CAF-6 · Chapter 7
IAS 12 Income Taxes MCQs with Answers
15 multiple-choice questions on IAS 12 Income Taxes for CAF-6 Corporate Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
What is the 'Tax Base' of an asset?
- A) The amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset.
- B) The fair value of the asset at the reporting date.
- C) The historical cost of the asset minus accumulated depreciation.
- D) The amount of tax the entity expects to pay when the asset is sold.
Show answer & explanation
Answer: A) The amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset.
IAS 12 defines the tax base of an asset as the amount that will be deductible for tax purposes against taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset.
Question 2
A 'Taxable Temporary Difference' arises when:
- A) Carrying Amount > Tax Base (for an asset)
- B) Carrying Amount < Tax Base (for an asset)
- C) Carrying Amount > Tax Base (for a liability)
- D) It results in a deferred tax asset.
Show answer & explanation
Answer: A) Carrying Amount > Tax Base (for an asset)
For an asset, if the carrying amount is greater than the tax base, it will lead to taxable amounts in the future, resulting in a taxable temporary difference and a deferred tax liability.
Question 3
Which of the following results in a 'Deferred Tax Liability'?
- A) Accelerated tax depreciation (tax depreciation is faster than accounting depreciation).
- B) Unused tax losses carried forward.
- C) Provisons that are only tax-deductible when paid.
- D) Impairment of an asset that is not recognized for tax purposes.
Show answer & explanation
Answer: A) Accelerated tax depreciation (tax depreciation is faster than accounting depreciation).
Accelerated tax depreciation reduces the tax base of an asset faster than its accounting carrying amount, creating a taxable temporary difference (CA > TB), which leads to a deferred tax liability.
Question 4
A deferred tax asset should be recognized for unused tax losses and unused tax credits to the extent that:
- A) The entity has paid taxes in the past.
- B) It is probable that future taxable profit will be available against which they can be utilized.
- C) Management intends to continue the business for 10 years.
- D) The government provides a guarantee of refund.
Show answer & explanation
Answer: B) It is probable that future taxable profit will be available against which they can be utilized.
Deferred tax assets for losses/credits are only recognized when it is probable that future taxable profits will exist to utilize those benefits.
Question 5
Deferred tax assets and liabilities should be measured using:
- A) The historical tax rates at the date of acquisition.
- B) The tax rates that are expected to apply to the period when the asset is realized or the liability is settled.
- C) A flat rate of 30% for all entities.
- D) The average tax rate of the last five years.
Show answer & explanation
Answer: B) The tax rates that are expected to apply to the period when the asset is realized or the liability is settled.
Measurement should be based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Question 6
Which of the following is an example of an 'Exempt' temporary difference where no deferred tax is recognized at initial recognition?
- A) The initial recognition of goodwill.
- B) Revaluation of land.
- C) Interest receivable recognized over time.
- D) Accrued expenses.
Show answer & explanation
Answer: A) The initial recognition of goodwill.
IAS 12 prohibits the recognition of a deferred tax liability arising from the initial recognition of goodwill.
Question 7
An entity revalues its building upwards by Rs. 1 million. The tax laws do not allow this revaluation for tax purposes. Where should the related deferred tax expense be recognized?
- A) Profit or Loss
- B) Other Comprehensive Income (OCI)
- C) Retained Earnings directly
- D) It should not be recognized.
Show answer & explanation
Answer: B) Other Comprehensive Income (OCI)
Deferred tax relating to items recognized in OCI (like revaluations) must also be recognized in OCI.
Question 8
Which of the following is true regarding the discounting of deferred tax assets and liabilities?
- A) They must be discounted using the risk-free rate.
- B) They must be discounted using the entity's WACC.
- C) Deferred tax assets and liabilities shall not be discounted.
- D) Discounting is optional based on management's preference.
Show answer & explanation
Answer: C) Deferred tax assets and liabilities shall not be discounted.
IAS 12 specifically prohibits the discounting of deferred tax assets and liabilities.
Question 9
How should deferred tax assets and liabilities be classified in the Statement of Financial Position?
- A) Always as Current.
- B) Always as Non-Current.
- C) Split between Current and Non-Current based on expected reversal.
- D) As a separate category called 'Deferred Items'.
Show answer & explanation
Answer: B) Always as Non-Current.
According to IAS 1 (and IAS 12), deferred tax assets and liabilities must always be classified as non-current.
Question 10
An entity has a trade receivable with a carrying amount of Rs. 10,000. For tax purposes, the revenue is only taxed when cash is collected. What is the tax base of the receivable?
- A) Rs. 10,000
- B) Rs. 0
- C) Rs. 5,000
- D) Rs. 10,000 plus interest.
Show answer & explanation
Answer: B) Rs. 0
Since the full amount will be taxed in the future and none of it has been taxed yet, the tax base is nil. (TB = CA - untaxed future benefits = 10,000 - 10,000 = 0).
Question 11
Wait Ltd recognizes a provision for product warranty of Rs. 50,000. The cost is only deductible for tax purposes when the warranty claims are actually paid. What kind of temporary difference is this?
- A) Taxable Temporary Difference
- B) Deductible Temporary Difference
- C) Permanent Difference
- D) There is no difference.
Show answer & explanation
Answer: B) Deductible Temporary Difference
For a liability, CA (50,000) > TB (0). This results in a deductible temporary difference, which leads to a deferred tax asset.
Question 12
Under IAS 12, 'Current Tax' is:
- A) The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.
- B) The total tax expense shown in the P&L.
- C) Only the taxes paid during the year in cash.
- D) The tax effect of temporary differences.
Show answer & explanation
Answer: A) The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.
Current tax is the amount currently owed to or receivable from the tax authorities based on the year's taxable result.
Question 13
The 'Initial Recognition Exemption' applies when an asset is acquired in a transaction that:
- A) Is not a business combination.
- B) At the time of the transaction, affects neither accounting profit nor taxable profit.
- C) Both A and B above.
- D) Is a standard purchase of inventory.
Show answer & explanation
Answer: C) Both A and B above.
The exemption applies to the initial recognition of an asset/liability in a transaction that is not a business combination and affects neither accounting nor taxable profit at the time.
Question 14
Which of the following would be considered a 'Permanent Difference' (though IAS 12 focuses on temporary ones)?
- A) Fines and penalties that are never tax-deductible.
- B) Interest income taxed on a cash basis.
- C) Depreciation of plant.
- D) Impairment of trade receivables.
Show answer & explanation
Answer: A) Fines and penalties that are never tax-deductible.
Permanent differences are items that enter into accounting profit but never into taxable profit (or vice versa), such as non-deductible fines. They do not give rise to deferred tax.
Question 15
The measurement of deferred tax liabilities and assets should reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to:
- A) Use the cash received from the asset.
- B) Recover or settle the carrying amount of its assets and liabilities.
- C) Report the information to its shareholders.
- D) Liquidate its entire business.
Show answer & explanation
Answer: B) Recover or settle the carrying amount of its assets and liabilities.
The deferred tax calculation must consider whether the entity expects to recover the asset through 'use' or through 'sale', as different tax rates or rules might apply.