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  • Chapter 16 Notes

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    Tran Kim Tram Phan
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    Interperiod tax allocation allocates tax expense to the appropriate fiscal year, regardless of when it is actually paid. There are two types of differences between taxable income and accounting income: permanent differences, which never enter both computations, and temporary differences, which result in timing differences between when an item affects accounting and taxable income. The balance sheet approach calculates taxable income by adjusting pre-tax GAAP income for permanent and temporary differences, determines the change in deferred tax balances by comparing tax and GAAP balance sheets, and prepares a journal entry combining income tax payable with deferred tax balances to record income tax expense.

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    CHAPTER 16 NOTES

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    Interperiod tax allocation allocates tax expense to the appropriate fiscal year, regardless of when it is actually paid. There are two types of differences between taxable income and accounting income: permanent differences, which never enter both computations, and temporary differences, which result in timing differences between when an item affects accounting and taxable income. The balance sheet approach calculates taxable income by adjusting pre-tax GAAP income for permanent and temporary differences, determines the change in deferred tax balances by comparing tax and GAAP balance sheets, and prepares a journal entry combining income tax payable with deferred tax balances to record income tax expense.

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    10 views1 page

    Chapter 16 Notes

    Uploaded by

    Tran Kim Tram Phan
    Interperiod tax allocation allocates tax expense to the appropriate fiscal year, regardless of when it is actually paid. There are two types of differences between taxable income and accounting income: permanent differences, which never enter both computations, and temporary differences, which result in timing differences between when an item affects accounting and taxable income. The balance sheet approach calculates taxable income by adjusting pre-tax GAAP income for permanent and temporary differences, determines the change in deferred tax balances by comparing tax and GAAP balance sheets, and prepares a journal entry combining income tax payable with deferred tax balances to record income tax expense.

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    CHAPTER 16

    Interperiod Tax Allocation deals with allocating tax expense to an appropriate fiscal year,
    regardless of when it is actually paid.
    Differences between Taxable and Accounting Income
    - Both accounting income and taxable income are the net result of recognizing revenues
    and expenses of a period.
    - Some differences can be categorized as:
    o Permanent differences
    o Temporary differences
    Permanent differences: Arises when a financial statement earnings element- a revenue, gain,
    expense or loss- enters the computation of either taxable income or pre-tax accounting income
    but never enter into the computation of the other
    Temporary differences: arises when there is difference between when an item is included in
    accounting income and when it is included in taxable income. In these cases, over time the total
    earnings and tax revenue or expense will be the same, but the pattern is different
    Approach: Balance Sheet Approach
    Step One: Calculate Taxable Income
    - Start with GAAP net income before taxes and adjust permanent and temporary
    differences
    • Permanent differences – one adjustment
    • Temporary differences – two adjustments (but one may be zero)
    Step Two: determine change in deferred income tax
    - Prepare tax B/S and compare GAAP B/S
    - Calculate DITA / DITL
    Step Three: Prepare journal entry
    - Combine income tax payable with deferred tax balances to get income tax expense

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