chapter 19-1. chapter 19-2 c h a p t e r 19 accounting for income taxes intermediate accounting 13th...

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  • Slide 1
  • Chapter 19-1
  • Slide 2
  • Chapter 19-2 C H A P T E R 19 ACCOUNTING FOR INCOME TAXES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield
  • Slide 3
  • Chapter 19-3 1. 1.Identify differences between pretax financial income and taxable income. 2. 2.Describe a temporary difference that results in future taxable amounts. 3. 3.Describe a temporary difference that results in future deductible amounts. 4. 4.Explain the purpose of a deferred tax asset valuation allowance. 5. 5.Describe the presentation of income tax expense in the income statement. 6. 6.Describe various temporary and permanent differences. 7. 7.Explain the effect of various tax rates and tax rate changes on deferred income taxes. 8. 8.Apply accounting procedures for a loss carryback and a loss carryforward. 9. 9.Describe the presentation of deferred income taxes in financial statements. 10. 10.Indicate the basic principles of the asset-liability method. Learning Objectives
  • Slide 4
  • Chapter 19-4 Fundamentals of Accounting for Income Taxes Future taxable amounts and deferred taxes Future deductible amounts and deferred taxes Income statement presentation Specific differences Rate considerations Accounting for Net Operating Losses Financial Statement Presentation Review of Asset- Liability Method Loss carryback Loss carryforward Loss carryback example Loss carryforward example Balance sheet Income statement Uncertain tax positions Accounting for Income Taxes
  • Slide 5
  • Chapter 19-5 Corporations must file income tax returns following the guidelines developed by the Internal Revenue Service (IRS), thus they: LO 1 Identify differences between pretax financial income and taxable income. Fundamentals of Accounting for Income Taxes calculate taxes payable based upon IRS code, calculate income tax expense based upon GAAP. Amount reported as tax expense will often differ from the amount of taxes payable to the IRS.
  • Slide 6
  • Chapter 19-6 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 LO 1 Identify differences between pretax financial income and taxable income. Illustration 19-1
  • Slide 7
  • Chapter 19-7 Illustration: KRC, Inc. reported revenues of $130,000 and expenses of $60,000 in each of its first three years of operations. For tax purposes, KRC reported the same expenses to the IRS in each of the years. KRC reported taxable revenues of $100,000 in 2010, $150,000 in 2011, and $140,000 in 2012. What is the effect on the accounts of reporting different amounts of revenue for GAAP versus tax? LO 1 Identify differences between pretax financial income and taxable income. Fundamentals of Accounting for Income Taxes
  • Slide 8
  • Chapter 19-8 Revenues Expenses Pretax financial income Income tax expense (40%) $130,000 60,000 $70,000 $28,000 $130,000 2011 60,000 $70,000 $28,000 $130,000 2012 60,000 $70,000 $28,000 $390,000 Total 180,000 $210,000 $84,000 GAAP Reporting Revenues Expenses Pretax financial income Income tax payable (40%) $100,000 2010 60,000 $40,000 $16,000 $150,000 2011 60,000 $90,000 $36,000 $140,000 2012 60,000 $80,000 $32,000 $390,000 Total 180,000 $210,000 $84,000 Tax Reporting 2010 LO 1 Identify differences between pretax financial income and taxable income. Book vs. Tax Difference Illustration 19-2 Illustration 19-3
  • Slide 9
  • Chapter 19-9 Income tax expense (GAAP) Income tax payable (IRS) Difference $28,000 16,000 $12,000 $28,000 2011 36,000 $(8,000) $28,000 2012 32,000 $(4,000) $84,000 Total 84,000 $0 ComparisonComparison 2010 Are the differences accounted for in the financial statements? YearReporting Requirement 2010 2011 2012 Deferred tax liability account increased to $12,000 Deferred tax liability account reduced by $8,000 Deferred tax liability account reduced by $4,000 Yes LO 1 Identify differences between pretax financial income and taxable income. Book vs. Tax Difference Illustration 19-4
  • Slide 10
  • Chapter 19-10 Balance Sheet Assets: Liabilities: Equity: Income tax expense 28,000 Income Statement Revenues: Expenses: Net income (loss) 2010 Deferred taxes 12,000 Where does the deferred tax liability get reported in the financial statements? Income tax payable16,000 LO 1 Identify differences between pretax financial income and taxable income. Financial Reporting for 2010
  • Slide 11
  • Chapter 19-11 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 LO 2 Describe a temporary difference that results in future taxable amounts. Temporary Differences
  • Slide 12
  • Chapter 19-12 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes Illustration: In KRCs situation, the only difference between the book basis and tax basis of the assets and liabilities relates to accounts receivable that arose from revenue recognized for book purposes. KRC reports accounts receivable at $30,000 in the December 31, 2010, GAAP-basis balance sheet. However, the receivables have a zero tax basis. Illustration 19-5
  • Slide 13
  • Chapter 19-13 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes KRC assumes that it will collect the accounts receivable and report the $30,000 collection as taxable revenues in future tax returns. KRC does this by recording a deferred tax liability. Illustration 19-6 Illustration: Reversal of Temporary Difference, KRC Inc.
  • Slide 14
  • Chapter 19-14 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes A 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 Liability Income tax expense (GAAP) Income tax payable (IRS) Difference $28,000 16,000 $12,000 $28,000 2011 36,000 $(8,000) $28,000 2012 32,000 $(4,000) $84,000 Total 84,000 $0 2010 Illustration 19-4
  • Slide 15
  • Chapter 19-15 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes Illustration: Because it is the first year of operations for KRC, there is no deferred tax liability at the beginning of the year. KRC computes the income tax expense for 2010 as follows: Deferred Tax Liability Illustration 19-9
  • Slide 16
  • Chapter 19-16 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes Illustration: KRC makes the following entry at the end of 2010 to record income taxes. Deferred Tax Liability Income Tax Expense 28,000 Income Tax Payable 16,000 Deferred Tax Liability 12,000
  • Slide 17
  • Chapter 19-17 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes Illustration: Computation of Income Tax Expense for 2011. Deferred Tax Liability Illustration 19-10
  • Slide 18
  • Chapter 19-18 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes Illustration: KRC makes the following entry at the end of 2011 to record income taxes. Deferred Tax Liability Income Tax Expense 28,000 Deferred Tax Liability 8,000 Income Tax Payable 36,000
  • Slide 19
  • Chapter 19-19 LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes Illustration: The entry to record income taxes at the end of 2012 reduces the Deferred Tax Liability by $4,000. The Deferred Tax Liability account appears as follows at the end of 2012. Deferred Tax Liability Illustration 19-11
  • Slide 20
  • Chapter 19-20 E19-1: E19-1: Starfleet Corporation has one temporary difference at the end of 2010 that will reverse and cause taxable amounts of $55,000 in 2011, $60,000 in 2012, and $75,000 in 2013. Starfleets pretax financial income for 2010 is $400,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2010.Instructions a) a)Compute taxable income and income taxes payable for 2010. b) b)Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2010. LO 2 Describe a temporary difference that results in future taxable amounts. Future Taxable Amounts and Deferred Taxes
  • Slide 21
  • Chapter 19-21 LO 2 Describe a temporary difference that results in future taxable amounts. a. a. Future Taxable Amounts and Deferred Taxes
  • Slide 22
  • Chapter 19-22 Future Deductible Amounts and Deferred Taxes Illustration: During 2010, Cunningham Inc. estimated its warranty costs related to the sale of microwave ovens to be $500,000, paid evenly over the next two years. For book purposes, in 2010 Cunningham reported warranty expense and a related estimated liability for warranties of $500,000 in its financial statements. For tax purposes, the warranty tax deduction is not allowed until paid. Illustration 19-12 LO 3 Describe a temporary difference that results in future deductible amounts.
  • Slide 23
  • Chapter 19-23 When Cunningham pays the warranty liability, it reports an expense (deductible amount) for tax purposes. Cunningham reports this future tax benefit in the December 31, 2010, balance sheet as a deferred tax asset. Illustration 19-13 Illustration: Reversal of Temporary Difference, Cunningham Inc. LO 3 Describe a temporary difference that results in future deductible amounts. Future Deductible Amounts and Deferred Taxes
  • Slide 24
  • Chapter 19-24 A 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. Deferred Tax Asset LO 3 Describe a temporary difference that results in future deductible amounts. Future Deductible Amounts and Deferred Taxes
  • Slide 25
  • Chapter 19-25 Illustration: Hunt Co. accrues a loss and a related liability of $50,000 in 2010 for financial reporting purposes because of pending litigation. Hunt cannot deduct this amount for tax purposes until the period it pays the liability, expected in 2011. Deferred Tax Asset LO 3 Describe a temporary difference that results in future deductible amounts. Illustration 19-14 Future Deductible Amounts and Deferred Taxes
  • Slide 26
  • Chapter 19-26 Illustration: Assuming that 2010 is Hunts first year of operations, and income tax payable is $100,000, Hunt computes its income tax expense as follows. Deferred Tax Asset LO 3 Describe a temporary difference that results in future deductible amounts. Illustration 19-16 Future Deductible Amounts and Deferred Taxes
  • Slide 27
  • Chapter 19-27 Illustration: Hunt makes the following entry at the end of 2010 to record income taxes. Deferred Tax Asset Income Tax Expense 80,000 Deferred Tax Asset20,000 Income Tax Payable 100,000 Future Deductible Amounts and Deferred Taxes LO 3 Describe a temporary difference that results in future deductible amounts.
  • Slide 28
  • Chapter 19-28 Illustration: Computation of Income Tax Expense for 2011. Deferred Tax Asset Illustration 19-17 Future Deductible Amounts and Deferred Taxes LO 3 Describe a temporary difference that results in future deductible amounts.
  • Slide 29
  • Chapter 19-29 Illustration: Hunt makes the following entry at the end of 2011 to record income taxes. Deferred Tax Asset Income Tax Expense 160,000 Deferred Tax Asset20,000 Income Tax Payable 140,000 Future Deductible Amounts and Deferred Taxes LO 3 Describe a temporary difference that results in future deductible amounts.
  • Slide 30
  • Chapter 19-30 Illustration: The entry to record income taxes at the end of 2011 reduces the Deferred Tax Asset by $20,000. Illustration 19-18 Deferred Tax Asset Future Deductible Amounts and Deferred Taxes LO 3 Describe a temporary difference that results in future deductible amounts.
  • Slide 31
  • Chapter 19-31 Illustration: Columbia Corporation has one temporary difference at the end of 2010 that will reverse and cause deductible amounts of $50,000 in 2011, $65,000 in 2012, and $40,000 in 2013. Columbias pretax financial income for 2010 is $200,000 and the tax rate is 34% for all years. There are no deferred taxes at the beginning of 2010. Columbia expects to be profitable in the future. Instructions a) a)Compute taxable income and income taxes payable for 2010. b) b)Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2010. LO 3 Describe a temporary difference that results in future deductible amounts. Future Deductible Amounts and Deferred Taxes
  • Slide 32
  • Chapter 19-32 LO 3 Describe a temporary difference that results in future deductible amounts. a. a. Future Deductible Amounts and Deferred Taxes
  • Slide 33
  • Chapter 19-33 Deferred Tax AssetValuation Allowance A company should reduce a deferred tax asset by a valuation allowance if it is more likely than not that it will not realize some portion or all of the deferred tax asset. More likely than not means a level of likelihood of at least slightly more than 50 percent. LO 4 Explain the purpose of a deferred tax asset valuation allowance. Future Deductible Amounts and Deferred Taxes
  • Slide 34
  • Chapter 19-34 E19-14: Callaway Corp. has a deferred tax asset balance of $150,000 at the end of 2010 due to a single cumulative temporary difference of $375,000. At the end of 2011 this same temporary difference has increased to a cumulative amount of $500,000. Taxable income for 2011 is $850,000. The tax rate is 40% for all years. No valuation account is in existence at the end of 2010. Instructions Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entries required for 2011. LO 4 Explain the purpose of a deferred tax asset valuation allowance. Future Deductible Amounts and Deferred Taxes
  • Slide 35
  • Chapter 19-35 LO 4 Explain the purpose of a deferred tax asset valuation allowance. Future Deductible Amounts and Deferred Taxes
  • Slide 36
  • Chapter 19-36 Deferred Tax AssetValuation Allowance E19-14 Balance Sheet Presentation LO 4 Explain the purpose of a deferred tax asset valuation allowance. Future Deductible Amounts and Deferred Taxes
  • Slide 37
  • Chapter 19-37 Income tax payable or refundable LO 5 Describe the presentation of income tax expense in the income statement. Income Statement Presentation Change in deferred income tax Income tax expense or benefit +-+-+-+- = In the income statement or in the notes to the financial statements, a company should disclose the significant components of income tax expense (current and deferred). Formula to Compute Income Tax Expense Illustration 19-20
  • Slide 38
  • Chapter 19-38 LO 5 Describe the presentation of income tax expense in the income statement. Income Statement Presentation Given the previous information related to KRC Inc., KRC reports its income statement as follows. Illustration 19-21
  • Slide 39
  • Chapter 19-39 Taxable temporary differences - Deferred tax liability Deductible temporary differences - Deferred tax Asset Temporary Differences Specific Differences Text Illustration 19-22 Examples of Temporary Differences LO 6 Describe various temporary and permanent differences.
  • Slide 40
  • Chapter 19-40 Permanent differences are caused by items that (1) enter into pretax financial income but never into taxable income or (2) enter into taxable income but never into pretax financial income. Permanent differences affect only the period in which they occur, they do not give rise to future taxable or deductible amounts. There are no deferred tax consequences to be recognized. Text Illustration 19-24 Examples of Permanent Differences Specific Differences LO 6 Describe various temporary and permanent differences.
  • Slide 41
  • Chapter 19-41 Do the following generate: Future Deductible Amount = Deferred Tax Asset Future Deductible Amount = Deferred Tax Asset Future Taxable Amount = Deferred Tax Liability Future Taxable Amount = Deferred Tax Liability A Permanent Difference A Permanent Difference 1. The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes. Future Taxable Amount 2. A landlord collects some rents in advance. Rents received are taxable in the period when they are received. Future Deductible Amount 3. Expenses are incurred in obtaining tax-exempt income. Permanent Difference 4. Costs of guarantees and warranties are estimated and accrued for financial reporting purposes. Future Deductible Amount Specific Differences LO 6 Describe various temporary and permanent differences.
  • Slide 42
  • Chapter 19-42 Do the following generate: Future Deductible Amount = Deferred Tax Asset Future Deductible Amount = Deferred Tax Asset Future Taxable Amount = Deferred Tax Liability Future Taxable Amount = Deferred Tax Liability A Permanent Difference A Permanent Difference 5. Sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes. Future Taxable Amount 6. Proceeds are received from a life insurance company because of the death of a key officer (the company carries a policy on key officers). Future Deductible Amount 7. Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.. A Permanent Difference Specific Differences LO 6 Describe various temporary and permanent differences.
  • Slide 43
  • Chapter 19-43 Permanent Differences LO 6 Describe various temporary and permanent differences. E19-4: Havaci Company reports pretax financial income of $80,000 for 2010. The following items cause taxable income to be different than pretax financial income. 1. 1.Depreciation on the tax return is greater than depreciation on the income statement by $16,000. 2. 2.Rent collected on the tax return is greater than rent earned on the income statement by $27,000. 3. 3.Fines for pollution appear as an expense of $11,000 on the income statement. Havacis tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2010.
  • Slide 44
  • Chapter 19-44 Permanent Differences LO 6 Describe various temporary and permanent differences.
  • Slide 45
  • Chapter 19-45 A company must consider presently enacted changes in the tax rate that become effective for a particular future year(s) when determining the tax rate to apply to existing temporary differences. Revision of Future Tax Rates When a change in the tax rate is enacted, companies should record its effect on the existing deferred income tax accounts immediately. Tax Rate Considerations Specific Differences LO 7 Explain the effect of various tax rates and tax rate changes on deferred income taxes.
  • Slide 46
  • Chapter 19-46 Net operating loss (NOL) = tax-deductible expenses exceed taxable revenues. The federal tax laws permit taxpayers to use the losses of one year to offset the profits of other years (carryback and carryforward). Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
  • Slide 47
  • Chapter 19-47 Loss Carryback Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. Back 2 years and forward 20 years Losses must be applied to earliest year first Illustration 19-29
  • Slide 48
  • Chapter 19-48 Loss Carryforward May elect to forgo loss carryback and Carryforward losses 20 years Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. Illustration 19-30
  • Slide 49
  • Chapter 19-49 BE19-12: (Carryback) Conlin Corporation had the following tax information. Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. In 2011 Conlin suffered a net operating loss of $480,000, which it elected to carry back. The 2011 enacted tax rate is 29%. Prepare Valiss entry to record the effect of the loss carryback.
  • Slide 50
  • Chapter 19-50 Accounting for Net Operating Losses $144,000 LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
  • Slide 51
  • Chapter 19-51 E19-12: Journal Entry for 2011 Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. Income tax refund receivable 144,000 Benefit due to loss carryback144,000
  • Slide 52
  • Chapter 19-52 Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. BE19-13: Rode Inc. incurred a net operating loss of $500,000 in 2010. Combined income for 2008 and 2009 was $350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.
  • Slide 53
  • Chapter 19-53 Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
  • Slide 54
  • Chapter 19-54 E19-13: Journal Entries for 2010 Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. Income tax refund receivable 140,000 Benefit due to loss carryback140,000 Deferred tax asset60,000 Benefit due to loss carryforward60,000
  • Slide 55
  • Chapter 19-55 BE19-14 (Carryback and Carryforward with Valuation Allowance): Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2010. Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
  • Slide 56
  • Chapter 19-56 E19-14: Journal Entries for 2010 Accounting for Net Operating Losses LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
  • Slide 57
  • Chapter 19-57 Whether the company will realize a deferred tax asset depends on whether sufficient taxable income exists or will exist within the carryforward period. Valuation Allowance Revisited LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. Text Illustration 19-37 Possible Sources of Taxable Income If any one of these sources is sufficient to support a conclusion that a valuation allowance is unnecessary, a company need not consider other sources. Text Illustration 19-38 Evidence to Consider in Evaluating the need for a Valuation Account
  • Slide 58
  • Chapter 19-58 Balance Sheet Presentation Financial Statement Presentation LO 9 Describe the presentation of deferred income taxes in financial statements. An individual deferred tax liability or asset is classified as current or noncurrent based on the classification of the related asset or liability for financial reporting purposes. Companies should classify deferred tax accounts on the balance sheet in two categories: one for the net current amount, and one for the net noncurrent amount.
  • Slide 59
  • Chapter 19-59 Income Statement Presentation Financial Statement Presentation LO 9 Describe the presentation of deferred income taxes in financial statements. Companies should allocate income tax expense (or benefit) to continuing operations, discontinued operations, extraordinary items, and prior period adjustments. Companies should disclose the significant components of income tax expense attributable to continuing operations (current tax expense, deferred tax expense, etc.).
  • Slide 60
  • Chapter 19-60 Review of the Asset-Liability Method Companies apply the following basic principles: (1) (1) Recognize a current tax liability or asset for the estimated taxes payable or refundable. (2) (2) Recognize a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carryforwards using enacted tax rate. (3) (3) Base the measurement of current and deferred taxes on provisions of the enacted tax law. (4) (4) Reduce the measurement of deferred tax assets, if necessary, by the amount of any tax benefits that, companies do not expect to realize. LO 10 Indicate the basic principles of the asset-liability method.
  • Slide 61
  • Chapter 19-61 Review of the Asset-Liability Method LO 10 Indicate the basic principles of the asset-liability method. Illustration 19-43 Procedures for Computing and Reporting Deferred Income Taxes
  • Slide 62
  • Chapter 19-62 The classification of deferred taxes under iGAAP is always noncurrent. Under iGAAP, an affirmative judgment approach is used, by which a deferred tax asset is recognized up to the amount that is probable to be realized. U.S. GAAP uses an impairment approach. iGAAP uses the enacted tax rate or substantially enacted tax rate. (Substantially enacted means virtually certain.) For U.S. GAAP, the enacted tax rate must be used.
  • Slide 63
  • Chapter 19-63 The tax effects related to certain items are reported in equity under iGAAP. That is not the case under U.S. GAAP, which charges or credits the tax effects to income. U.S. GAAP requires companies to assess the likelihood of uncertain tax positions being sustainable upon audit. Potential liabilities must be accrued and disclosed if the position is more likely than not to be disallowed. Under iGAAP, all potential liabilities must be recognized. With respect to measurement, iGAAP uses an expected-value approach to measure the tax liability, which differs from U.S. GAAP.
  • Slide 64
  • Chapter 19-64 Fiscal Year-2009 Allman Company, which began operations at the beginning of 2009, produces various products on a contract basis. Each contract generates a gross profit of $80,000. Some of Allmans contracts provide for the customer to pay on an installment basis. Under these contracts, Allman collects one-fifth of the contract revenue in each of the following four years. For financial reporting purposes, the company recognizes gross profit in the year of completion (accrual basis); for tax purposes, Allman recognizes gross profit in the year cash is collected (installment basis). LO 11 Understand and apply the concepts and procedures of interperiod tax allocation.
  • Slide 65
  • Chapter 19-65 Fiscal Year-2009 Presented below is information related to Allmans operations for 2009. 1. 1.In 2009, the company completed seven contracts that allow for the customer to pay on an installment basis. Allman recognized the related gross profit of $560,000 for financial reporting purposes. It reported only $112,000 of gross profit on installment sales on the 2009 tax return. The company expects future collections on the related installment receivables to result in taxable amounts of $112,000 in each of the next four years. 2. 2.At the beginning of 2009, Allman Company purchased depreciable assets with a cost of $540,000. For financial reporting purposes, Allman depreciates these assets using the straight-line method over a six-year service life. For tax purposes, the assets fall in the five- year recovery class, and Allman uses the MACRS system. LO 11
  • Slide 66
  • Chapter 19-66 Fiscal Year-2009 LO 11 3. 3.The company warrants its product for two years from the date of completion of a contract. During 2009, the product warranty liability accrued for financial reporting purposes was $200,000, and the amount paid for the satisfaction of warranty liability was $44,000. Allman expects to settle the remaining $156,000 by expenditures of $56,000 in 2010 and $100,000 in 2011.
  • Slide 67
  • Chapter 19-67 Fiscal Year-2009 LO 11 4. 4.In 2009 nontaxable municipal bond interest revenue was $28,000. 5. 5.During 2009 nondeductible fines and penalties of $26,000 were paid. 6. 6.Pretax financial income for 2009 amounts to $412,000. 7. 7.Tax rates enacted before the end of 2009 were: 2009 50% 2010 and later years 40% 8. 8.The accounting period is the calendar year. 9. 9.The company is expected to have taxable income in all future years.
  • Slide 68
  • Chapter 19-68 Taxable Income and Income Tax Payable-2009 LO 11 The first step is to determine Allman Companys income tax payable for 2009 by calculating its taxable income. Illustration 19A-1 Illustration 19A-2
  • Slide 69
  • Chapter 19-69 Computing Deferred Income Taxes End of 2009 LO 11 Illustration 19A-3 Illustration 19A-4
  • Slide 70
  • Chapter 19-70 Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2009 LO 11 Illustration 19A-5 Computation of Deferred Tax Expense (Benefit), 2009 Computation of Net Deferred Tax Expense, 2009 Illustration 19A-6
  • Slide 71
  • Chapter 19-71 Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2009 LO 11 Illustration 19A-7 Computation of Total Income Tax Expense, 2009 Journal Entry for Income Tax Expense, 2009 Income Tax Expense 174,000 Deferred Tax Asset 62,400 Income Tax Payable 50,000 Deferred Tax Liability 186,400
  • Slide 72
  • Chapter 19-72 Companies should classify deferred tax assets and liabilities as current and noncurrent on the balance sheet based on the classifications of related assets and liabilities. Financial Statement Presentation - 2009 LO 11 Illustration 19A-8
  • Slide 73
  • Chapter 19-73 Balance Sheet Presentation of Deferred Taxes, 2009 Financial Statement Presentation - 2009 LO 11 Illustration 19A-9 Illustration 19A-10
  • Slide 74
  • Chapter 19-74 Copyright 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. CopyrightCopyright