Professional Documents
Culture Documents
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
19-2 LO 1
Accounting for Income Taxes
vs.
19-3 LO 1
Accounting for Income Taxes
19-4 LO 1
Book vs. Tax Differences
Illustration 19-2
GAAP Reporting 2014 2015 2016 Total
Illustration 19-3
Tax Reporting 2014 2015 2016 Total
19-5 LO 1
Book vs. Tax Differences
Illustration 19-4
Comparison 2014 2015 2016 Total
19-6 LO 1
Financial Reporting for 2014
Expenses:
Liabilities:
Deferred taxes 12,000
Income taxes payable 16,000
Income tax expense 28,000
Equity:
Net income (loss)
Where does the “deferred tax liability” get reported in the financial
statements?
19-7 LO 1
Accounting for
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Illustration 19-5
19-10 LO 2
Future Taxable Amounts
Chelsea assumes that it will collect the accounts receivable and report
the $30,000 collection as taxable revenues in future tax returns.
Chelsea does this by recording a deferred tax liability.
19-11 LO 2
Deferred Taxes
Illustration 19-4
19-12 LO 2
Deferred Tax Liability
19-13 LO 2
Deferred Tax Liability Illustration 19-9
Computation of Income
Tax Expense, 2014
19-14 LO 2
Deferred Tax Liability Illustration 19-10
Computation of Income
Tax Expense for 2015
19-15 LO 2
Deferred Tax Liability
The entry to record income taxes at the end of 2016 reduces the
Deferred Tax Liability by $4,000. The Deferred Tax Liability account
appears as follows at the end of 2016.
Illustration 19-11
19-16 LO 2
Deferred Tax Liability
Instructions
19-17 LO 2
Deferred Tax Liability
19-18 LO 2
Accounting for
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
19-20 LO 3
Future Deductible Amounts
19-22 LO 3
Deferred Tax Asset
19-23 LO 3
Deferred Tax Asset
Assume that 2014 is Hunt’s first year of operations, and income tax
payable is $100,000, compute income tax expense.
Illustration 19-16
The entry to record income taxes at the end of 2015 reduces the
Deferred Tax Asset by $20,000.
Illustration 19-18
19-26 LO 3
Deferred Tax Asset
19-27 LO 3
Deferred Tax Asset
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
19-30 LO 4
Deferred Tax Asset—Valuation Allowance
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
2015.
19-31 LO 4
Deferred Tax Asset—Valuation Allowance
Illustration: Current Yr.
INCOME: 2013 2014 2015
Financial 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) -
Assets: 2014
Deferred tax asset $ 200,000
Allowance for deferred tax (30,000)
Deferred tax asset, net 170,000
19-33 LO 4
Accounting for
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
19-35 LO 5
Income Statement Presentation
19-36 LO 5
Accounting for
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Specific Differences
Temporary Differences
Taxable temporary differences - Deferred tax liability
Deductible temporary differences - Deferred tax
Asset
19-38 LO 6
Temporary Differences Illustration 19-22
Examples of Temporary
Differences
Revenues or gains are taxable after they are recognized in financial income.
19-39 LO 6
Temporary Differences Illustration 19-22
Examples of Temporary
Differences
Expenses or losses are deductible after they are recognized in financial income.
A liability (or contra asset) may be recognized for expenses or losses that will result in
deductible amounts in future years when the liability is settled. Examples:
1. Product warranty liabilities.
2. Estimated liabilities related to discontinued operations or restructurings.
3. Litigation accruals.
4. Bad debt expense recognized using the allowance method for financial reporting
purposes; direct write-off method used for tax purposes.
5. Stock-based compensation expense.
6. Unrealized holding losses for financial reporting purposes (including use of the fair
value option), but deferred for tax purposes.
19-40 LO 6
Temporary Differences Illustration 19-22
Examples of Temporary
Differences
Revenues or gains are taxable before they are recognized in financial income.
19-41 LO 6
Temporary Differences Illustration 19-22
Examples of Temporary
Differences
Expenses or losses are deductible before they are recognized in financial income.
The cost of an asset may have been deducted for tax purposes faster than it was
expensed for financial reporting purposes. Amounts received upon future recovery of
the amount of the asset for financial reporting (through use or sale) will exceed the
remaining tax basis of the asset and thereby result in taxable amounts in future
years. Examples:
1. Depreciable property, depletable resources, and intangibles.
2. Deductible pension funding exceeding expense.
3. Prepaid expenses that are deducted on the tax return in the period paid.
19-42 LO 6
Specific Differences
19-43 LO 6
Specific Differences
19-44 LO 6
Permanent Differences Illustration 19-24
Examples of Permanent
Differences
Items are recognized for financial reporting purposes but not for tax purposes.
Examples:
1. Depreciable property, depletable resources, and intangibles.
2. Examples:
3. Interest received on state and municipal obligations.
4. Expenses incurred in obtaining tax-exempt income.
5. Proceeds from life insurance carried by the company on key officers or employees.
6. Premiums paid for life insurance carried by the company on key officers or
employees (company is beneficiary).
7. Fines and expenses resulting from a violation of law.
Items are recognized for tax purposes but not for financial reporting purposes.
Examples:
1. “Percentage depletion” of natural resources in excess of their cost.
2. The deduction for dividends received from U.S. corporations, generally 70% or 80%.
19-45 LO 6
Specific Differences
Illustration
Do the following generate:
Future Deductible Amount = Deferred Tax Asset
Future Taxable Amount = Deferred Tax Liability
Permanent Difference
19-46 LO 6
Specific Differences
Illustration
Do the following generate:
Future Deductible Amount = Deferred Tax Asset
Future Taxable Amount = Deferred Tax Liability
Permanent Difference
Future Deductible
4. Costs of guarantees and warranties are estimated Amount
and accrued for financial reporting purposes. Asset
19-48 LO 6
Specific Differences
Illustration: Current Yr. Deferred Deferred
INCOME: 2014 Asset Liability
Financial 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 -
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
19-51 LO 7
Accounting for Income Taxes
19-52 LO 7
Accounting for
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
The federal tax laws permit taxpayers to use the losses of one
year to offset the profits of other years (loss carryback and
loss carryforward).
19-54 LO 8
Accounting for Net Operating Losses
Loss Carryback
Back 2 years and forward 20 years
Losses must be applied to earliest year first
Illustration 19-29
19-55 LO 8
Accounting for Net Operating Losses
Loss Carryforward
May elect to forgo loss carryback and
Carryforward losses 20 years
Illustration 19-30
19-56 LO 8
Accounting for Net Operating Losses
19-57 LO 8
Accounting for Net Operating Losses
Illustration: 2012 2013 2014 2015
Financial income $ 300,000 $ 325,000 $ 400,000
Difference
Taxable income (loss) 300,000 325,000 400,000 (480,000)
Rate 35% 30% 30% 29%
Income tax $ 105,000 $ 97,500 $ 120,000
NOL Schedule
Taxable 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 -
19-59 LO 8
Accounting for Net Operating Losses
19-60 LO 8
Accounting for Net Operating Losses
NOL Schedule
Taxable income $ 350,000 (500,000)
Carryback (350,000) 350,000
Taxable income - (150,000)
Rate 40% 40%
Income tax (revised) $ - (60,000)
NOL Schedule
Journal Entries for 2014
Taxable income $ 350,000 (500,000)
Carryback
Income (350,000)
Tax Refund Receivable 140,000350,000
Taxable income - (150,000)
Benefit Due to Loss Carryback 140,000
Rate 40% 40%
Income tax (revised) $ - (60,000)
19-62 LO 8
Accounting for Net Operating Losses
19-63 LO 8
Accounting for Net Operating Losses
19-64 LO 8
Accounting for Net Operating Losses
Benefit Advance
Due to Loss
slide Carryforward 60,000
in presentation mode to reveal journal entry to
recognize the valuation allowance.
Allowance for Deferred Tax Asset 60,000
19-65 LO 8
Accounting for Net Operating Losses
19-66 LO 8
Valuation Allowance Revisited Illustration 19-38
Evidence to Consider
in Evaluating the Need
for a Valuation Account
19-67 LO 8
Accounting for
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Balance Sheet
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.
19-69 LO 9
Balance Sheet ILLUSTRATION 19-39
Classification of
Temporary Differences
as Current or Noncurrent
19-70 LO 9
Financial Statement Presentation
Income Statement
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.).
19-71 LO 9
Accounting for
L E A R N IN G O B J E C T IV E S
19 Income Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
19-73 LO 10
Review of the Asset-Liability Method
Illustration 19-43
Procedures for Computing
and Reporting Deferred
Income Taxes
19-74 LO 10