Question

Question 40

Twohig Company reported an $188 million loss on its 2017 Income Statement. Twohig had reported positive income in years 2002 through 2016, but had been experiencing rapid economic decline recently and was unsure as to whether they would continue to be profitable in the future. Twohig carried the loss back to offset income taxes paid in the past two years, however, they have $120,000 of the loss remaining after offsetting the previous two years’ income. With respect to the overflow loss from the year 2017, Twohig should

	Create a deferred tax asset and carry the loss forward to offset income in the next two years.
	Create a deferred tax asset and carry the loss forward to offset income in the next 20 years.

Create deferred tax asset to carry forward the loss to offset income for the next 20 years, but establish a valuation account to reduce the benefit if it is more likely than not that they will not use the full benefit.

None of these answers are correct.

Question 41

Bellamy Company obtained a $200,000, 7% note on January 1, 2017. Interest is paid each December 31. How would Bellamy report the a) principal and b) interest payment on their Statement of Cash Flows?

	Principal: inflow from financing, Interest: outflow from financing
	Principal inflow from investing, Interest: outflow from investing

	Principal: inflow from financing, Interest: outflow from operating
	Principal: inflow from investing, Interest: outflow from operating

None of these answers are correct.

Answer 1

40

Twohig should Create deferred tax asset to carry forward the loss to offset income for the next 20 years, but establish a valuation account to reduce the benefit if it is more likely than not that they will not use the full benefit.

Under U.S. GAAP, valuation allowance is created when there is more than 50% probability that some portion of the deferred tax asset may not be realized

Option C is correct

41

Principal: inflow from financing, Interest: outflow from operating

Any loans obtained are reported as an inflow under financing activities and interest payment on such loans are reported as outflow from operating activities

Option C is correct