Testbank

to accompany

Applying International
Accounting Standards
by
Alfredson, Leo, Picker, Pacter & Radford
Prepared by
Victoria Wise

John Wiley & Sons Australia, Ltd 2005

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CHAPTER 6 Income taxes

Question 1
Farrugia Limited has an asset which cost $300 and against which depreciation of $100 has
accumulated. The accumulated depreciation for tax purposes is $180 and the company tax rate is
30%. The tax base of this asset is:
A
B
C
D

$120;
$220;
$80;
$20.

Question 2
DSilva Limited has a product warranty liability amounting to $10 000. The product warranty
costs are not tax deductible until paid out to customers. The company tax rate is 30%. The
company has:
A
B
C
D

a deductible temporary difference of $10 000;

an assessable temporary difference of $10 000;
a tax base of $10 000;
a future deductible amount of $0.

Question 3
Under IAS 12 Incomes Taxes, deferred tax assets and liabilities are measured at the tax rates that:
A
B
C
D

applied at the beginning of the reporting period;

at the end of the reporting period;
at the rates that prevail at the reporting date;
are expected to apply when the asset or liability is settled.

Question 4
In jurisdictions where the impairment of goodwill is not tax deductible, IAS 12 Income Taxes:
A
B
C

does not permit the application of deferred tax accounting to goodwill;

allows the recognition of a deferred tax item in relation to goodwill;
requires that any deferred tax items in relation to goodwill be recognised directly in
equity;

Applying International Accounting Standards Chapter 6

-3D

requires that any deferred tax items for goodwill be capitalised in the carrying
amount of goodwill.

Question 5
Tracey Limited revalued an item of plant from initial cost of $10 000 to fair value of $15 000.
The company tax rate is 30%. The adjusting journal entry to recognise the tax effect of the
revaluation will include the following item:
A
B
C
D

DR
DR
CR
CR

Deferred tax asset

Deferred tax liability
Deferred tax asset
Deferred tax liability

$3 500;
$3 500;
$1 500;
$1 500.

Question 6
When a deferred tax asset is subsequently recognised by an acquirer, the following adjustment is
made:
A
B
C
D

increase the carrying amount of goodwill;

reduce the carrying amount of goodwill;
reduce the carrying amount of the assets acquired;
increase the carrying amount of the assets acquired.

Question 7
Deferred tax assets must be recognised for deductible temporary differences and for tax losses,
but only to the extent that:
A
B
C
D

it is probable that future taxable profits will be available;

it is possible that future taxable profits will be available;
it is likely that future deductible expenses will be incurred;
there is a chance that future deductible items will be incurred.

Question 8
On 1 April 20X5, the company rate of income tax was changed from 35% to 30%. At the
previous reporting date (30 June 20X4) Montgomery Limited had the following tax balances:

Deferred tax assets

Deferred tax liabilities

$26 250
$21 000

Applying International Accounting Standards Chapter 6

-4What is the impact of the tax rate change on income tax expense?
A
B
C
D

increase $750;
decrease $750;
increase $875;
decrease $875.

Question 9
Balchin Limited had the following deferred tax balances at reporting date:
Deferred tax assets
Deferred tax liabilities

$12 000
$30 000

Effective from the first day of the next financial period, the company rate of income tax was
reduced from 40% to 30%. The adjustment to income tax expense to recognise the impact of the
tax rate change is:
A
B
C
D

DR
DR
CR
CR

$6 000;
$4 500;
$6 000;
$4 500.

Question 10
The tax expense related to profit or loss of the period is required to be presented:
A
B
C
D

on the face of the balance sheet;

on the face of the income statement;
in the cash flow statement;
in the statement of changes in equity.

Question 11
Unless a company has a legal right of set-off, IAS 12 Income Taxes, requires disclosure of all of
the following information for deferred tax balance sheet items:
I.
II.
III.
IV.

The amount of deferred tax assets recognised.

The amount of the deferred tax liabilities recognised.
The net amount of the deferred tax assets and liabilities recognised.
The amount of the deferred tax asset relating to tax losses.
A

I, II and IV only;

Applying International Accounting Standards Chapter 6

-5B
C
D

I, II and III only;

III and IV only;
IV only.

Question 12
Where a business transaction requires a direct adjustment to an equity account, the tax effect is
adjusted against:
A
B
C
D

income;
tax expense;
equity;
cash.

Applying International Accounting Standards Chapter 6

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ANSWERS
1

10

11

12

Applying International Accounting Standards Chapter 6