12. Income Taxes, Accouting Changes, Error Corrections Flashcards
What are two components of Income tax provision? What are their components and based on? What is the total income tax?
Current (benefit/expense based on taxable income) and deferred (Benefit/expense based on DTL/DTA).
Current and deferred benefit/expense.
What are the examples of permanent differences?
Officers ins policies, life ins premium on key employees when the firm is beneficiary
How does DRD work when $400 divi pmt qualifies?
DRD: 400 x 80%= 320 excluded from taxable income.
Add $20 to taxable income.
What is the criteria of recognizing DTA?
More likely than not. DTA is tax benefit, which should not be realized if not being able to use
What’s the limit of carrying forward and back net operating losses?
Forward: max 20yrs
Back: max 2 yrs
What’s the recognition criteria of DTA under IFRS? Does IFRS use valuation allowance?
When probable. > 50%.
No.
When there is accounting principle change, but retrospective approach impractical, treatment? Does this rule apply to corrections of error? Is it same for IFRS?
Prospective approach.
No.
For IFRS, it applies to both change in accounting principle and correction of errors.
When should the cumulative change be computed for inventory valuation method?
At the beginning of the change (net of tax).
How should change in estimate, principle, corrections of error be treated?
E: Prospectively. P & C: Retrospective.
When estimated life of an asset change, how do you compute depreciation? BV: 10,000. Initial life: 10 yrs. Depreciated for 6 years. Change: 2 yrs
10,000/10=1000x6yrs=AD:6,000.
(10,000-6,000)/2=2,000 dpr.
Retrospective change: Where should the effect of the change on prior years be reflected? JE for inventory method valuation change?
Adjustment to current Retained earnings as if the change never happened. Prior financial stmt that are presented comparably restated.
Dr: Inventory (increase). Cr: RE
Retrospective application to RE: What’s called under principle change and correction of error?
P: Cumulative effect of change in accounting principle.
C: Prior period adjustment.
Is initial adoption of a new principle to new events or for transactions that were immaterial in the past change in principle?
No.
Change in depreciation method: Which application?
Change in estimate.
Change in reporting entity: Which application?
Retrospective application.
Corrections of errors: How to adjust when an error is discovered in 2006 that began in 2001. Comparative stmt: 2004-2006.
- Prior period adjustment to current beg RE in 2006.
2. Restate 2004 RE stmt for 2001-2003. Update the change in 2005.
How is indirect effect treated for accounting principle change?
Retrospectively.
How do you determine DTA or DTL?
Compare GAAP assets/liability with tax value. GAAP asset > tax = Good now, bad later (future taxable) = DTL. GAAP asset < tax = Bad now, good later (future deductible) = DTA.
Explain originating and reversing JE when book depreciation is lesser than tax depreciation and reverse on year 3 & 4.
1&2. Dr: Income tax expense. Cr: DTL - depreciation.
3&4. Dr: DTL - depreciation. Cr: Income tax exp.
Enacted rate is only rate for GAAP. Same for IFRS?
No. Enacted + Sustatsively enacted rate.
When should DTA allowance be used?
When it is more likely than not (more than 50%), the entity will not realize the benefit of DTA.
Uncertain tax position: Explain how to evaluate and how to treat the result when its more likely than not (50% >), the position will be allowed. JE?
Take the cumulative more likely than not allowed amount.
Ex) $100 deduction - 10%. $80 - 15%. $70 - 30%. Tax=30%.
$100x30% deducted from Income tax payable. $70x30% deducted from income tax expense. $30x30% is recognized as liability for unrecognized tax benefit.
Dr: Income tax expense. Cr: Income tax payable. Cr: Liability - uncertain tax benefit.
Uncertain tax benefits: Treatment of the difference with the actual amount?
Income tax expense.
Uncertain tax position: Treatment when it’s more likely than not (< 50%), the benefit is not allowed.
No reduction in expense and record liability.
Dr: Income tax expense. Cr: Income tax payable (whole amount). Cr: Liability - unrecognized tax benefit.
Carry back/forward: what is the amount used to offset past or future income? What is the amount used to record? Amount of loss or the amount of tax saved?
Actual loss amount. Ex) Tax: 30%. Year 1: 1,000 NI. Year 2: 2,000 NI. Year 3 (4,000). (4,000) can offset 1,000 and 2,000, resulting in tax refund of $300 and $600. Residual amount of (1,000) can be carried forward.
Amount of tax saved.
Dr: Income tax refund receivable 900. Cr: Income tax benefit-NOL CB 900.
Dr: DTA 300. Cr: Income tax benefit-NOL CF 300.
