FA Module 13 Capital gains and deferred taxes practice exam questions
covering available for sale (GAAP) = fair value through other comprehensive income (IFRS), held for trading (GAAP) = fair value through profit or loss (IFRS), unrealized capital gains and losses, other comprehensive income, deferred tax asset (liability)
(The attached PDF file has better formatting.)
A firm has the following share purchases, with the market prices of the shares:
Stock Y Stock Z
December 31 Market Price Shares bought Market Price Shares bought
20X0 45 24 59 57
20X1 66 85 20 38
20X2 65 49
The firm classifies
● Stock Y as available for sale (GAAP) = fair value through other comprehensive income (IFRS)
● Stock Z as held for trading (GAAP) = fair value through profit or loss (IFRS)
All share purchases are on December 31 of the year shown in the table above. The capital gains and losses are taxed at 10% when they are realized. No shares are sold in 20X1 or 20X2.
Question 13.1: Unrealized capital gains and losses
What are the unrealized capital gains (losses) in 20X1?
Answer 13.1:
● Stock Y (available for sale): 24 × (66 – 45) = 504
● Stock Z (held for trading): 57 × (20 – 59) = (2,223)
(unrealized capital gains = shares held × Δ(market price) )
Question 13.2: Pre-tax income
What is pre-tax income in 20X1?
Answer 13.2: -2,223
(unrealized capital gains and losses on shares held for trading (fair value through profit or loss) affect pre-tax income (income statement or statement of profit or loss) )
Question 13.3: Other comprehensive income
What is other comprehensive income in 20X1?
Answer 13.3: 504
(unrealized capital gains and losses on shares available for sale (fair value through other comprehensive income) affect other comprehensive income)
Question 13.4: Taxable income
What is taxable income in 20X1?
Answer 13.4: 0
(No shares are sold, so taxable income is zero)
Question 13.5: Deferred tax asset or liability
What is the deferred tax asset (liability) on December 31, 20X1?
Answer 13.5:
● Stock Y (available for sale): (0 – 504) × 10% = (50.40)
● Stock Z (held for trading): (0 – -2,223) × 10% = 222.30
combined deferred tax asset (liability) = -50.40 + 222.30 = 171.90
(deferred tax asset = (tax basis – carrying value) × tax rate)
Question 13.6: Taxes paid
What are taxes paid in 20X1?
Answer 13.6: 0
(taxable income is zero)
Question 13.7: Tax expense
What is the tax expense in 20X1?
Answer 13.7:
● Stock Y (available for sale): 0 – -50.40 = 50.40
● Stock Z (held for trading): 0 – 222.30 = (222.30)
combined tax expense = 50.40 – 222.30 = (171.90)
(tax expense = taxes paid + deferred tax liability – deferred tax asset)
Question 13.8: Unrealized capital gains and losses
What are the unrealized capital gains (losses) in 20X2?
Answer 13.8:
● Stock Y (available for sale): (24 + 85) × (65 – 66) = (109)
● Stock Z (held for trading): (57 + 38) × (49 – 20) = 2,755
(Combined unrealized capital gain or loss = -109 + 2,755 = 2,646
(unrealized capital gain = shares held × Δ(market price) )
Question 13.9: Pre-tax income
What is pre-tax income in 20X2?
Answer 13.9: 2,755
(unrealized capital gains and losses on shares held for trading (fair value through profit or loss) affect pre-tax income (income statement or statement of profit or loss) )
Question 13.10: Other comprehensive income
What is other comprehensive income in 20X2?
Answer 13.10: -109
(unrealized capital gains and losses on shares available for sale (fair value through other comprehensive income) affect other comprehensive income)
Question 13.11: Taxable income
What is taxable income in 20X2?
Answer 13.11: 0
(No shares are sold, so taxable income is zero)
Question 13.12: Deferred tax asset or liability
What is the deferred tax asset (liability) on December 31, 20X2?
Answer 13.12:
● Stock Y (available for sale): -50.40 + (0 – -109) × 10% = (39.50)
● Stock Z (held for trading): 222.30 + (0 – 2,755) × 10% = (53.20)
combined deferred tax asset (liability) = -39.50 + -53.20 = (92.70)
(change in deferred tax asset = (change in (tax basis – carrying value) ) × tax rate)
Question 13.13: Taxes paid
What are taxes paid in 20X2?
Answer 13.13: 0
(taxable income is zero)
Question 13.14: Tax expense
What is the tax expense in 20X2?
Answer 13.14:
● Stock Y (available for sale): -109 × 10% = (10.90)
● Stock Z (held for trading): 2,755 × 10% = 275.50
combined tax expense = -10.90 + 275.50 = 264.60
(tax expense = taxes paid + deferred tax liability – deferred tax asset)
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