognition and Measurement of Current and Deferred Tax and Presentation
and Disclosure
Difficulty: medium
According to IFRS, for each class of plant, property, and equipment, firms are most likely to disclose under
the cost model:
fair value.
the useful life.
restrictions on title of intangible assets.
Rationale
fair value.
Firms are required to disclose many items concerning plant, property, and equipment, one of which is
the useful life.
Rationale
the useful life.
Firms are required to disclose many items concerning plant, property, and equipment, one of which is
the useful life.
Rationale
restrictions on title of intangible assets.
Firms are required to disclose many items concerning plant, property, and equipment, one of which is
the useful life.
,Question 2
L1FR-PQ3112-1410
LOS: LOS-3160
Lesson Reference: Lesson 2: Creation of Deferred Tax Assets and Liabilities, Related Calculations and
Changes in Deferred Taxes
Difficulty: medium
ABC Company uses the straight-line method of depreciation on its financial statements to write off a piece of
equipment that it purchased for $10,000. The asset has an estimated salvage value of zero and a useful life of
4 years. On the tax return it writes off the asset over 2 years with zero salvage value. The company is taxed at
30%.
For Year 3, which of the following statements is most likely?
Income tax expense will be greater than taxes payable by $750.
Income tax expense will be lower than taxes payable by $750.
Income tax expense will be greater than taxes payable by $500.
Rationale
This Answer is Correct
In Year 3, taxes payable exceed income tax expense by 2,500 × 0.3 = $750.
,Question 3
L1FR-PQ3125-1410
LOS: LOS-3130
Lesson Reference: Lesson 1: Key Definitions and Calculating the Tax Base of Assets and Liabilities
Difficulty: medium
Royal Manufacturers acquires an asset for $280,000. The asset has a useful life of 4 years and an estimated
salvage value of $20,000. It is expected to generate $150,000 of cash flow each year over its useful life. Royal
will depreciate the asset using the double-declining balance method for tax purposes, but for financial
reporting purposes, it will depreciate the asset on a straight-line basis. The company’s tax rate is 40%.
Taxable income in Year 1 is closest to:
$85,000
$10,000
$34,000
Rationale
This Answer is Correct
Tax Reporting:
Years 1 ($) 2 ($) 3 ($) 4 ($) Total ($)
Revenue 150,000 150,000 150,000 150,000 600,000
Depreciation expense 140,000 70,000 35,000 15,000 260,000
Taxable Income 10,000 80,000 115,000 135,000 340,000
Taxes payable (40%) 4,000 32,000 46,000 54,000 136,000
Profit after tax 6,000 48,000 69,000 81,000 204,000
Financial Reporting:
Years 1 ($) 2 ($) 3 ($) 4 ($) Total ($)
Revenue 150,000 150,000 150,000 150,000 600,000
Depreciation expense 65,000 65,000 65,000 65,000 260,000
Taxable Income 85,000 85,000 85,000 85,000 340,000
Taxes payable (40%) 34,000 34,000 34,000 34,000 136,000
Profit after tax 51,000 51,000 51,000 51,000 204,000
, Question 4
L1FR-PQ3130-1410
LOS: LOS-3160
Lesson Reference: Lesson 2: Creation of Deferred Tax Assets and Liabilities, Related Calculations and
Changes in Deferred Taxes
Difficulty: medium
Royal Manufacturers acquires an asset for $280,000. The asset has a useful life of 4 years and an estimated
salvage value of $20,000. It is expected to generate $150,000 of cash flow each year over its useful life. Royal
will depreciate the asset using the double-declining balance method for tax purposes, but for financial
reporting purposes, it will depreciate the asset on a straight-line basis. The company’s tax rate is 40%.
In Year 1, the company will most likely report a:
Deferred tax liability of $30,000.
Deferred tax liability of $75,000.
Deferred tax asset of $140,000.
Rationale
This Answer is Correct
Taxes payable is $30,000 less than income tax expense. Therefore, the company will recognize a
deferred tax liability of $30,000.
L1R31TB-AC016-1605
LOS: LOS-3210
Lesson Reference: Lesson 3: Recognition and Measurement of Current and Deferred Tax and Presentation
and Disclosure
Difficulty: medium
According to IFRS, for each class of plant, property, and equipment, firms are most likely to disclose under
the cost model:
fair value.
the useful life.
restrictions on title of intangible assets.
Rationale
fair value.
Firms are required to disclose many items concerning plant, property, and equipment, one of which is
the useful life.
Rationale
the useful life.
Firms are required to disclose many items concerning plant, property, and equipment, one of which is
the useful life.
Rationale
restrictions on title of intangible assets.
Firms are required to disclose many items concerning plant, property, and equipment, one of which is
the useful life.
,Question 2
L1FR-PQ3112-1410
LOS: LOS-3160
Lesson Reference: Lesson 2: Creation of Deferred Tax Assets and Liabilities, Related Calculations and
Changes in Deferred Taxes
Difficulty: medium
ABC Company uses the straight-line method of depreciation on its financial statements to write off a piece of
equipment that it purchased for $10,000. The asset has an estimated salvage value of zero and a useful life of
4 years. On the tax return it writes off the asset over 2 years with zero salvage value. The company is taxed at
30%.
For Year 3, which of the following statements is most likely?
Income tax expense will be greater than taxes payable by $750.
Income tax expense will be lower than taxes payable by $750.
Income tax expense will be greater than taxes payable by $500.
Rationale
This Answer is Correct
In Year 3, taxes payable exceed income tax expense by 2,500 × 0.3 = $750.
,Question 3
L1FR-PQ3125-1410
LOS: LOS-3130
Lesson Reference: Lesson 1: Key Definitions and Calculating the Tax Base of Assets and Liabilities
Difficulty: medium
Royal Manufacturers acquires an asset for $280,000. The asset has a useful life of 4 years and an estimated
salvage value of $20,000. It is expected to generate $150,000 of cash flow each year over its useful life. Royal
will depreciate the asset using the double-declining balance method for tax purposes, but for financial
reporting purposes, it will depreciate the asset on a straight-line basis. The company’s tax rate is 40%.
Taxable income in Year 1 is closest to:
$85,000
$10,000
$34,000
Rationale
This Answer is Correct
Tax Reporting:
Years 1 ($) 2 ($) 3 ($) 4 ($) Total ($)
Revenue 150,000 150,000 150,000 150,000 600,000
Depreciation expense 140,000 70,000 35,000 15,000 260,000
Taxable Income 10,000 80,000 115,000 135,000 340,000
Taxes payable (40%) 4,000 32,000 46,000 54,000 136,000
Profit after tax 6,000 48,000 69,000 81,000 204,000
Financial Reporting:
Years 1 ($) 2 ($) 3 ($) 4 ($) Total ($)
Revenue 150,000 150,000 150,000 150,000 600,000
Depreciation expense 65,000 65,000 65,000 65,000 260,000
Taxable Income 85,000 85,000 85,000 85,000 340,000
Taxes payable (40%) 34,000 34,000 34,000 34,000 136,000
Profit after tax 51,000 51,000 51,000 51,000 204,000
, Question 4
L1FR-PQ3130-1410
LOS: LOS-3160
Lesson Reference: Lesson 2: Creation of Deferred Tax Assets and Liabilities, Related Calculations and
Changes in Deferred Taxes
Difficulty: medium
Royal Manufacturers acquires an asset for $280,000. The asset has a useful life of 4 years and an estimated
salvage value of $20,000. It is expected to generate $150,000 of cash flow each year over its useful life. Royal
will depreciate the asset using the double-declining balance method for tax purposes, but for financial
reporting purposes, it will depreciate the asset on a straight-line basis. The company’s tax rate is 40%.
In Year 1, the company will most likely report a:
Deferred tax liability of $30,000.
Deferred tax liability of $75,000.
Deferred tax asset of $140,000.
Rationale
This Answer is Correct
Taxes payable is $30,000 less than income tax expense. Therefore, the company will recognize a
deferred tax liability of $30,000.
