19-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting.

19-1

Prepared by Coby Harmon

University of California, Santa Barbara

Intermediate Accounting

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.



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?



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


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


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


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



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.



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



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:


Illustration 19-9



Illustration: Chelsea makes the following entry at the end of

2012 to record income taxes.


Income Tax Expense 28,000

Income Tax Payable

16,000


12,000



Illustration: Computation of Income Tax Expense for 2013.


Illustration 19-10



Illustration: Chelsea makes the following entry at the end of

2013 to record income taxes.



Deferred Tax Liability 8,000

Income Tax Payable

36,000



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.


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.



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


Deferred tax liability 57,000

a.a.

a.a.


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.



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



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


Illustration 19-14


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


Illustration 19-16


19-27

Illustration: Hunt makes the following entry at the end of 2012

to record income taxes.

Deferred Tax Asset


Deferred Tax Asset 20,000

Income Tax Payable

100,000



19-28

Illustration: Computation of Income Tax Expense for 2013.

Deferred Tax Asset

Illustration 19-17



19-29

Illustration: Hunt makes the following entry at the end of 2013

to record income taxes.

Deferred Tax Asset


Deferred Tax Asset

20,000

Income Tax Payable

140,000



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



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.



19-32

Illustration Current Yr.

INCOME: 2012 2013 2014 2015


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



a.a.

a.a.


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.


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.



19-35

E19-14: Current Yr.

INCOME: 2011 2012 2013


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




Allowance for deferred tax asset 30,000



19-36

Deferred Tax Asset—Valuation Allowance

E19-14 Balance Sheet Presentation


Assets: 2012

Deferred tax asset 200,000$

Allowance for deferred tax (30,000)

Deferred tax asset, net 170,000


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



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.


AmountAmount



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).


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



E19-6

19-43

Permanent DifferencesPermanent DifferencesPermanent DifferencesPermanent 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


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$ -



Deferred tax liability 4,800


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



Back 2 years and forward 20 years

Losses must be applied to earliest year first

Illustration 19-29

19-48



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.



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


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


19-51

E19-12: Journal Entry for 2013



Income tax refund receivable 144,000

Benefit due to loss carryback

144,000

19-52



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


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)


19-54

E19-13: Journal Entries for 2012



Income tax refund receivable 140,000

Benefit due to loss carryback

140,000


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.



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



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


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


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.


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.


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


19-67

Computing Deferred Income Taxes – End of 2011

LO 11

Illustration 19A-3

Illustration 19A-4


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


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


Deferred Tax Asset 62,400

Income Tax Payable

50,000


186,400


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


19-71

Balance Sheet Presentation of Deferred Taxes, 2011

Financial Statement Presentation - 2011

LO 11

Illustration 19A-9

Illustration 19A-10


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.


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.


19-77

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19-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting.

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Transcript of 19-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting.