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63 Cards in this Set

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What is pretax financial income?
income before taxes, income for financial reporting, book purposes. Determined according to Gaap
What is taxable income?
income for tax purposes. Determined according to the tax code.
Why is there a difference between income tax expense and income tax payable?
for financial reporting the full accrual method is used to report revenues, whereas for tax purposes a modified cash basis is used.
What is a deferred tax amount?
is an accounting term, meaning future tax liability or asset, resulting from temporary differences
deferred tax liability?
A deferred tax liability occurs when a company underpays its taxes due to a difference between how it accounts for an asset on its books versus how it accounts for it on a tax basis.
purposes.
Define deferred tax asset?
A deferred tax asset is created by overpaying taxes during a given time period. This deferred tax asset reduces the company's tax liability in the future.
How are deferred tax assets recorded as?
Because they have value, they're recorded as an asset.
How are deferred tax liabilities recorded?
they increase the liability in the future. Because they have value, they're recorded as liabilities.
What is a temporary difference?
the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts or deductible amounts in future years.
Taxable amounts ______ taxable income in future years.
increase
Deductible amounts ______ taxable income in future years.
decrease
deductible amounts will occur in future tax returns. positive consequence in the future.
How do you calculate the deferred tax liability?
you take the cumulative temporary difference and multiply it by the tax rate.
How do you compute income tax expense with a deferred tax liability?
def tax liab @ end 2004 xxx
+def tax liab @ beg 2004 xxx
def tax expense (benefit) 2004 XXX
+current tax expense (income tax payable) XXX
Income tax expense(total)XXX
Why does Fasb feel that the deferred tax liability meets the def of a liability?
1. It results from a past transaction
2. It is a present obligation
3. It represents a future sacrifice.
What is one objective of accounting for income taxes?
to recognize the amount of taxespayable or refundable for the current year.
What is a second objective of accounting for income taxes?
is to recognize deferred tax liabilities and assets for the future tax consequences of events that have already been recognized in the financial statements or tax returns.
When will accounts receivable be recorded as income for income tax purposes?
when it is collected.
deferred taxes affect ____ _____ _______
income tax expense.
what is the tax purpose treatment of warranty expense and estimated warranty expense?
the warranty tax deduction is not allowed until paid.
Ex. comp has $500,000 estimated liability for warranties in 2004 what action should they take?
they should recognize that when the liability is finally paid, an expense (deductible amount) will be reported for tax purposes. they should recognize the tax benefits.
How do you calculate income tax expense with a deferred tax asset?
def tax asset @end 2004 xxx
+def tax asset @beg2004 xxx
=def tax expense(benfit)(xxx)
+current inc tax payable 2004 xxx
income tax exp(total) XXX
Discuss why the FASB decided that deferred tax assets meet the definition of an asset.
a. Results from a past transaction.
b. Gives rise to a probable future benefit.
c. Controls access to the benefits.
Calculation of deferred tax asset (temporary difference)?
Book basis
—tax basis of asset or liability
= cumulative temporary difference
in regards to a deferred tax liability what is a deferred tax benefit?
Deferred tax (benefit) is the (decrease) in the deferred tax liability balance from the beginning to the end of the accounting period.
in regards to a deferred tax liability what is a deferred tax expense?
Deferred tax (expense) is the (increase) in the deferred tax liability balance from the beginning to the end of the accounting period.
in regards to a deferred tax asset what is a deferred tax benefit?
Deferred tax (benefit) is the (increase) in the deferred tax asset balance from the beginning to the end of the accounting period.
in regards to a deferred tax asset what is a deferred tax expense?
Deferred tax (expense) is the (decrease)in the deferred tax asset balance from the beginning to the end of the accounting period.
What do you do if more likely than not that some portion or all of the deferred tax asset will not be realized?
you set up an valuation allowance.
What does more like than not mean?
slightly more than 50%
What is the entry to reduce income tax expense by the amount not expected to be realized?
income tax expense XXX
Allowance to reduce Deferred tax asset to expected realizable value XXX
What is the Balance sheet presentation of Valuation Allowance Account?
Deferred Tax Asset XXX
Less:Allowance to reduce xxx
asset to expected
Deferred Tax Asset (net) XXX
What if you evaluate the valuation account and actually are going to realize deferred assets that you thought you weren't? (entry)
Allowance to reduce DTA to expected rlzble value XXX
Income Tax Expense XXX
What is the formula to compute income tax expense?
Income Tax Payable
+/- Change in Deferred Income Taxes
= Total Income Tax Expense or Benefit
What is a taxable temporary difference?
a temporary difference that will result in taxable amounts in future years

give rise to deferred liabilities
What is a deductible temporary difference?
temporary difference that will result in deductible amounts in future years

give rise to deferred tax assets
An originating temporary difference?
is the initial difference between the book basis and the tax basis of an asset or liability.
A reversing difference?
occurs when a temporary difference that originated in prior periods is eliminated and the related tax effect is removed from the deferred tax account.
What 2 items cause permanent differences?
1. items that enter into pretax financial income but never into taxable income
2. enter into taxable income but never into pretax financial income.
Do you recognize deferred tax consequences with permanent differences?
No, these differences affect only the period in which they occur.
Name 6 permanent differences that are never recognized for tax purposes.
1. interest received on state + municipal obligations
2. expenses incurred in obtaining tax exempt income
3. proceeds from life insurance key employees
4. premiums paid for life insurance on key employees
5. Penalty/Fine from violation of a law
6. compensation expense assoc. w/ certain employee stock options
Name 2 permanent differences that are items recognized for tax purposes but not financial reporting
1. "% of depletion" of natural resources in excess of their cost
2. the deduction for dividends received from US corps
Differences causing pretax financial income to exceed taxable income are ______ ___ pretax financial income when determining taxable income.
deducted from
Differences causing pretax financial income to be less than taxable income are ______ ___ pretax financial income when determining taxable income.
added to
how to compute Effective tax rate?
divide total income tax expense by the pretax financial income
When should you use future tax rates on temporary differences?
when the future tax rates have been enacted into law otherwise use the current rate
What is an average tax rate?
companies who use a graduated tax rate calculate an average tax rate to apply to temporary differences
What happens to existing deferred income tax accounts when a tax law change occurs?
The effect is reported as an adjustment to income tax expense in the period of the change.
net operating loss (nol)
tax deductible expenses exceed taxable revenues
loss carryback
a comp may carry the nol back 2 years and receive refunds for income taxes paid in those years. Any loss remaining after that may be carried forward up to 20 years.
loss carryforward
a company may elect to forgo the carryback and just carry the loss forward for up to 20 years.
how is a loss carryback applied?
1st to the second year preceeding the loss, than any unused is applied to the year before. File ammended returns
when is the tax effect of a loss carryback recognized?
in the year of the loss, since it is both measurable and realizable.
What is the journal entry for a tax refund from a loss carryback?
income tax refund
receivable XXX
Benefit due to loss
carryback(income tax exp)XXX
How is income tax refund receivable reported on the balance sheet
as a current asset
What is the tax effect of loss carryforward?
it is a future tax savings
What is FASbs stand on the treatment of deferred tax assets and operating loss carryforwards?
there should not be different requirements
What is the name of the deferred tax asset from a loss carryforward?
benefit due to loss carryforward (income tax expense)
What is the name of the two contra accounts to income tax expense?
1. benefit due to loss carryback
2. benefit due to loss carry forward
how are the two contra accounts recorded on the income statement?
They reduce the net operating loss.
Operatng Loss b4 income (XXX)
income tax benefit:
benefit carryback + xxx
benefit carryforward + xxx
Net Loss (xxx)
what is the current tax benefit with a nol?
the income tax refundable for the year from the carryback
what is the deferred tax benefit with a nol?
the increase in the deferred tax asset from carryforward
how do you calculate income tax payable with a carryforward?
taxable income 2004 XXX
loss carryforward (xxx)
______
Taxable Income XXX
tax rate %
______
Income tax payable 2004 XXX
What is the journal entry with a loss carryforward for income tax expense?
Income Tax Expense XXX
Deferred tax asset XXX
(carryforward $* tax rate)
Icome Tax Payable XXX
(diferrence)