Accy 304 Test #2

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Chapter 19

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Accounting for Income Taxes

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Deferred Tax Liability

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A deferred tax liability represents the increase in taxes payable in future years (Future Taxable Amount) as a result of taxable temporary differences existing at the end of the current year.

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What are the 2 components of Income Tax Expense (Benefit)

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1. Deferred Tax Expense (Benefit)

2. Current Tax Expense (Benefit)

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Deferred Tax Expense (DTL)

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is the increase in the deferred tax liability
balance from the beginning to the end of the accounting period.

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Deferred Tax Benefit (DTL)

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is the decrease in the deferred tax liability
balance from the beginning to the end of the accounting period.

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Current Tax Expense (Benefit) (DTL)

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which is equal to the amount of income taxes paid or
payable for the period

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Deferred Tax Asset

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A deferred tax asset represents the increase in taxes refundable (saved) in future years (Future Deductible Amount) as a result of deductible temporary differences at the end of the current year.

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Deferred Tax Expense (DTA)

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is the decrease in the deferred tax asset
balance from the beginning to the end of the accounting period.

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Deferred Tax Benefit (DTA)

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is the increase in the deferred tax asset
balance from the beginning to the end of the accounting period.

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Current Tax Expense (DTA)

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Equal to income taxes payable

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Valuation Allowance account should be used for what? What is it called?

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Deferred Tax Asset.

Allowance to reduce deferred tax asset to expected realizable value.

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Two types of Temporary Differences

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1. Originating temporary differences. The initial difference between the book basis
and tax basis of an asset or liability.

2. Reversing temporary differences. Occurs when a temporary difference that originated in
prior periods is eliminated and the related tax effect removed from the deferred tax
account.

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Taxable Temporary Differences definition and what they give rise to

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Temporary differences that will result in taxable amounts in future years when the related assets are recovered.

Give rise to recording DTL's.

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Examples of Temporary Differences (Taxable Amounts) (DTL)

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*Revenues/gains r taxable after they r recognized n financial income*
-Sales accounted for on Accrual basis for financial reporting purposes
-Sales accounted for on the installment (cash) basis for tax purposes
-Contracts accounted for under percentage-of-completion method for fin report purposes and a portion of related gross profit deferred for tax purposes
-Investments accounted for under the equity method for fin report purposes
-Investments accounted for under the cost method for tax purposes
-Gain on involuntary conversion of nonmonetary asset which is recognized for financial purposes but deferred for tax purposes
-Unrealized holding gains for financial reportin purposes (including use of the fair value option) but deferred for tax purposes

*Expenses/losses r deductible b4 they r recognized n financial income*
-Depreciable property, depletable resources
-Deductible pension funding exceeding expense
-Prepaid expenses that are deducted on tax return in the period paid

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Deductible Temporary Differences definition and what they give rise to

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Temporary differences that will result in deductible amounts in future years when the related book liabilities are settled.

Give rise to recording DTA's.

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Examples of Temporary Differences (Deductible Amounts) (DTA)

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*Expenses or losses are deductible after they are recognized in financial income*
-Product warranty liabilities
-Estimated liabilities related to discontinued operations or restructurings
-Litigation accruals
-Bad debt expense recognized using the allowance method for financial reporting purposes; Direct write off method used for tax purposes
-Stock based compensation expense
-Unrealized holding losses for financial reporting purposes (including use of the fair value option), but deferred for tax purposes.

*Revenues or gains are taxable before they are recognized in financial income*
-Subscriptions received in advance
-Advance rental receipts
-Sales and leasebacks for financial reporting purposes (income deferral) but reported as sales for tax purposes
-Prepaid contracts and royalties received in advance

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Definition of Permanent Differences and the two types of them

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There are no defined tax consequences to be recognized.

Because they affect only the period in which they occur, the do not give rise to future taxable or deductible amounts.

Companies recognize no deferred tax consequences.


1. Items recognized for accounting but not for taxes.

2. Items recognized for tax but not for accounting.

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Examples of Permanent Differences

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*Items are recognized for financial reporting purposes but NOT tax purposes*

-Interest received on state and municipal obligations.
-Expenses incurred in obtaining tax-exempt income.
-Proceeds from life insurance by the company of a key officer or employees.
-Premiums paid by the company on key officers or employees (company is beneficiary).
-Fines and expenses resulting from a violation of law.



*Items are recognized for tax purposes but NOT for financial reporting purposes*

-"Percentage depletion" of natural resources in excess of their cost.
-The deduction of dividends received from U.S. corporations, generally 70% to 80%.

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When do you use Current Tax Rate?

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Use when currently enacted tax rate will not change.

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When do you use Future Enacted Tax Rate?

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Use when known.

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When do you use Average Tax Rate?

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Use when graduated tax rates exist.

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Revisions of future tax rates and effects on the deferred tax accounts

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Record effect as soon as change is enacted. Treat as an adjustment to income tax expense in the period of
the change.

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Effective Tax Rate formula

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Total Income Tax Expense for the Period

(Divided By)

Pretax Financial Income