Chapter 19 - Accounting For Income Taxes

Front 1

1) Permanent Differences in Taxes

Back 1

1) Revenues that are recognized under GAAP for financial reporting purposes but are never taxable

Hint 1

ie. Interest on Municipal Bonds
Life insurance proceeds payed to a corporation upon the death of an employee

Front 2

2) Permanent Differences in Taxes

Back 2

2) Expenses that are recognized under GAAP for financial reporting purposes but are never tax deductible for income tax purposes

Hint 2

ie Life insurance premiums on officers

Fines are not tax deductable

Front 3

3) Permanent Differences in Taxes

Back 3

3) Deductions that are allowed for income tax purpose but do not qualify as expenses under GAAP

Hint 3

ie. Percentage depletion in excess of cost depletion to encourage natural resource exploration
Special dividend deductions

Front 4

1) Temporary Differences -Future taxable income will be greater than future pretax financial income

Back 4

Revenues or Gains are included in pretax financial income prior to the time they are included in taxable income

Hint 4

ie. Gross profit on installment sales is recognized at the point of sale for financial reporting but recognized when cash is collected for tax purposes or percentage of completion for GAAP and completed project for Income Taxes

Front 5

2) Temporary Differences -Future taxable income will be greater than future pretax financial income

Back 5

Expenses or losses are deducted to compute taxable income prior to the time they are subtracted to compute pretax financial income

Hint 5

MACRS depreciation for Taxes, Straight line depreciation for GAAP statements

Front 6

1) Temporary Differences - Future Taxable Income will be less than future pretax financial income

Back 6

Revenues or gains are included in taxable income prior to the time they are included in pretax financial income

Hint 6

Rents and Royalties received in advance are taxable when received. However Gaap only reports after service actually provided. Gains on sales and leasebacks are taxed at date of sale but reported over the life of the lease of the contract for financial reporting.

Front 7

2) Temporary Differences - Future Taxable Income will be less than future pretax financial income)

Back 7

Expenses or losses are subtracted to compute pretax financial income prior to the time they are deducted to compute taxable income

Hint 7

Product Warranty Costs , bad debts, compensation expense for share option plans may be recorded as expenses for GAAP but may only be deducted as actually incurred.

Front 8

Interperiod Income Tax Allocation
Step 1

Back 8

Compute income tax obligation for the year buy multiplying current tax rate times the current taxable income

Front 9

Interperiod Income Tax Allocation
Step 2

Back 9

Identify the temporary differences and classify each as either a future taxable amount or a future deductible amount

Front 10

Interperiod Income Tax Allocation
Step 3

Back 10

Measure the year end deferred tax liability for each future taxable amount using the applicable tax rate

Front 11

Interperiod Income Tax Allocation
Step 4

Back 11

Measure the year-end deferred tax asset for each future deductible amount using the applicable tax rate

Front 12

Interperiod Income Tax Allocation
Step 5

Back 12

Reduce deferred tax assets buy a valuation allowance if, based on available evidence, it is more likely than not that some or all of the year-end deferred tax assets will not be realized

Front 13

Interperiod Income Tax Allocation: 6)

Back 13

Record the income tax expense (including the deferred tax expense or benefit) income tax obligation, change in deferred tax liabilities and /or deferred tax assets, and change in valuation allowance (if any)

Front 14

Previous Balance for Tax Deferred Asset or Tax Deferred Liability

Back 14

Subtract the previous Tax Deferred Asset and Liability from the Current Deferred Asset and Liability

Hint 14

The Difference affects the Current Liability or Tax Deferred assets- these are cumlative accounts.

Front 15

Allowance to Reduce Tax Deferred Asset to Net Realizable Value

Back 15

Debit Tax Expense
Credit the Tax Deferred Asset

Hint 15

Necessary when future earnings are expected to be negative and asset will not be realized, hence tax expense will increase. Note, If deferred tax liability exceeds tax deferred assets no valuation is necessary (tax asset not needed to offset positive income)

Front 16

Operating Loss Carryback

Back 16

Must be recognized in current period as an asset and a reduction of operating loss on its income statement.

Hint 16

ie.
Dr Income Tax Refund Receivable 25,000
Cr Income Tax Benefit from
Operating Loss Carryback 25,000

Front 17

Operating Loss Carryfoward

Back 17

ie Deferred Tax Asset 18,000
Income Tax Benefit from
Operating Loss Carryforward 18,000

Hint 17

If insufficient positive evidence of future taxable income, must reduce tax deferred asset by a valuation allowance.
Dr Income Tax Benefit from
Operating Loss Carry Back 18,000
Cr Allowance to Reduce Tax
Deferred Tax Asset to Realizable
Value 18,000

Front 18

If positive income in year of Carryforward

Back 18

Company eliminates deferred asset and related valuation allowance.

Hint 18

Dr Income Tax Expense 12,000
Dr Allowance to Reduce tax
Deferred Asset to Realizable Value 18,000
Cr Income Tax Payable 12,000
Cr Deferred Tax Asset 18,000

Front 19

Reporting Tax Liabilities and Assets on a balance sheet

Back 19

Must present a net current amount

and a net noncurrent amount

Front 20

Operating Loss Carryback

Back 20

Go back 2 years sequentially to offset previous taxable income and create a refund of taxes previously paid, any remaining loss can be carried forward for 20 years to offset future taxable income