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46 Cards in this Set
- Front
- Back
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How is Goodwill handled in a business combo?
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A DTL or DTA is recognized for the differences btw the assigned values and the tax bases of the assets & liab recognized in a business purchase combo.
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Do any temp diff's arise from cost method investments?
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No! Basis for inc recognition on cost method investments is dividends received for both financial & tax purposes.
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What causes a temporary diff in Equity Method Investments?
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An equity methods undistributed income.
The tax effect of this temp diff depends on whether the investor ultimately expects to receive the undistributed income as dividends or as a realized gain upon disposal of the investment. If dividends, computation of temp diff should allow for div rec deduction. |
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What's a permanent diff?
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An event recognized in the f/s that does not have a tax consequence under the regular U.S. tax system. Certain revenues are exempt from taxation & certain expenses are not deductible.
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What are 3 examples of permanent diff's resulting from expenses?
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1. Expenses incurred in generating tax-exempt income.
2. Premiums paid for life ins. on officers when the enterprise is the beneficiary. 3. Fines, penalties & other costs incurred from activities that are a violation of the law. |
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How do you deal with a DTL or DTA for diff jurisdictions?
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They are separately computed for each tax jurisdiction (i.e., fed, state, local or foreign) because the tax attributes related to one tax authority cannot be used to directly offset tax attributes related to a different taxing authority.
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What are 2 examples of items that are deductible before being included in financial income?
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1. Prepaid Expense
2. Depr Expense These situations will result in future taxable amounts! |
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What's an example of a temp diff that is not linked to a particular item?
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A LT-Contract that is accted for by the % of completion method for financial reporting & the completed contract method for tax purposes.
The temp diff is deferred inc for tax purposes that becomes taxable when the contract is completed. |
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What are 3 examples of permanent differences resulting from revenues?
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1. Int earned on state & municipal obligations.
2. Life ins proceeds received by an enterprise on one of it's officers. 3. Dividends received by one US corp from another that are excluded from taxable inc due to the dividends received deduction. |
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What's a deferred tax expense or benefit?
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The change during the year in an enterprise's deferred tax liabilities & assets.
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What's a valuation allowance?
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Reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not (more than 50%) that some or all of the DTA will not be realized. The allowance must reduce the DTA to an amount that is more likely than not to be realized.
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What's an income tax benefit?
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When a loss situation results in a tax refund or tax savings.
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What is inc taxes currently payable (refundable)?
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Inc taxes currently payable (refundable) is also called current tax expense (or benefit) & is determined by applying the provisions of the tax law to the taxable income or taxable loss for period.
ex. taxable inc x tax rate / inc taxes currently payable |
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What are some other names for pretax financial income?
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Pretax accting income, book income, financial income, accting income, or income for financial accting purposes.
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What's the calculation to figure Net Loss when you got an NOL?
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Oper loss b4 inc taxes (XXX)
+ Benefits of loss crybk xxx + Benefits of loss cryfw xxx ---- Net Loss (XXX) |
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Financial vs Taxable Income Comparison
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For FINANCIAL: Revenues Earned - Expenses incurred = Pretax Financial inc (loss) - Inc Tax Exp (benefit) = NI (Loss)
for TAXABLE: Taxable Amts - deductible amounts = taxable inc (loss) |
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What is inc tax expense (benefit)?
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ITE (benefit)is the sum of the current tax exp (benefit) and deferred tax exp (benefit). In the rare instances where taxable inc is the same amt as pretax financial inc, total inc tax expense will equal inc taxes currently payable.
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What would be the 2 JE's when you got on NOL going back then forward?
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1st Entry
For yrs going back Dr: Inc Tax Refund Rec Cr: Benefits of Loss Crybak 2nd Entry (to record carryforward) Dr: Deferred Tax Asset Cr: Benefits of Loss Cryfo |
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Why can a DTA be either a current asset or non current?
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Depends on whether the benefits of the NOL Carryforward are expected to be realized in the following yr or in a later yr.
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What's the formula for the reconciliation btw financial income & taxable income?
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(6 Parts)
Pretax fin inc (loss) XXX + xs of taxable rev's over rev's per books XXX - xs of ddtible amts over expenses per bks (XXX) - xs rev's per books over taxable rev's (XXX) + xs of expenses per books over ded exp's XXX --- Taxable inc (loss) XXX |
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What would the JE be after the yr of NOL?
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Inc Tax Exp - Current
Inc Tax Exp - Def (this was benefits of loss carryfwd) Inc Taxes Payable DTA |
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What's a taxable temp difference?
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Temp diff's that will result in taxable amounts in future yrs when the related assets are recovered.
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When are some certain items such as warranty expense & loss contingencies deductible for tax purposes?
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When they are realized.
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Show a brief part of the I/S presentation for taxes.
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Inc b4 inc taxes XXX
Current tax exp XXX Deferred tax exp XXX Total Inc Tax Exp XXX NI XXX |
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What's the asset & liability method?
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Diff btw (1) the amt of taxable inc & pretax financial inc for a yr & (2)the tax bases of A & L's & their reported amounts in f/s as temporary differences.
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What's the definition of a temporary diff?
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It's the diff btw the tax basis of an asset or liab & it's reported amt in the f/s that will result in taxable or deductible amts in future yrs when the reported amt of the asset is recovered or the liab is settled.
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What's a deductible temporary difference?
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Temp diff's that will result in deductible amts in future yrs when related liab's are settled.
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2 ways to deal with future tax rates & DTA's & DTL's.
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1. If taxable inc is expected in the yr that a future taxable or deductible amt is scheduled, use the entacted tax rate for that future year to calculate the related DTA or DTL.
2. IF NOL is expected, use the enactd rate of what will be the prior year the NOL will be carried back to or the enacted rate of the future yr to which the carryfwd will apply. |
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Explain tax-planning strategies.
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In some cases, there are actions (including elections for tax purposes) that 1) are prudent & feasible 2) an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryfwd from expiring unused 3) would result in realization of deferred tax assets.
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How are DTA's & DTL's reported in a classified balance sheet?
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They are seperated & reported in a net current & a net noncurrent amount.
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What's positive evidence that a valuation allowance is not needed when there is negative evidence?
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1. Contracts or backlog that will produce more than enough taxable income to realize the DTA based on existing sales prices & cost structures
2. An xs of appreciated asset value over the tax basis of the entity's net assets in an amount suffient to realize the DTA. 3. A strong earnings history & any loss isn't an indication of a continuing condition. |
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What is negative evidence when it comes to valuation allowances?
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1. Cumulative losses in recent yrs
2. History of operating loss or tax credit carryforwards expiring unused 3. Losses expected in early future yrs (by a presently profitable entity) 4. Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations & profit levels on a continuing basis in the future. 5. A carryback, carryfwd period that is so brief that it would limit realization of tax benefits. |
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Explain future realization of tax benefit.
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It ultimately depends on the existence of sufficient taxable income of the appropriate character (ex. ordinary inc. or capital gain) within the carryback, carryfwd period available under the tax law.
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What's weighing evidence when it comes to valuation allowances?
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An enterprise must use judgement in considering the relative impact of neg & pos evidence.
The more negative evidence that exists the more positive evidence is necessary & the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the DTA. |
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Where is the effect of recognizing or eliminating a deferred tax liability or asset reported?
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It's included in inc from continuing operations.
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Do losses & carryforwards need to be dislosed?
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Yes! The amts & expiration dates of operating loss & tax credit carryforwards.
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How do you apply tax benefits in a business combo?
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If a valuation allowance is recognized for the DTA for an acquired entity's deductible temp diff's or operating loss or tax credit carryforwards apply them to:
1. First to reduce to zero any GW related to the acquisition. 2. Reduce to zero other noncurrent intangible assets related to the acquisition. 3. Reduce the income tax expense |
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What's the dividends received deduction?
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Tax law has generally allowed corporate shareholders owning less than 20% of the stk of a qualifying domestic corp to deduct 70% of the dividends received & 80% for owning 20-80%.
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How are DTA's & DTL's classified?
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They are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting.
A DTA or DTL that is not related to an asset or liab for financial reporting, including DTA's related to carryfwds, is classified according to the expected reversal date of the temporary difference. |
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When is stkholders equity charged or credited for inc tax effects?
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1. Adj of the opening bal or RE for certain changes in accting principles or a correction of an error.
2. G & L's recognized in comprehensive inc., but excluded from net inc. 3. An increase or decrease in contributed capital 4. Expenses for employee stk options recognized differently for financial reporting & tax purposes |
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What are the components of Inc Tax Expense that are disclosed in the f/s or notes thereto?
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1. Current Tax Exp (benefit)
2. Deferred tax exp (bene) 3. Investment tax credits 4. Government grants 5. The benefits of oper loss 6. Tax expense that reults from allocating certain tax benefits. 7. Adj of a DTA or DTL or a change in tax status of an enterprise. 8. Adj of the valtion allow |
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What is the amount allocated to continuing operations?
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The amount allocated to continuing operations is the tax effect of the pretax inc or loss from continuing operations that occurred during the yr, + or - inc tax effects of:
1. Changes in judgement about the realization of DTA's in future yrs 2. Changes in tax laws or rates 3. Changes in tax status The remainder is allocated to items other than continuing operations. |
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Explain the tax allocation for the I/S.
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Inc tax expense (benefit) for the yr is to be allocated among continuing operations, disc operations, extra items & items of OCI.
The process of allocating inc. taxes to key components of the f/s is called intraperiod tax allocation. |
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There are 5 things that must be disclosed, what are they?
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1. Total of all DTL's
2. Total of all DTA's 3. Total valuation allowance recognized for DTA's 4. Net change during the yr in total valuation allowance 5. Approxiamate tax effect of each type of temp diff & carryfwd |
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Explain the allocation to other than continuing operations.
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If there is only 1 item other than cont operations, the portion of inc tax expense (benefit) for the yr that remains after the allocation to continuing operations is allocated to that item. If there are 2 or more items other than cont opers, the amt that remains after the allocation to cont opers shall be allocated among those other items in proportion to their individual effects on inc tax expense (benefit) for the yr.
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What's a tax reconciliation?
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A public enterprise discloses a reconciliation using percentages or dollar amts of a reported amt of inc tax expense attributable to continuing operations for the yr to an amt of inc tax expense that would result from applying domestic federal statutory tax rates to pretax inc from continuing operations.
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