Learning ObjectivesLearning Objectives Accounting for ...econ.ucsb.edu/~harmon/X120Cslides19.pdf · ACCOUNTING FOR INCOME TAXES Intermediate Accounting ... income taxes. 8. Apply

Chapter 19-1

Chapter 19-2

C H A P T E R C H A P T E R 1919

ACCOUNTING FOR INCOME TAXESACCOUNTING FOR INCOME TAXES

Intermediate Accounting13th Edition

Kieso, Weygandt, and Warfield

Chapter 19-3

1. Identify differences between pretax financial income and taxable income.

2. Describe a temporary difference that results in future taxable amounts.

3. Describe a temporary difference that results in future deductible amounts.

4. Explain the purpose of a deferred tax asset valuation allowance.

5. Describe the presentation of income tax expense in the income statement.

6. Describe various temporary and permanent differences.

7. Explain the effect of various tax rates and tax rate changes on deferred income taxes.

8. Apply accounting procedures for a loss carryback and a loss carryforward.

9. Describe the presentation of deferred income taxes in financial statements.

10. Indicate the basic principles of the asset-liability method.

Learning ObjectivesLearning ObjectivesLearning Objectives

Chapter 19-4

Fundamentals of Fundamentals of Accounting for Accounting for Income TaxesIncome Taxes

Future taxable Future taxable amounts and amounts and deferred taxesdeferred taxesFuture deductible Future deductible amounts and amounts and deferred taxesdeferred taxesIncome Income statement statement presentationpresentationSpecific Specific differencesdifferencesRate Rate considerationsconsiderations

Accounting for Accounting for Net Operating Net Operating

LossesLosses

Financial Financial Statement Statement

PresentationPresentation

Review of AssetReview of Asset--Liability MethodLiability Method

Loss carrybackLoss carrybackLoss Loss carryforwardcarryforwardLoss carryback Loss carryback exampleexampleLoss Loss carryforward carryforward exampleexample

Balance sheetBalance sheetIncome Income statementstatementUncertain tax Uncertain tax positionspositions

Accounting for Income TaxesAccounting for Income TaxesAccounting for Income Taxes

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 TaxesFundamentals of Accounting for Income TaxesFundamentals 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.

Chapter 19-6

Tax Code

Exchanges

Investors and Creditors

Financial Statements

Pretax Financial Income

GAAPIncome Tax Expense

Taxable Income

Income Tax Payable

Tax Return

vs.

≠

≠



Illustration 19-1

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?



Chapter 19-8

RevenuesExpenses

Pretax financial income

Income tax expense (40%)

$130,00060,000

$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 ReportingGAAP ReportingGAAP Reporting

RevenuesExpenses

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 ReportingTax Reporting

2010


Book vs. Tax DifferenceBook vs. Tax DifferenceBook vs. Tax DifferenceIllustration 19-2

Illustration 19-3

Chapter 19-9

Income tax expense (GAAP)Income tax payable (IRS)

Difference

$28,00016,000

$12,000

$28,000

2011

36,000

$(8,000)

$28,000

2012

32,000

$(4,000)

$84,000

Total

84,000

$0

ComparisonComparisonComparison 2010

Are the differences accounted for in the financial statements?

Year Reporting Requirement20102011

2012

Deferred tax liability account increased to $12,000

Deferred tax liability account reduced by $8,000Deferred tax liability account reduced by $4,000

YesYes


Book vs. Tax DifferenceBook vs. Tax DifferenceBook vs. Tax DifferenceIllustration 19-4

Chapter 19-10

Balance Sheet

Assets:

Liabilities:

Equity: Income tax expense Income tax expense 28,00028,000

Income Statement

Revenues:

Expenses:

Net income (loss)

2010 2010

Deferred taxes Deferred taxes 12,00012,000

Where does the “deferred tax liability” get reported in the financial statements?

Income tax payableIncome tax payable 16,00016,000


Financial Reporting for 2010Financial Reporting for 2010Financial Reporting for 2010

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 AmountsFuture Taxable Amounts Future Deductible AmountsFuture Deductible AmountsDeferred Tax LiabilityDeferred Tax Liabilityrepresents the increase in taxes represents the increase in taxes payable in future years as a payable in future years as a result of taxable temporary result of taxable temporary differences existing at the end differences existing at the end of the current year.of the current year.

Deferred Tax AssetDeferred Tax Asset represents represents the increase in taxes refundable the increase in taxes refundable (or saved) in future years as a (or saved) in future years as a result of deductible temporary result of deductible temporary differences existing at the end of differences existing at the end of the current year.the current year.

Illustration 19Illustration 19--2222 Examples of Temporary DifferencesExamples of Temporary Differences

LO 2 Describe a temporary difference that results in future taxable amounts.

Temporary DifferencesTemporary DifferencesTemporary Differences

Chapter 19-12 LO 2 Describe a temporary difference that results in future taxable amounts.

Future Taxable Amounts and Deferred TaxesFuture Taxable Amounts and Deferred TaxesFuture Taxable Amounts and Deferred Taxes

Illustration: In KRC’s 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



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.



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

$28,00016,000

$12,000

$28,000

2011

36,000

$(8,000)

$28,000

2012

32,000

$(4,000)

$84,000

Total

84,000

$0

2010Illustration 19-4



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:


Illustration 19-9



Illustration: KRC makes the following entry at the end of 2010 to record income taxes.


Income Tax Expense 28,000

Income Tax Payable 16,000

Deferred Tax Liability 12,000



Illustration: Computation of Income Tax Expense for 2011.


Illustration 19-10



Illustration: KRC makes the following entry at the end of 2011 to record income taxes.



Deferred Tax Liability 8,000




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.


Illustration 19-11

Chapter 19-20

E19E19--1:1: 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. Starfleet’s 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.

InstructionsInstructionsa) Compute taxable income and income taxes payable for

2010.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.



Ex. 19-1: Current Yr.INCOME: 2010 2011 2012 2013Financial income (GAAP) 400,000 Temporary Diff. (190,000) 55,000 60,000 75,000 Taxable income (IRS) 210,000 55,000 60,000 75,000

Tax rate 30% 30% 30% 30%Income tax 63,000 16,500 18,000 22,500

b. Income tax expense (plug) 120,000 Income tax payable 63,000 Deferred tax liability 57,000

a.a.

a.a.


Chapter 19-22

Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture 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.

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.



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



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


Illustration 19-14


Chapter 19-26

Illustration: Assuming that 2010 is Hunt’s first year of operations, and income tax payable is $100,000, Hunt computes its income tax expense as follows.

Deferred Tax Asset


Illustration 19-16


Chapter 19-27

Illustration: Hunt makes the following entry at the end of 2010 to record income taxes.

Deferred Tax Asset


Deferred Tax Asset 20,000



LO 3 Describe a temporary difference that results in future deductible amounts.Chapter

19-28

Illustration: Computation of Income Tax Expense for 2011.

Deferred Tax Asset

Illustration 19-17



Chapter 19-29

Illustration: Hunt makes the following entry at the end of 2011 to record income taxes.

Deferred Tax Asset


Deferred Tax Asset 20,000



LO 3 Describe a temporary difference that results in future deductible amounts.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



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. Columbia’s 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) Compute taxable income and income taxes payable for 2010.b) Prepare the journal entry to record income tax expense,

deferred income taxes, and income taxes payable for 2010.



Chapter 19-32

Illustration Current Yr.INCOME: 2010 2011 2012 2013Financial income (GAAP) 200,000 Temporary Diff. 155,000 (50,000) (65,000) (40,000) Taxable income (IRS) 355,000 (50,000) (65,000) (40,000)

Tax rate 34% 34% 34% 34%Income tax 120,700 (17,000) (22,100) (13,600)

b. Income tax expense 68,000 Deferred tax asset 52,700

Income tax payable 120,700


a.a.

a.a.


Chapter 19-33

Deferred Tax Asset—Valuation 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.


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.InstructionsAssuming 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.



Chapter 19-35

E19-14: Current Yr.INCOME: 2009 2010 2011Financial income (GAAP) 725,000 Temporary difference 375,000 125,000 (500,000) Taxable income (IRS) 375,000 850,000 (500,000) -

Tax rate 40% 40% 40% 40%Income tax 150,000 340,000 (200,000) -

Income tax expense 290,000 Deferred tax asset 50,000

Income tax payable 340,000

Income tax expense 30,000 Allowance for deferred tax asset 30,000



Chapter 19-36

Deferred Tax Asset—Valuation Allowance

E19-14 Balance Sheet Presentation


Assets: 2010

Deferred tax asset 200,000$ Allowance for deferred tax (30,000)

Deferred tax asset, net 170,000


Chapter 19-37

Income tax payable or refundable

LO 5 Describe the presentation of income tax expense in the income statement.

Income Statement PresentationIncome Statement PresentationIncome Statement Presentation

Change in deferred

income tax

Income taxexpense 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

Chapter 19-38 LO 5 Describe the presentation of income tax expense in the income statement.

Income Statement PresentationIncome Statement PresentationIncome Statement Presentation

Given the previous information related to KRC Inc., KRC reports its income statement as follows.

Illustration 19-21

Chapter 19-39

Taxable temporary differences - Deferred tax liability

Deductible temporary differences - Deferred tax Asset

Temporary Differences

Specific DifferencesSpecific DifferencesSpecific Differences

Text Illustration 19Text Illustration 19--2222 Examples of Temporary DifferencesExamples of Temporary Differences

LO 6 Describe various temporary and permanent differences.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 Permanent differences affect only the period in which they occur, they do not give rise to future taxable or deductible occur, they do not give rise to future taxable or deductible amounts. amounts. There are no deferred tax consequences to be recognized.There are no deferred tax consequences to be recognized.

Text Illustration 19Text Illustration 19--2424 Examples of Permanent DifferencesExamples of Permanent Differences


LO 6 Describe various temporary and permanent differences.

Chapter 19-41

Do the following generate: Do the following generate: Future Deductible Amount = Deferred Tax AssetFuture Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityFuture Taxable Amount = Deferred Tax LiabilityA Permanent DifferenceA Permanent Difference

1. The MACRS depreciation system is used for tax 1. The MACRS depreciation system is used for tax purposes, and the straightpurposes, and the straight--line depreciation method is line depreciation method is used for financial reporting purposes.used for financial reporting purposes.

Future Future Taxable Taxable AmountAmount

2. A landlord collects some rents in advance. Rents 2. A landlord collects some rents in advance. Rents received are taxable in the period when they are received are taxable in the period when they are received.received.

Future Future Deductible Deductible AmountAmount

3. Expenses are incurred in obtaining tax3. Expenses are incurred in obtaining tax--exempt income.exempt income. Permanent Permanent DifferenceDifference

4. Costs of guarantees and warranties are estimated and 4. Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.accrued for financial reporting purposes.



LO 6 Describe various temporary and permanent differences.Chapter

19-42

Do the following generate: Do the following generate: Future Deductible Amount = Deferred Tax AssetFuture Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityFuture Taxable Amount = Deferred Tax LiabilityA Permanent DifferenceA Permanent Difference

5. Sales of investments are accounted for by the accrual 5. Sales of investments are accounted for by the accrual method for financial reporting purposes and the method for financial reporting purposes and the installment method for tax purposes.installment method for tax purposes.

Future Future Taxable Taxable AmountAmount

6. Proceeds are received from a life insurance company 6. Proceeds are received from a life insurance company because of the death of a key officer (the company because of the death of a key officer (the company carries a policy on key officers).carries a policy on key officers).


7. Estimated losses on pending lawsuits and claims are 7. Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled..the period(s) when the related liabilities are settled..

A A Permanent Permanent DifferenceDifference



Chapter 19-43

Permanent DifferencesPermanent DifferencesPermanent 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. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.

2. Rent collected on the tax return is greater than rent earned on the income statement by $27,000.

3. Fines for pollution appear as an expense of $11,000 on the income statement.

Havaci’s 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.

Chapter 19-44

Permanent DifferencesPermanent DifferencesPermanent Differences


E19-4: Current Yr. Deferred DeferredINCOME: 2010 Asset LiabilityFinancial income (GAAP) 80,000$ Excess tax depreciation (16,000) 16,000$ Excess rent collected 27,000 (27,000)$ Fines (permanent) 11,000 Taxable income (IRS) 102,000 (27,000) 16,000 -

Tax rate 30% 30% 30%Income tax 30,600$ (8,100)$ 4,800$ -

Income tax expense 27,300 Deferred tax asset 8,100

Deferred tax liability 4,800 Income tax payable 30,600

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


LO 7 Explain the effect of various tax rates and tax rate changes on deferred income taxes.

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 LossesAccounting for Net Operating LossesAccounting for Net Operating Losses

LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.

Chapter 19-47

Loss Carryback



Back 2 years and forward 20 years

Losses must be applied to earliest year first

Illustration 19-29

Chapter 19-48

Loss CarryforwardMay elect to forgo loss carryback and

Carryforward losses 20 years



Illustration 19-30

Chapter 19-49

BE19-12: (Carryback) Conlin Corporation had the following tax information.



Taxable Tax TaxesYear Income Rate Paid2008 300,000$ 35% 105,000$ 2009 325,000 30% 97,500 2010 400,000 30% 120,000

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 Valis’s entry to record the effect of the loss carryback.

Chapter 19-50

Accounting for Net Operating LossesAccounting for Net Operating LossesAccounting for Net Operating LossesBE19-12 2008 2009 2010 2011Financial income 300,000$ 325,000$ 400,000$ DifferenceTaxable income (loss) 300,000 325,000 400,000 (480,000) Rate 35% 30% 30% 29%Income tax 105,000$ 97,500$ 120,000$

NOL ScheduleTaxable income 300,000$ 325,000$ 400,000$ (480,000) Carryback (325,000) (155,000) 480,000 Taxable income 300,000 - 245,000 - Rate 35% 30% 30% 29%Income tax (revised) 105,000$ -$ 73,500$ -

Refund 97,500$ 46,500$ $144,000$144,000


Chapter 19-51

E19-12: Journal Entry for 2011



Income tax refund receivable 144,000

Benefit due to loss carryback 144,000

Chapter 19-52



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.

Chapter 19-53


BE19-13 2008-2009 2010 2011Financial income 350,000$ DifferenceTaxable income (loss) 350,000 (500,000) Rate 40% 40%Income tax 140,000$

NOL ScheduleTaxable income 350,000$ (500,000) Carryback (350,000) 350,000 Taxable income - (150,000) Rate 40% 40%Income tax (revised) -$ (60,000)

LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. Chapter 19-54

E19-13: Journal Entries for 2010



Income tax refund receivable 140,000

Benefit due to loss carryback 140,000

Deferred tax asset 60,000

Benefit due to loss carryforward 60,000

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.


LO 8 Apply accounting procedures for a loss carryback and a loss carryforward. Chapter 19-56

E19-14: Journal Entries for 2010

Income tax refund receivable 140,000 Benefit due to loss carryback 140,000

Deferred tax asset 60,000 Benefit due to loss carryforward 60,000

Benefit due to loss carryforward 60,000 Allowance for deferred tax asset 60,000



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 RevisitedValuation Allowance RevisitedValuation Allowance Revisited


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

Chapter 19-58

Balance Sheet Presentation

Financial Statement PresentationFinancial Statement PresentationFinancial 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.

Chapter 19-59

Income Statement Presentation

Financial Statement PresentationFinancial Statement PresentationFinancial 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.).

Chapter 19-60

Review of the Asset-Liability MethodReview of the AssetReview of the Asset--Liability MethodLiability Method

Companies apply the following basic principles:

(1) Recognize a current tax liability or asset for the estimated taxes payable or refundable.

(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) Base the measurement of current and deferred taxes on provisions of the enacted tax law.

(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.

Chapter 19-61

Review of the Asset-Liability MethodReview of the AssetReview of the Asset--Liability MethodLiability Method

LO 10 Indicate the basic principles of the asset-liability method.

Illustration 19-43Procedures for Computingand Reporting DeferredIncome Taxes

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.

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 chargesor 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.

Chapter 19-64

Fiscal YearFiscal Year--20092009Allman 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 Allman’s 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.

Chapter 19-65

Fiscal YearFiscal Year--20092009Presented below is information related to Allman’s operations for 2009.

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. 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 11Chapter

19-66

Fiscal YearFiscal Year--20092009

LO 11

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.

Chapter 19-67

Fiscal YearFiscal Year--20092009

LO 11

4. In 2009 nontaxable municipal bond interest revenue was $28,000.5. During 2009 nondeductible fines and penalties of $26,000 were paid.6. Pretax financial income for 2009 amounts to $412,000.7. Tax rates enacted before the end of 2009 were:

2009 50%2010 and later years 40%

8. The accounting period is the calendar year.9. The company is expected to have taxable income in all future years.

Chapter 19-68

Taxable Income and Income Tax PayableTaxable Income and Income Tax Payable--20092009

LO 11

The first step is to determine Allman Company’s income tax payable for 2009 by calculating its taxable income.

Illustration 19A-1

Illustration 19A-2

Chapter 19-69

Computing Deferred Income Taxes Computing Deferred Income Taxes –– End of 2009End of 2009

LO 11

Illustration 19A-3

Illustration 19A-4

Chapter 19-70

Deferred Tax Expense (Benefit) and the Journal Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes Entry to Record Income Taxes -- 20092009

LO 11

Illustration 19A-5

Computation of Deferred Tax Expense (Benefit), 2009

Computation of Net Deferred Tax Expense, 2009 Illustration 19A-6

Chapter 19-71

Deferred Tax Expense (Benefit) and the Journal Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes Entry to Record Income Taxes -- 20092009

LO 11

Illustration 19A-7

Computation of Total Income Tax Expense, 2009

Journal Entry for Income Tax Expense, 2009

Income Tax Expense 174,000Deferred Tax Asset 62,400

Income Tax Payable 50,000Deferred Tax Liability 186,400

Chapter 19-72

Companies should classify deferred tax assets and liabilities ascurrent and noncurrent on the balance sheet based on the classifications of related assets and liabilities.

Financial Statement Presentation Financial Statement Presentation -- 20092009

LO 11

Illustration 19A-8

Chapter 19-73

Balance Sheet Presentation of Deferred Taxes, 2009

Financial Statement Presentation Financial Statement Presentation -- 20092009

LO 11

Illustration 19A-9

Illustration 19A-10

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.

CopyrightCopyrightCopyright

Documents

Learning ObjectivesLearning Objectives Accounting for ...econ.ucsb.edu/~harmon/X120Cslides19.pdf · ACCOUNTING FOR INCOME TAXES Intermediate Accounting ... income taxes. 8. Apply