# Free CFA Level 1 practice question bank for June 2011 exam

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• 20-04-2011, 04:23 PM
Q71. Ans: B
• 21-04-2011, 11:52 AM
DG Mod
Q 71 Ans A:

Both DTA and DTL should increase, but since increase in DTA is more we will have to pay lower taxes and hence tax expense should decrease.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 72 Greece is in severe crisis and the government is taking strict measure to reduce the fiscal deficit, it has increased the tax rate from 40% to 60%. A firm has the following data for the deferred tax expenses and the earnings, which of the following is most likely to be the income tax expense for this year (2010).

Taxable Income for 2010-----------------------------------------------------\$10000
Temporary difference in 2010 which will create deferred tax asset------\$2000
Temporary difference in 2010 which will create deferred tax liability----\$3000
Deferred tax asset (DTA) for 2009------------------------------------------\$2000
Deferred tax liability (DTL) for 2009-----------------------------------------\$4000

A. \$6800
B. \$4400
C. \$7600

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• 22-04-2011, 03:07 AM
anita123
Ans 72: C
• 22-04-2011, 11:44 AM
DG Mod
Q 72 Ans: C

This is a slightly complicated problem, but can be divided into 6 steps:-

Calculate the tax liability for this year => \$10,000 * (tax rate = 60%) = \$6,000
Calculate revised estimates of 2009 DTA and DTL – here you need to focus that the revised DTA and DTL will be the more than older one due to increase in tax rate.
Revised DTA = {(new tax rate)/(old tax rate)} * DTA for 2009

Therefore, revised DTA = (0.6/0.4)* \$2000 = \$3000
Revised DTL = {(new tax rate)/(old tax rate)} * DTA for 2009
Therefore revised DTL = (0.6/0.4)* \$4000 = \$6000

Find the DTA and DTL impact in the current year due to the temporary difference. This will be equal to (tax rate) * DTA or DTL
Therefore incremental DTA for 2010 = 0.6 * \$2000 = \$1200
Therefore incremental DTL for 2010 = 0.6 * \$3000 = \$1800

Find the new DTA and DTL in 2010
New DTA = Revised 2009 DTA + Incremental DTA in 2010
New DTA = \$3000 + \$1200 = \$4200
New DTL = Revised 2009 DTL + Incremental DTL in 2010
New DTL = \$6000 + \$1800 = \$7800

Find the change in DTA and DTL
Change in DTA = 2010 DTA – 2009 DTA = \$4200 - \$2000 = \$2200
Change in DTL = 2010 DTL – 2009 DTL = \$7800 - \$4000 = \$3800
Income tax expense = taxes payable + change in DTL – change in DTA
Income tax expense = \$6000 + \$3800 - \$2200 = \$7600

If you mistakenly assume the equation as below you will get \$4400
Income tax expense = taxes payable + change in DTA – change in DTL
If you estimate the revised like below then you will get \$6800
DTA(L) = 2009 DTA(L) + (difference between the tax rate) * 2009 DTA

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 73 Which of the following with regards to deferred tax is correct?

A) All deferred tax assets and liabilities are classified as noncurrent under US GAAP.
B) All deferred tax assets and liabilities are classified as noncurrent under IFRS.
C) All deferred tax assets and liabilities are classified as current under US GAAP.

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• 23-04-2011, 02:05 AM
naveen
73. Not sure but seems B
• 23-04-2011, 11:21 AM
ajaiswal
Hi,
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• 23-04-2011, 11:44 AM
DG Mod
Q 73 Ans B:

US GAAP treats DTA & DTL as current or non-current based on the
classification of the underlying asset. Whereas in IFRS the classification for both DTA and DTL is
non-current

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q 74 Bharti Airtel and Idea have raised same amount of funds by issuing debt securities. The difference
is that Idea has issued zero coupon bonds where as Bharti has issued coupon paying bonds. An analyst
comparing these two telecom firms makes the following statements, assume that both the firms differ only
due to the debt issue

Statement I) Bharti Airtel’s cash flow from operations is higher than that of Idea
Statement II) Idea’s interest expense will increase as time passes

Analyst is correct with respect to:

A. Neither statement 1 nor statement 2
B. Statement 2 but not statement 1
C. Both Statement 1 and statement 2

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• 23-04-2011, 03:42 PM
Quote:

Originally Posted by ajaiswal
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• 23-04-2011, 11:07 PM
naveen
Ans 74: C
• 24-04-2011, 03:16 PM
Daulat Guru
Q74 Ans B:

When zero coupon debt is issued, there is no cash outflow as coupon till the maturity and hence Cash flow from operations for firms are higher. Also entire amount that is received at issuance and given at maturity is treated as cash flow from financing. Since the book value of the debt keeps on increasing the interest expense associated with the bond issue keeps on increasing.

For debt issue having coupons, there will be cash out-flow from operations every year. If the coupon is more than the market rate, debt is issued at premium and the bond book value and interest expense decreases with time. When the debt is issued at discount, the bond book value and interest expense increases with time.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q75. A firm is planning to raise capital by issuing hybrid security (having both debt and equity feature). But the firm has existing debt covenants which restricts a high amount of debt to equity ratio. Which of the following instrument issue is most likely suitable for the firm, assume that the firm is following US GAAP.

A. Convertible bond
B. Debt with warrant
C. Both convertible bond and debt with warrant will have the same impact

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