End-Quarter 1 Test Review. Identify which number step is the rate-determining step. Step 3.
COMPUTING INCOME TAX EXPENSE A SIX STEP PROGRAM. STEP 1 IDENTIFY TEMPORARY DIFFERENCES IDENTIFY...
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Transcript of COMPUTING INCOME TAX EXPENSE A SIX STEP PROGRAM. STEP 1 IDENTIFY TEMPORARY DIFFERENCES IDENTIFY...
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)