Post on 24-Dec-2015
19-2
Intermediate Accounting
14th Edition
19 Accounting for Income Taxes
Kieso, Weygandt, and Warfield
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 ObjectivesLearning Objectives
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 TaxesAccounting for Income TaxesAccounting for Income TaxesAccounting for Income Taxes
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 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.
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 TaxesFundamentals of Accounting for Income TaxesFundamentals of Accounting for Income TaxesFundamentals of Accounting for Income Taxes
LO 1 Identify differences between pretax financial income and taxable income.
Illustration 19-1
19-7
Illustration: Chelsea, Inc. reported revenues of $130,000
and expenses of $60,000 in each of its first three years of
operations. For tax purposes, Chelsea reported the same
expenses to the IRS in each of the years. Chelsea reported
taxable revenues of $100,000 in 2012, $150,000 in 2013,
and $140,000 in 2014. 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 TaxesFundamentals of Accounting for Income TaxesFundamentals of Accounting for Income TaxesFundamentals of Accounting for Income Taxes
19-8
Revenues
Expenses
Pretax financial income
Income tax expense (40%)
$130,000
60,000
$70,000
$28,000
$130,000
2013
60,000
$70,000
$28,000
$130,000
2014
60,000
$70,000
$28,000
$390,000
Total
180,000
$210,000
$84,000
GAAP ReportingGAAP ReportingGAAP ReportingGAAP Reporting
Revenues
Expenses
Pretax financial income
Income tax payable (40%)
$100,000
2012
60,000
$40,000
$16,000
$150,000
2013
60,000
$90,000
$36,000
$140,000
2014
60,000
$80,000
$32,000
$390,000
Total
180,000
$210,000
$84,000
Tax ReportingTax Reporting
2012
LO 1 Identify differences between pretax financial income and taxable income.
Book vs. Tax DifferenceBook vs. Tax DifferenceBook vs. Tax DifferenceBook vs. Tax Difference
Illustration 19-2
Illustration 19-3
19-9
Income tax expense (GAAP)
Income tax payable (IRS)
Difference
Income tax expense (40%)
$28,000
16,000
$12,000
$28,000
$28,000
2013
36,000
$(8,000)
$28,000
$28,000
2014
32,000
$(4,000)
$28,000
$84,000
Total
84,000
$0
$84,000
ComparisonComparisonComparisonComparison 2012
LO 1 Identify differences between pretax financial income and taxable income.
Book vs. Tax DifferenceBook vs. Tax DifferenceBook vs. Tax DifferenceBook vs. Tax Difference
Illustration 19-2
Are the differences accounted for in the financial statements?
Year Reporting Requirement
2012
2013
2014
Deferred tax liability account increased to $12,000
Deferred tax liability account reduced by $8,000
Deferred tax liability account reduced by $4,000
YesYes
19-10
Balance Sheet
Assets:
Liabilities:
Equity: Income tax expense 28,000
Income Statement
Revenues:
Expenses:
Net income (loss)
2012 2012
Deferred taxes 12,000
Where does the “deferred tax liability” get reported in the financial statements?
Income tax payable 16,000
LO 1 Identify differences between pretax financial income and taxable income.
Financial Reporting for 2010Financial Reporting for 2010Financial Reporting for 2010Financial Reporting for 2010
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 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 DifferencesTemporary DifferencesTemporary DifferencesTemporary Differences
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 TaxesFuture Taxable Amounts and Deferred Taxes
Illustration: In Chelsea’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. Chelsea reports accounts
receivable at $30,000 in the December 31, 2012, GAAP-basis
balance sheet. However, the receivables have a zero tax
basis.Illustration 19-5
19-13 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 TaxesFuture Taxable Amounts and Deferred Taxes
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.
Illustration 19-6
Illustration: Reversal of Temporary Difference, Chelsea Inc.
19-14 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 TaxesFuture 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
2013
36,000
$(8,000)
$28,000
2014
32,000
$(4,000)
$84,000
Total
84,000
$0
2012
Illustration 19-4
19-15 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 TaxesFuture Taxable Amounts and Deferred Taxes
Illustration: Because it is the first year of operations for
Chelsea, there is no deferred tax liability at the beginning of the
year. Chelsea computes the income tax expense for 2012 as
follows:
Deferred Tax Liability
Illustration 19-9
19-16 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 TaxesFuture Taxable Amounts and Deferred Taxes
Illustration: Chelsea makes the following entry at the end of
2012 to record income taxes.
Deferred Tax Liability
Income Tax Expense 28,000
Income Tax Payable
16,000
Deferred Tax Liability
12,000
19-17 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 TaxesFuture Taxable Amounts and Deferred Taxes
Illustration: Computation of Income Tax Expense for 2013.
Deferred Tax Liability
Illustration 19-10
19-18 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 TaxesFuture Taxable Amounts and Deferred Taxes
Illustration: Chelsea makes the following entry at the end of
2013 to record income taxes.
Deferred Tax Liability
Income Tax Expense 28,000
Deferred Tax Liability 8,000
Income Tax Payable
36,000
19-19 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 TaxesFuture Taxable Amounts and Deferred Taxes
Illustration: The entry to record income taxes at the end of
2014 reduces the Deferred Tax Liability by $4,000. The Deferred
Tax Liability account appears as follows at the end of 2014.
Deferred Tax Liability
Illustration 19-11
19-20
E19-1: Starfleet Corporation has one temporary difference at the end of 2012 that will reverse and cause taxable amounts of $55,000 in 2013, $60,000 in 2014, and $75,000 in 2015. Starfleet’s pretax financial income for 2012 is $400,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2012.
Instructions
a) Compute taxable income and income taxes payable for 2012.
b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012.
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 TaxesFuture Taxable Amounts and Deferred Taxes
19-21 LO 2 Describe a temporary difference that results in future taxable amounts.
Ex. 19-1: Current Yr.
INCOME: 2012 2013 2014 2015
Financial 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.
Future Taxable Amounts and Deferred TaxesFuture Taxable Amounts and Deferred TaxesFuture Taxable Amounts and Deferred TaxesFuture Taxable Amounts and Deferred Taxes
19-22
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
Illustration: During 2012, 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 2012 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.
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, 2012, balance sheet as a deferred tax
asset.
Illustration 19-13
Illustration: Reversal of Temporary Difference.
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
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 TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
19-25
Illustration: Hunt Co. accrues a loss and a related liability of
$50,000 in 2012 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 2013.
Deferred Tax Asset
LO 3 Describe a temporary difference that results in future deductible amounts.
Illustration 19-14
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
19-26
Illustration: Assuming that 2012 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
LO 3 Describe a temporary difference that results in future deductible amounts.
Illustration 19-16
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
19-27
Illustration: Hunt makes the following entry at the end of 2012
to record income taxes.
Deferred Tax Asset
Income Tax Expense 80,000
Deferred Tax Asset 20,000
Income Tax Payable
100,000
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
LO 3 Describe a temporary difference that results in future deductible amounts.
19-28
Illustration: Computation of Income Tax Expense for 2013.
Deferred Tax Asset
Illustration 19-17
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
LO 3 Describe a temporary difference that results in future deductible amounts.
19-29
Illustration: Hunt makes the following entry at the end of 2013
to record income taxes.
Deferred Tax Asset
Income Tax Expense 160,000
Deferred Tax Asset
20,000
Income Tax Payable
140,000
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
LO 3 Describe a temporary difference that results in future deductible amounts.
19-30
Illustration: The entry to record income taxes at the end of
2013 reduces the Deferred Tax Asset by $20,000.
Illustration 19-18
Deferred Tax Asset
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
LO 3 Describe a temporary difference that results in future deductible amounts.
19-31
Illustration: Columbia Corporation has one temporary difference
at the end of 2012 that will reverse and cause deductible amounts
of $50,000 in 2013, $65,000 in 2014, and $40,000 in 2015.
Columbia’s pretax financial income for 2012 is $200,000 and the
tax rate is 34% for all years. There are no deferred taxes at the
beginning of 2012. Columbia expects to be profitable in the future.
Instructions
a) Compute taxable income and income taxes payable for 2012.
b) Prepare the journal entry to record income tax expense,
deferred income taxes, and income taxes payable for 2012.
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
19-32
Illustration Current Yr.
INCOME: 2012 2013 2014 2015
Financial 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
LO 3 Describe a temporary difference that results in future deductible amounts.
a.a.
a.a.
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
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.
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
19-34
E19-14: Callaway Corp. has a deferred tax asset balance of
$150,000 at the end of 2012 due to a single cumulative
temporary difference of $375,000. At the end of 2013 this same
temporary difference has increased to a cumulative amount of
$500,000. Taxable income for 2013 is $850,000. The tax rate is
40% for all years. No valuation account is in existence at the end
of 2012.
Instructions
Assuming that it is more likely than not that $30,000 of the
deferred tax asset will not be realized, prepare the journal entries
required for 2013.
LO 4 Explain the purpose of a deferred tax asset valuation allowance.
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
19-35
E19-14: Current Yr.
INCOME: 2011 2012 2013
Financial income (GAAP) 725,000
Temporary difference 375,000 125,000 (500,000)
Taxable income (IRS) 375,000 850,000 (500,000) -
Tax rate 40% 40% 40% 40%
Income tax 150,000 340,000 (200,000) -
Income tax expense 290,000
Deferred tax asset 50,000
Income tax payable 340,000
Income tax expense 30,000
Allowance for deferred tax asset 30,000
LO 4 Explain the purpose of a deferred tax asset valuation allowance.
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
19-36
Deferred Tax Asset—Valuation Allowance
E19-14 Balance Sheet Presentation
LO 4 Explain the purpose of a deferred tax asset valuation allowance.
Assets: 2012
Deferred tax asset 200,000$
Allowance for deferred tax (30,000)
Deferred tax asset, net 170,000
Future Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesFuture Deductible Amounts and Deferred Taxes
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 PresentationIncome 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
19-38 LO 5 Describe the presentation of income tax expense in the income statement.
Income Statement PresentationIncome Statement PresentationIncome Statement PresentationIncome Statement Presentation
Given the previous information related to Chelsea Inc.,
Chelsea reports its income statement as follows.Illustration 19-21
19-39
Taxable temporary differences - Deferred tax
liability
Deductible temporary differences - Deferred tax
Asset
Temporary Differences
Specific DifferencesSpecific DifferencesSpecific DifferencesSpecific Differences
Text Illustration 19-22 Examples of Temporary Differences
LO 6 Describe various temporary and permanent differences.
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 DifferencesSpecific DifferencesSpecific DifferencesSpecific Differences
LO 6 Describe various temporary and permanent differences.
19-41
Do the following generate: Future Deductible Amount = Deferred Tax Asset Future Taxable Amount = Deferred Tax Liability 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 Future Taxable Taxable AmountAmount
2. A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
Future Future Deductible Deductible
AmountAmount
3. Expenses are incurred in obtaining tax-exempt income. Permanent Permanent DifferenceDifference
4. Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
Future Future Deductible Deductible
AmountAmount
Specific DifferencesSpecific DifferencesSpecific DifferencesSpecific Differences
LO 6 Describe various temporary and permanent differences.
E19-6
19-42
Do the following generate: Future Deductible Amount = Deferred Tax Asset Future Taxable Amount = Deferred Tax Liability Permanent Difference
5. Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment-sales method for tax purposes.
Future Future Taxable Taxable AmountAmount
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 Future Deductible Deductible
AmountAmount
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.
Permanent Permanent DifferenceDifference
Specific DifferencesSpecific DifferencesSpecific DifferencesSpecific Differences
LO 6 Describe various temporary and permanent differences.
E19-6
19-43
Permanent DifferencesPermanent DifferencesPermanent DifferencesPermanent Differences
LO 6 Describe various temporary and permanent differences.
E19-4: Havaci Company reports pretax financial income of $80,000 for 2012. 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 $11,000 on the income statement.
Havaci’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2012.
19-44
Permanent DifferencesPermanent DifferencesPermanent DifferencesPermanent Differences
LO 6 Describe various temporary and permanent differences.
E19-4: Current Yr. Deferred Deferred
INCOME: 2012 Asset Liability
Financial income (GAAP) 80,000$
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$ -
Income tax expense 27,300
Deferred tax asset 8,100
Deferred tax liability 4,800
Income tax payable 30,600
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 ConsiderationsTax Rate ConsiderationsTax Rate ConsiderationsTax Rate Considerations
LO 7 Explain the effect of various tax rates and tax rate changes on deferred income taxes.
Future Tax Rates
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 LossesAccounting for Net Operating Losses
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
19-47
Loss Carryback
Accounting for Net Operating LossesAccounting 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.
Back 2 years and forward 20 years
Losses must be applied to earliest year first
Illustration 19-29
19-48
Accounting for Net Operating LossesAccounting 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.
Loss Carryforward
May elect to forgo loss carryback and
Carryforward losses 20 years
Illustration 19-30
19-49
BE19-12: (Carryback) Conlin Corporation had the following tax
information.
Accounting for Net Operating LossesAccounting 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.
Taxable Tax TaxesYear Income Rate Paid
2010 300,000$ 35% 105,000$
2011 325,000 30% 97,500
2012 400,000 30% 120,000
In 2013 Conlin suffered a net operating loss of $480,000, which it
elected to carry back. The 2013 enacted tax rate is 29%.
Prepare Valis’s entry to record the effect of the loss carryback.
19-50
Accounting for Net Operating LossesAccounting for Net Operating LossesAccounting for Net Operating LossesAccounting for Net Operating Losses
BE19-12 2010 2011 2012 2013
Financial income 300,000$ 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$ -
Refund 97,500$ 46,500$ $144,000$144,000
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
19-51
E19-12: Journal Entry for 2013
Accounting for Net Operating LossesAccounting 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.
Income tax refund receivable 144,000
Benefit due to loss carryback
144,000
19-52
Accounting for Net Operating LossesAccounting 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.
BE19-13: Rode Inc. incurred a net operating loss of
$500,000 in 2012. Combined income for 2010 and 2011
was $350,000. The tax rate for all years is 40%. Rode
elects the carryback option. Prepare the journal entries to
record the benefits of the loss carryback and the loss
carryforward.
19-53
Accounting for Net Operating LossesAccounting for Net Operating LossesAccounting for Net Operating LossesAccounting for Net Operating Losses
BE19-13 2010-2011 2012 2013
Financial income 350,000$
Difference
Taxable income (loss) 350,000 (500,000)
Rate 40% 40%
Income tax 140,000$
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)
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
19-54
E19-13: Journal Entries for 2012
Accounting for Net Operating LossesAccounting 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.
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
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 2012.
Accounting for Net Operating LossesAccounting 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.
19-56
E19-14: Journal Entries for 2012
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
Accounting for Net Operating LossesAccounting 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.
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 RevisitedValuation 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
19-58
Balance Sheet Presentation
Financial Statement PresentationFinancial 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.
19-59
Income Statement Presentation
Financial Statement PresentationFinancial 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.).
19-60
Review of the Asset-Liability MethodReview of the Asset-Liability MethodReview of the Asset-Liability MethodReview of the Asset-Liability Method
Companies apply the following basic principles:
a. A current tax liability or asset is recognized for the estimated taxes payable or refundable on the tax return for the current year.
b. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
c. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.
d. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
LO 10 Indicate the basic principles of the asset-liability method.
19-61
Review of the Asset-Liability MethodReview of the Asset-Liability MethodReview of the Asset-Liability MethodReview of the Asset-Liability Method
LO 10 Indicate the basic principles of the asset-liability method.
Illustration 19-43Procedures for Computingand Reporting DeferredIncome Taxes
19-62
Fiscal Year-2011
Allman Company, which began operations at the beginning of 2011,
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.
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-63
Fiscal Year-2011Presented below is information related to Allman’s operations for 2011.
1. In 2011, 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 2011 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 2011, 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
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-64
Fiscal Year-2011
LO 11
3. The company warrants its product for two years from the date of completion of a contract. During 2011, 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 2012 and $100,000 in 2013.
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-65
Fiscal Year-2011
LO 11
4. In 2011 nontaxable municipal bond interest revenue was $28,000.
5. During 2011 nondeductible fines and penalties of $26,000 were paid.
6. Pretax financial income for 2011 amounts to $412,000.
7. Tax rates enacted before the end of 2011 were:
2011 50%
2012 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.
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-66
Taxable Income and Income Tax Payable-2011
LO 11
The first step is to determine Allman Company’s income tax
payable for 2011 by calculating its taxable income.
Illustration 19A-1
Illustration 19A-2
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-67
Computing Deferred Income Taxes – End of 2011
LO 11
Illustration 19A-3
Illustration 19A-4
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-68
Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2011
LO 11
Illustration 19A-5Computation of Deferred Tax Expense (Benefit), 2011
Computation of Net Deferred Tax Expense, 2011 Illustration 19A-6
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-69
Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2011
LO 11
Illustration 19A-7
Computation of Total Income Tax Expense, 2011
Journal Entry for Income Tax Expense, 2011
Income Tax Expense 174,000
Deferred Tax Asset 62,400
Income Tax Payable
50,000
Deferred Tax Liability
186,400
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-70
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 - 2011
LO 11
Illustration 19A-8
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-71
Balance Sheet Presentation of Deferred Taxes, 2011
Financial Statement Presentation - 2011
LO 11
Illustration 19A-9
Illustration 19A-10
APPENDIXAPPENDIX 19A COMPREHENSIVE EXAMPLE OF INTERPERIOD TAX ALLOCATION
19-72
RELEVANT FACTS
The classification of deferred taxes under IFRS is always non-current. As indicated in the chapter, GAAP classifies deferred taxes based on the classification of the asset or liability to which it relates.
Under IFRS, an affirmative judgment approach is used, by which a deferred tax asset is recognized up to the amount that is probable to be realized. GAAP uses an impairment approach. In this approach, the deferred tax asset is recognized in full. It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized.
IFRS uses the enacted tax rate or substantially enacted tax rate. (“Substantially enacted” means virtually certain.) For GAAP, the enacted tax rate must be used.
19-73
RELEVANT FACTS
The tax effects related to certain items are reported in equity under IFRS. That is not the case under GAAP, which charges or credits the tax effects to income.
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 IFRS, all potential liabilities must be recognized. With respect to measurement, IFRS uses an expected-value approach to measure the tax liability, which differs from GAAP.
19-74
Which of the following is false?
a. Under GAAP, deferred taxes are reported based on the
classification of the asset or liability to which it relates.
b. Under IFRS, some potential liabilities are not recognized.
c. Under GAAP, the enacted tax rate is used to measure deferred
tax assets and liabilities.
d. Under IFRS, all deferred tax assets and liabilities are classified
as non-current.
IFRS SELF-TEST QUESTION
19-75
Which of the following statements is correct with regard to IFRS and GAAP?
a. Under GAAP, all potential liabilities related to uncertain tax positions
must be recognized.
b. The tax effects related to certain items are reported in equity under
GAAP; under IFRS, the tax effects are charged or credited to income.
c. IFRS uses an affirmative judgment approach for deferred tax assets,
whereas GAAP uses an impairment approach for deferred tax assets.
d. IFRS classifies deferred taxes based on the classification of the asset
or liability to which it relates.
IFRS SELF-TEST QUESTION
19-76
Under IFRS:
a. “probable” is defined as a level of likelihood of at least slightly
more than 60%.
b. a company should reduce a deferred tax asset when it is likely
that some or all of it will not be realized by using a valuation
allowance.
c. a company considers only positive evidence when determining
whether to recognize a deferred tax asset.
d. deferred tax assets must be evaluated at the end of each
accounting period.
IFRS SELF-TEST QUESTION
19-77
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