accounting for income taxes c hapter 19 an electronic presentation by norman sunderman angelo state...

Accounting for Income Taxes

Chapter19

An electronic presentation by Norman Sunderman Angelo State University

An electronic presentation by Norman Sunderman Angelo State University

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Intermediate AccountingIntermediate Accounting 10th edition 10th edition

Nikolai Bazley JonesNikolai Bazley Jones

2

1. Understand permanent and temporary differences.

2. Explain the conceptual issues regarding interperiod tax allocation.

3. Record and report deferred tax liabilities.

4. Record and report deferred tax assets.5. Explain an operating loss carryback

and carryforward.

Objectives

3

6. Account for an operating loss carryback.7. Account for an operating loss

carryforward.8. Apply intraperiod tax allocation.9. Classify deferred tax liabilities and

assets.

Objectives

4

1. Because there are differences between when an event is recognized for tax purposes and when it is recognized for financial purposes, there will be differences between tax expense on the income statement and taxes actually paid.

2. The objective of accounting for income taxes on the accrual basis is to recognize the amount of current and deferred taxes payable or refundable at the date of the financial statements.

1. Because there are differences between when an event is recognized for tax purposes and when it is recognized for financial purposes, there will be differences between tax expense on the income statement and taxes actually paid.

2. The objective of accounting for income taxes on the accrual basis is to recognize the amount of current and deferred taxes payable or refundable at the date of the financial statements.

ContinuedContinuedContinuedContinued

Differences Between Taxable and Financial Income

5

3. These differences require the use of Deferred Income Tax accounts to reflect the tax consequences of events recognized in different periods for financial and tax reporting.

4. Recognition of deferred tax liabilities and deferred tax assets is required for domestic federal income taxes, and foreign, state, and local (including franchise) taxes based on income.

3. These differences require the use of Deferred Income Tax accounts to reflect the tax consequences of events recognized in different periods for financial and tax reporting.

4. Recognition of deferred tax liabilities and deferred tax assets is required for domestic federal income taxes, and foreign, state, and local (including franchise) taxes based on income.

Differences Between Taxable and Financial Income

6

The objective of financial reporting is to provide

useful information about companies to decision

makers.

The objective of financial reporting is to provide

useful information about companies to decision

makers.

Income State-ment

Income Tax

Return

Overview and Definitions

7

Income State-ment

Income Tax

Return

Frees CorporationIncome Statement

For Year Ended 12/31/07Revenues $180,000 Cost of goods sold (78,000)Gross profit $105,000 Other expenses (60,000)Pretax income from continuing operations $ 45,000 Income taxes (11,000)Net income $ 34,000


8

Income State-ment

Income Tax

Return

Frees CorporationIncome Tax Return

For Year Ended 12/31/07Revenues $170,000 Cost of goods sold (70,000)Gross profit $100,000 Other expenses (60,000)Pretax income from continuing operations $ 40,000 Income taxes ( 9,200)Net income $ 30,800


9

Permanent differences.Temporary differences.Operating loss

carrybacks and carryforwards.

Tax credits.Intraperiod tax

allocations.

Causes of Differences

10

1. Should corporations be required to make interperiod income tax allocations for temporary differences, or should there be no interperiod tax allocation?

2. If interperiod tax allocation is required, should it be based on a comprehensive approach for all temporary differences or on a partial approach for certain temporary differences?

3. Should interperiod tax allocation be applied using the asset/liability method or the deferred method?

Conceptual Issues

11

The FASB concluded that-- Interperiod income tax allocation of

temporary differences is appropriate.

The comprehensive allocation approach is to be applied.

The asset/liability method of income tax allocation is to be used.

Conceptual Issues

12

Some items of revenue and expense that a corporation

reports for financial accounting purposes are

never reported for income tax purposes. These

permanent differences never reverse in a later accounting

period.

Permanent Differences

13


14

Revenues that are recognized for financial reporting purposes but are never taxable

1. Interest on state and local government bonds

2. Life insurance proceeds payable to a corporation upon death of insured

Revenues that are recognized for financial reporting purposes but are never taxable

1. Interest on state and local government bonds

2. Life insurance proceeds payable to a corporation upon death of insured



15

Expenses that are recognized for financial reporting purposes but are never deductible for income tax purposes

1. Life insurance premiums on officers2. Fines resulting from a violation of the

law3. Expenses incurred in obtaining tax-

exempt income

Expenses that are recognized for financial reporting purposes but are never deductible for income tax purposes

1. Life insurance premiums on officers2. Fines resulting from a violation of the

law3. Expenses incurred in obtaining tax-

exempt income



16

Deductions that are allowed for income tax purposes but do not qualify as expenses under generally accepted accounting principles

1. Percentage depletion in excess of cost depletion

2. Dividend received deduction

Deductions that are allowed for income tax purposes but do not qualify as expenses under generally accepted accounting principles

1. Percentage depletion in excess of cost depletion

2. Dividend received deduction

Permanent differences affect either a corporation’s reported pretax financial income or its taxable

income, but not both.

Permanent differences affect either a corporation’s reported pretax financial income or its taxable

income, but not both.


17

Corporations receive a 70% deduction for dividends received if

less than 20% of a U.S. corporation is owned, an 80% deduction for

dividends received if 80% or less of a U.S. corporation is owned, and a

100% deduction for dividends received if more than 80% of a U.S.

corporation is owned.

Corporations receive a 70% deduction for dividends received if

less than 20% of a U.S. corporation is owned, an 80% deduction for

dividends received if 80% or less of a U.S. corporation is owned, and a

100% deduction for dividends received if more than 80% of a U.S.

corporation is owned.

Dividend Received Deduction

18

A temporary difference causes a difference

between a corporation’s pretax financial income and taxable income that

“originates” in one or more years and

“reverses” in later years.

Temporary Differences

19

1. For example, a depreciable asset may be depreciated using MACRS over the prescribed tax life for income purposes, but using straight-line depreciation over a longer life for financial reporting purposes.

1. For example, a depreciable asset may be depreciated using MACRS over the prescribed tax life for income purposes, but using straight-line depreciation over a longer life for financial reporting purposes.

Future Taxable Income Will Be Higher Than Future Pretax Financial Income


Temporary Differences- Future Taxable Amounts

TTOver Over

FF

TTOver Over

FF= Taxable= Taxable= Taxable= Taxable

20

2. Gross profit on installment sales normally is recognized at the point of sale for financial reporting purposes, but for income tax purposes, in certain situations it is recognized as cash is collected.

2. Gross profit on installment sales normally is recognized at the point of sale for financial reporting purposes, but for income tax purposes, in certain situations it is recognized as cash is collected.




TTOver Over

FF

TTOver Over


21

3. It is assumed that investment income reported under the equity method for financial purposes, but not received as a dividend, will eventually be received as dividends or as a gain when the stock is sold.

3. It is assumed that investment income reported under the equity method for financial purposes, but not received as a dividend, will eventually be received as dividends or as a gain when the stock is sold.




TTOver Over

FF

TTOver Over


22

4. Prepaid expenses are deductible when paid for tax purposes, but are not recorded as expenses under used for financial purposes.

5. Unrealized gains on trading securities are not taxable until realized.

4. Prepaid expenses are deductible when paid for tax purposes, but are not recorded as expenses under used for financial purposes.

5. Unrealized gains on trading securities are not taxable until realized.




TTOver Over

FF

TTOver Over


23

6. Profit recognized, but not realized, under the percentage of completion method for financial reporting that will not be taxable until a later year.

6. Profit recognized, but not realized, under the percentage of completion method for financial reporting that will not be taxable until a later year.




TTOver Over

FF

TTOver Over


24

1. For example, items such as rent, interest, and royalties received in advance are taxable when received but are not reported for financial reporting purposes until the service actually has been provided.

1. For example, items such as rent, interest, and royalties received in advance are taxable when received but are not reported for financial reporting purposes until the service actually has been provided.

Future Pretax Financial Income Higher Than Future Taxable Income


Temporary Differences- Future Deductible Amounts

FFOver Over

TT

FFOver Over

TT= Deductible= Deductible= Deductible= Deductible

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2. Product warranty costs may be estimated and recorded as expenses in the current year for financial reporting purposes but deducted, as actually incurred, for the determination of taxable income.

2. Product warranty costs may be estimated and recorded as expenses in the current year for financial reporting purposes but deducted, as actually incurred, for the determination of taxable income.




FFOver Over

TT

FFOver Over


26

3. Bad debts expense estimated for financial reporting, but not deductible until the receivable is written off for tax purposes.

4. Portion of depreciation capitalized for tax purposes into inventory.

3. Bad debts expense estimated for financial reporting, but not deductible until the receivable is written off for tax purposes.

4. Portion of depreciation capitalized for tax purposes into inventory.




FFOver Over

TT

FFOver Over


27

5. Accrued litigation losses for financial reporting, but not deducted until paid for tax purposes.

6. Losses on investments classified as trading securities.

7. Unrealized profit on sale and leaseback for financial reporting and a profit on the sale for tax purposes.

5. Accrued litigation losses for financial reporting, but not deducted until paid for tax purposes.

6. Losses on investments classified as trading securities.

7. Unrealized profit on sale and leaseback for financial reporting and a profit on the sale for tax purposes.



FFOver Over

TT

FFOver Over


28

The FASB established four basic principles that a corporation is to apply

in accounting for its income taxes at the date

of its financial statements.

The FASB established four basic principles that a corporation is to apply

in accounting for its income taxes at the date

of its financial statements.

Conceptual Issues

29

1. A current tax liability or asset is recognized for the estimated income tax obligation or refund on its income tax return for the current year.

2. A deferred tax liability or asset is recognized for the estimated future tax effects of each temporary difference.


Conceptual Issues

30

3. The measurement of deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax law or rates are not anticipated.

4. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that are not expected to be realized.

Conceptual Issues

31

1. The applicable income tax rates.

2. Whether a valuation allowance should be established for deferred tax assets.

The FASB addressed two issues regarding the measurement of deferred tax liabilities or deferred tax asset in its financial statements.

Measurement

32

Step 1. Measure the income tax obligation by applying the applicable tax rate to the current taxable income.

Step 2. Identify the existing temporary differences and classify each as either“taxable” or “deductible.”

Step 3. Measure the deferred tax liability for each taxable temporary difference using the applicable tax rate.


Steps in Recording and Reporting of Current and

Deferred Taxes

33

Step 4. Measure the deferred tax asset for each deductible temporary difference using the applicable tax rate.

Step 5. Reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Step 6. Record the income tax obligation, change in deferred tax liabilities and/or deferred tax assets, change in valuation allowance (if any), and plug income tax expense.

Steps in Recording and Reporting of Current and

Deferred Taxes

34

In 2007, Track Company purchased an asset at a cost of $6,000. For financial reporting

purposes, the asset has a 4-year life, no residual value, and is depreciated by the units-of-output method over 6,000 units

(2007: 1,600 units). For income tax purposes the asset is depreciated under MACRS using

the 3-year life (33.33% for 2007). The taxable income is $7,500 and the income tax rate for

2007 is 30%.

In 2007, Track Company purchased an asset at a cost of $6,000. For financial reporting

purposes, the asset has a 4-year life, no residual value, and is depreciated by the units-of-output method over 6,000 units

(2007: 1,600 units). For income tax purposes the asset is depreciated under MACRS using

the 3-year life (33.33% for 2007). The taxable income is $7,500 and the income tax rate for

2007 is 30%.

Basic Entries

This button will be used laterThis button will be used later

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In the future taxable income will be higher than financial income, so the taxable amount times the tax rate is the deferred tax liability.

In the future taxable income will be higher than financial income, so the taxable amount times the tax rate is the deferred tax liability.

Financial Income Tax Year Depreciation Depreciation Difference

2007 $1,600 $2,000 400

Deferred Tax Liability

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Step 1. $7,500 (taxable income) x 30%

Step 2. The depreciation difference is identified as the only taxable temporary difference.

Step 3. The $120 total deferred tax liability is calculated by multiplying the total taxable temporary difference ($400) times the future tax rate (30%).

Steps 4 and 5. No deferred tax asset, so not required.

Step 6. A journal entry is made.


Basic Entries

37

Income Tax Expense (plug) 2,370Income Taxes Payable 2,250Deferred Tax Liability 120

$2,250 + $120

Basic Entries

38

When future enacted tax rates change,

reversals are calculated at the future tax rates.

When future enacted tax rates change,

reversals are calculated at the future tax rates.

Future Tax Rates Differ

39

Assume the same facts as in Slide 34, except that the income tax rate for 2007 for 40%, but Congress has

enacted tax rates of 35% for 2008, 33% for 2009, and 30% for 2010 and beyond.

Assume the same facts as in Slide 34, except that the income tax rate for 2007 for 40%, but Congress has

enacted tax rates of 35% for 2008, 33% for 2009, and 30% for 2010 and beyond.

Financial Income Tax Year Depreciation Depreciation

2007 $2,800 $2,6672008 1,100 8892009 500 444

Click here to review Slide 34, then click the button on Slide 34 to return.

Example 2-Multiple Rates

40

2007 2008 2009

Deferred Tax Liability

Financial depreciation $2,800 $1,100 $500

Income tax depreciation(2,667 ) (889 ) (444 )

Taxable amount $ 133 $ 211 $ 56 = $400

Income tax rate 0.35 0.33 0.30

Deferred tax liability $ 47 $ 70 $ 17 = $134

Income Tax Expense (plug) 3,134Deferred Tax Liability 134Income Taxes Payable 3,000

Example 2-Multiple Rates

41

Klemper Company sells a product on which it provides

a 3-year warranty. For financial reporting purposes,

the company estimates its future warranty costs and

records a warranty expense/liability at year-end. For income tax purposes, the

company deducts its warranty costs when paid.

Klemper Company sells a product on which it provides

a 3-year warranty. For financial reporting purposes,

the company estimates its future warranty costs and

records a warranty expense/liability at year-end. For income tax purposes, the

company deducts its warranty costs when paid.

Deferred Tax Asset

42

At the beginning of 2007, the company had a deferred tax asset of $330 related to its warranty

plan. At the end of 2007, the company estimates that its ending warranty liability is $1,400. In 2007, the

company has taxable income of $5,000 and a tax rate of 30%. The ending Deferred Asset should be $1,400

X 30%, or $420.

At the beginning of 2007, the company had a deferred tax asset of $330 related to its warranty

plan. At the end of 2007, the company estimates that its ending warranty liability is $1,400. In 2007, the

company has taxable income of $5,000 and a tax rate of 30%. The ending Deferred Asset should be $1,400

X 30%, or $420.

Income Tax Expense (plug) $1,410Deferred Tax Asset ($420 - $330) 90

Income Taxes Payable ($5,000 x 30%) 1,500

Deferred Tax Asset

43

Deferred Tax Asset and Valuation Allowance

If it is “more likely than not” that a deferred tax

asset will not be realized, a valuation allowance must be established.

If it is “more likely than not” that a deferred tax

asset will not be realized, a valuation allowance must be established.

44

Negative Evidence

Negative evidence indicating the need for a valuation allowance include:

1. A history of operating loss or tax credit carryforwards expiring unused.

2. Losses expected in early future years (by a presently profitable entity).

3. Unrecognized loss contingencies that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years.

4. A carryback, carryforward period that is so brief that it would limit realization of tax benefits.

45

Positive EvidencePositive evidence as to whether existing net deductible

temporary differences and loss carryforwards will be realized include:

1. Existing contracts or firm sales backlog will produce more than enough future taxable income to realize the deferred tax asset based on existing sales prices and cost structures.

2. Income in carryback years prior to the present year.3. Feasible and presently available tax strategies would result

in more than enough taxable income to realize the deferred tax asset.

4. Appreciation of assets is sufficient to realize the deferred tax asset.

5. A strong earnings history exclusive of the charge to income that created the future deductible amount coupled with evidence indicating the transaction or event that created the charge to income (i.e. extraordinary item) is an aberration rather than a continuing condition.

46

Deferred Tax Assets and Valuation Allowance

At the end of 2007, Klemper Corporation decides that it is “more likely than not” that

$600 of the ending temporary difference will not be realized. (30% tax rate)

At the end of 2007, Klemper Corporation decides that it is “more likely than not” that

$600 of the ending temporary difference will not be realized. (30% tax rate)

Income Tax Expense 180Allowance to Reduce Deferred Tax Asset to Realizable Value 180

47

PPretax financial income XXAdd: Deductible temporary items XXFines XXExcess charitable contributions XXExpenses to earn tax exempt income XXExcess of bad debts expense over write-offs (deductible item) XX XX

XXLess: Taxable temporary items XXTax exempt interest XXProceeds of life insurance XXExcess of percentage depletion over cost depletion XXEquity income not received as dividends (taxable item) XXDividends received deduction XX XX

Taxable income XX

Determining Taxable IncomeBoth permanent and temporary differences are considered when determining taxable income.

48

Example 5-Pages 959 & 960

Assume the following for Sand Company for 2007:Interest on municipal bonds $1,500Gross profit on installment sales-financial 10,000Gross profit on installment sales-taxable 2,000Rent revenue-financial 3,000Rent revenue-taxable 9,000Pre-tax financial income 75,500Deferred tax liability-Jan. 1, 2007 300Deferred gross profit-installment sales-2006 1,000Make the journal entry for 2007.

49

PPretax financial income $75,500Add: Rent revenue collected in advance 6,000

$81,500Less: Tax exempt interest $1,500Difference in gross profit on installment sales 8,000 9,500Taxable income $72,000

Determining Taxable IncomeBoth permanent and temporary differences are considered when determining taxable income.

50

Deferred Tax Assets and Liabilities

Income Tax Expense (plug) 22,200Deferred Tax Asset 1,800

Deferred Tax Liability 2,400Taxes Payable 21,600

$8,000 (2007) + $1,000 (2006)$8,000 (2007) + $1,000 (2006)

51

FASB concluded in FASB Statement No. 109 that GAAP for operating

carrybacks and carryforwards are...

FASB concluded in FASB Statement No. 109 that GAAP for operating

carrybacks and carryforwards are...

Conceptual Issues

52

1. A corporation must recognize the tax benefit of an operating loss carryback in the period of the loss as an asset on its balance sheet and as a reduction of the operating loss on its income statement.

2. A corporation must recognize the tax benefit of an operating loss carryforward in the period of the loss as a deferred tax asset. However, it must reduce the deferred tax asset by a valuation allowance if it is more likely than not that the corporation will not realize some or all of the deferred tax asset.

Conceptual Issues

53

Operating Loss Carrybacks and Carryforwards

54

Monk Company reports a pretax operating loss of $90,000 in 2007 for both financial reporting and income tax purposes, and that reported pretax

financial income and taxable income for the previous 2 years had been: 2005--$40,000 (tax rate 25%); and

2006--$70,000 (tax rate 30%).

Monk Company reports a pretax operating loss of $90,000 in 2007 for both financial reporting and income tax purposes, and that reported pretax

financial income and taxable income for the previous 2 years had been: 2005--$40,000 (tax rate 25%); and

2006--$70,000 (tax rate 30%).

Income Tax Refund Receivable 25,000 Income Tax Benefit From Operating Loss Carryback 25,000

2005 $40,000 x 0.25 =2005 $40,000 x 0.25 = $10,000$10,0002006 $50,000 x 0.30 =2006 $50,000 x 0.30 = 15,00015,000

$25,000$25,000

Operating Loss Carryback


55

Income Statement

An operating loss is reduced by the benefit, not by the total carryback.

Pretax operating loss $(90,000)

Less: Income tax benefit from operating loss carryback$40,000 x 25% + $50,000 x 30% 25,000

Net loss $(65,000)

56

Lake Company reports a pretax operating loss of $60,000 in 2007 for both financial reporting and

income tax purposes. The income tax rate is 30% and no change in the tax rate has been enacted for

future years. The deferred tax asset is calculated to be $18,000 ($60,000 x 0.30).

Lake Company reports a pretax operating loss of $60,000 in 2007 for both financial reporting and

income tax purposes. The income tax rate is 30% and no change in the tax rate has been enacted for

future years. The deferred tax asset is calculated to be $18,000 ($60,000 x 0.30).

Deferred Tax Asset 18,000 Income Tax Benefit From Operating Loss Carryforward 18,000


Operating Loss Carryforward

57

If the company establishes a valuation allowance for the entire amount of the deferred tax asset, it also

makes the following journal entry at the end of 2007.

If the company establishes a valuation allowance for the entire amount of the deferred tax asset, it also

makes the following journal entry at the end of 2007.

Income Tax Benefit From Operating Loss Carryforward 18,000 Allowance to Reduce Deferred Tax Asset to Realizable Value 18,000



58

In 2008, Lake Company operates successfully and earns pretax operating income of $100,000 for both

financial reporting and tax purposes.

In 2008, Lake Company operates successfully and earns pretax operating income of $100,000 for both

financial reporting and tax purposes.

Income Tax Expense 12,000Allowance to Reduce Deferred Tax Asset to Realizable Value 18,000 Income Taxes Payable 12,000 Deferred Tax Asset 18,000


$40,000 x 0.30$40,000 x 0.30$40,000 x 0.30$40,000 x 0.30

59

Income tax allocation within a period is mandatory under

GAAP.

Income tax allocation within a period is mandatory under

GAAP.

Intraperiod Tax Allocation

60

Intraperiod Tax AllocationIncome tax may appear in five different places

in the financial statements for a period.

1. Income from continuing operations

2. Discontinued operations

3. Extraordinary items

4. Prior period and retrospective adjustments

5. Other comprehensive income

61

Income from continuing operations [$270,000 (revenues) – $190,000 (expenses)] $80,000 Gain on disposal of discontinued Segment X 18,000 Loss from operations of discontinued Segment X (5,000 )Extraordinary loss on bond redemption (10,000 )Cumulative effect of change in accounting principle (accelerated depreciation to S/L) 15,000 Prior period adjustment (error) (8,000 )Amount subject to income taxes $90,000


Intraperiod Tax AllocationKalloway Company reports the following items of

pretax financial and taxable income for 2007:

Kalloway Company reports the following items of pretax financial and taxable income for 2007:

62

Kalloway Company is subject to income tax rates of 20% on the first $50,000 of

income and 30% on all income in excess

of $50,000.

Kalloway Company is subject to income tax rates of 20% on the first $50,000 of

income and 30% on all income in excess

of $50,000.

Let’s take a look at Kalloway

Company’s income statement for 2007.

Let’s take a look at Kalloway

Company’s income statement for 2007.



63

Pretax Amount

Income Tax Rate

Income Tax

Expense (Cr.)Component (Pretax)

Income from continuingoperations $50,000 0.20

$10,00030,000 0.30

9,000Gain on disposal of

discontinued Division X 18,000 0.305,400

Extraordinary loss from tornado(5,000)0.30(1,500)

x =



64

Pretax Amount

Income Tax Rate

Income Tax

Expense (Cr.)Component (Pretax)

Cumulative effect of change in accounting principle on prior year’s income $15,000 0.20

$ 4,300Prior period adjustment (8,000) 0.30 (2,400)Total income tax expense

$22,000

x =


65

Now, let’s examine Kalloway Company’s income statement for

2007.

Now, let’s examine Kalloway Company’s income statement for

2007.

Intraperiod Tax Allcoation

66

(0.20 x $50,000) + (0.20 x $50,000) + (0.30 x $30,000)(0.30 x $30,000)

Kalloway CompanyIncome Statement

for Year Ended December 31, 2007

Revenues (listed separately) $270,000 Expenses (listed separately) (190,000)Pretax income from continuing operations$ 80,000 Income tax expense (19,000)


67

Kalloway CompanyIncome Statement

for Year Ended December 31, 2007

Revenues (listed separately) $270,000 Expenses (listed separately) (190,000)Pretax income from continuing operations $ 80,000 Income tax expense (19,000)Income from continuing operations $ 61,000 Results of discontinued operations: Gain on disposal of discontinued Segment X (net of $5,400 tax) $12,600

Loss from operations of discontinued Segment X (net of $1,500 tax credit) (3,500) 9,100

Income before extraordinary item $ 70,100

Statement ContinuedStatement ContinuedStatement ContinuedStatement Continued

$18,000 x 0.30$18,000 x 0.30

($5,000) X .30($5,000) X .30

68

Income before extraordinary item $70,100 Extraordinary loss from tornado (net of $3,000 income tax credit) (7,000)Net Income $63,100

Prior period adjustments on the statement of

retained earnings also would be shown net of tax.

Prior period adjustments on the statement of

retained earnings also would be shown net of tax.

($10,000) x 0.30($10,000) x 0.30

69

A corporation must report its deferred tax liabilities and assets in

two classifications...

A corporation must report its deferred tax liabilities and assets in

two classifications...

…a net current amount and a net

noncurrent amount.

…a net current amount and a net

noncurrent amount.

Balance Sheet Presentation

70

Deferred tax liabilities and assets are classified

as current or noncurrent based upon their related

assets or liabilities for financial reporting.

Deferred tax liabilities and assets are classified

as current or noncurrent based upon their related

assets or liabilities for financial reporting.


71

Any deferred tax liability or asset not related to an asset or liability

is classified according to the expected reversal date of the

temporary difference.

Any deferred tax liability or asset not related to an asset or liability

is classified according to the expected reversal date of the

temporary difference.


72

Current and Noncurrent

RelatedAsset orLiability Classification

Installment sales Accounts Receivable CurrentInventory differences Inventory CurrentAllowance for Doubtful Accounts Receivable CurrentDepreciation differences Plant Assets Noncurrent

Estimated ReversalsAccrued Pension Expense Probably noncurrentWarranty Liability Probably currentUnearned RevenueNOL

73

Account Related BalanceDeferred Tax Accounts Balance Sheet Account

Deferred Tax Liabilities

Installment sales $ 6,000 credit Accounts receivable

Depreciation $12,000 credit Property, plant, and equipment

Deferred Tax Assets

Warranty costs $ 3,400 debit Warranty liability

Rent revenue $ 2,500 debit Unearned revenue


CurrentCurrent

CurrentCurrent

NoncurrentNoncurrent

NoncurrentNoncurrent

74

The next slide presents an illustration that includes

several temporary differences. Assume taxable

income of $700,000 at a 30% tax rate.

The next slide presents an illustration that includes

several temporary differences. Assume taxable

income of $700,000 at a 30% tax rate.

75

Comprehensive Illustration

Balance Balance sheet sheet

amountsamountsDeferred Tax Asset 25,500 Income Tax Expense (plug) 194,500

Deferred Tax Liability 10,000Taxes Payable 210,000ContinuedContinuedContinuedContinued

76

Current and Deferred Amounts on INCOME STATEMENT

Taxes Payable (current) $210,000

Deferred Tax Asset (net)

($25,500 asset - $10,000 liability) 15,500

Income Tax Expense $194,500

77

Chapter19

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accounting for income taxes c hapter 19 an electronic presentation by norman sunderman angelo state...

Documents

financial income slide

corporation income tax

tax purposes

tax reporting

deferred tax assets

income taxes11

net income

pretax income