COMPUTING INCOME TAX EXPENSE

A SIX STEP PROGRAM

STEP 1

• IDENTIFY TEMPORARY DIFFERENCES

• IDENTIFY PERMANENT DIFFERENCES

STEP 2• COMPUTE TAXES PAYABLE

– DETERMINE GAAP BASED INCOME BEFORE TAXES

– ADD/SUBTRACT PERMANENT DIFFERENCES

– ADD/SUBTRACT NET ORIGINATING AND/OR REVERSING TEMPORARY DIFFERENCES FOR THE CURRENT PERIOD

• APPLY APPROPRIATE RATE/CREDITS

• TAXES PAYABLE=CURRENT PORTION

STEP 3

• QUANTIFY UNREVERSED TEMPORARY DIFFERENCES– COMPUTE BOOK VALUE OF RELATED

ASSETS/LIABILITIES– COMPUTE TAX BASIS OF RELATED

ASSETS/LIABILITIES– SUBTRACT TAX BASIS FROM BOOK

VALUE

STEP 4

• CLASSIFY REVERSING DIFFERENCES– TAXABLE

• WHEN REVERSED-TAXABLE INCOME IS GREATER THAN GAAP INCOME

– DEDUCTIBLE• WHEN REVERSED-TAXABLE INCOME IS LESS

THAN GAAP INCOME

• DETERMINE BALANCE SHEET CLASSIFICATION

STEP 5

• COMPUTE INCOME TAX EFFECT OF REVERSING DIFFERENCE– USE ENACTED TAX RATES– TAXABLE DIFFERENCES CREATE

DEFERRED TAX LIABILITIES– DEDUCTIBLE DIFFERENCES CREATE

DEFERRED TAX ASSETS• CONSIDER NEED FOR VALUATION ALLOWANCE

• APPLY “MORE LIKELY THAN NOT” TEST

STEP 6

• PREPARE ADJUSTING JOURNAL ENTRY– RECORD INCREASE/DECREASE IN

DEFERRED TAX ASSETS/LIABILITIES– RECORD DEFERRED TAX EXPENSE

(PLUG)– RECORD CURRENT TAX EXPENSE

(TAXES PAYABLE)