Accounting for Income Taxes Chapter 19 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California,

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  • Slide 1
  • Accounting for Income Taxes Chapter 19 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara
  • Slide 2
  • Background Deferral approach to tax allocation (APB Opinion 11) Income tax expense = amount of taxes that would be paid if income statement numbers appeared on the current year's tax return. Deferred taxes was the plug figure (difference between taxes payable and tax expense). The effect of subsequent changes in tax rates on deferred tax account were essentially ignored. Matching Approach
  • Slide 3
  • Background A method that was proposed theoretically (but has never been GAAP in US) Assets and liabilities would be recorded NET of any deferred tax related to the item Net-of-Tax Approach
  • Slide 4
  • Background Liability approach to tax allocation (FASB 96, 109) Income tax expense = taxes currently payable plus change in deferred taxes. If tax rates change, the effect on deferred tax amounts affect income tax expense in the year the change is enacted. If there are no changes in tax rates, income tax expense should be approximately the same as under APB Opinion 11. Asset/Liability Measurement Approach
  • Slide 5
  • Tax Code Exchanges Investors and Creditors Financial Statements Pretax Financial Income GAAP Income Tax Expense Taxable Income Income Tax Payable Tax Return vs. Fundamentals of Accounting for Income Taxes
  • Slide 6
  • A Temporary Difference is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts or deductible amounts in future years. Future Taxable Amounts Future Deductible Amounts Deferred Tax Liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year. Deferred Tax Asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year. Illustration 19-22 Examples of Temporary Differences Temporary Differences
  • Slide 7
  • Temporary Differences (1) Revenues and gains, recognized in financial income, are later taxed for income tax purposes. Installment sales Expenses and losses are deducted for income tax purposes before they are recognized in financial income. MACRS depreciation Goodwill deduction on tax return Called taxable temporary differences
  • Slide 8
  • Revenues and gains are taxed for income tax purposes before they are recognized in financial income. Subscription revenue Prepaid rent Expenses and losses, recognized in financial income, are later deducted for income tax purposes. Warranty expense Called deductible temporary differences Temporary Differences (2)
  • Slide 9
  • Transaction When recorded in books When recorded on tax return Deferred tax effect Rev or GainEarlierLater Liability Rev or GainLaterEarlier Asset Exp or LossEarlierLater Asset Exp or LossLaterEarlier Liability Summary of Temporary Differences
  • Slide 10
  • Sources of Permanent Differences No deferred tax effects for permanent differences Some items are recorded in Books but NEVER on tax return Other items are NEVER recorded in books but recorded on tax return Permanent Differences
  • Slide 11
  • Permanent Differences: Examples Items, recognized for financial accounting purposes, but not for income tax purposes: Interest revenue on Municipal Bonds Life insurance premiums and proceeds when corporation is beneficiary Fines and penalties Items, recognized for tax purposes, but not for financial accounting purposes: Dividend exclusion Statutory depletion
  • Slide 12
  • Deferred Tax Asset & Deferred Tax Liability: Sources Deferred taxes may be a: Deferred tax liability, or Deferred tax asset Deferred tax liability arises due to net taxable amounts in the future. Deferred tax asset arises due to net deductible amounts in the future.
  • Slide 13
  • If the deferred tax asset appears doubtful, a Valuation Allowance account is needed. Journal entry : Income Tax Expense $$ Allowance to Reduce Deferred Tax Asset to Expected Realizable Value $$ The entry records a potential future tax benefit that is not expected to be realized in the future. Valuation Allowance for Deferred Tax Assets New GAAP = FIN 48 (not on a 2006 FARS)
  • Slide 14
  • Basic Rule: Apply the yearly tax rate to calculate deferred tax effects. If future tax rates change: use the enacted tax rate expected to apply in the future year. If new rates are not yet enacted into law for future years, the current rate should be used. The appropriate enacted rate for a year is the average tax rate [based on graduated tax brackets]. What Tax Rate to Apply
  • Slide 15
  • The deferred tax classification relates to its underlying asset or liability. Classify the deferred tax amounts as current or non-current. Presentation is NET amount related to current items If DR>CR, current deferred tax asset If DRCR, noncurrent deferred tax asset If DR

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