CFAI Practice: M09 Income Taxes

Total: 5 questions


Question 1

A deferred tax liability (DTL) is most likely created when:

  • A. Taxable income exceeds pretax accounting income in the current period
  • B. Pretax accounting income exceeds taxable income in the current period
  • C. The statutory tax rate exceeds the effective tax rate

Question 2

A temporary difference between the tax base and carrying amount of an asset will:

  • A. Never reverse in future periods
  • B. Reverse in future periods, affecting future taxable income
  • C. Only affect the current period’s tax expense

Question 3

The tax base of an asset is 100,000. If the tax rate is 25%, the resulting deferred tax item is:

  • A. A deferred tax asset of $5,000
  • B. A deferred tax liability of $5,000
  • C. A deferred tax liability of $20,000

Question 4

A company has a statutory tax rate of 30% but reports an effective tax rate of 25%. This difference is most likely due to:

  • A. Temporary differences only
  • B. Permanent differences such as tax-exempt income
  • C. Changes in deferred tax balances

Question 5

A valuation allowance against a deferred tax asset is established when:

  • A. The company expects higher future tax rates
  • B. It is probable the DTA will not be fully realized
  • C. The company has no permanent differences