300670 Flashcards
Hut Co. has temporary taxable differences that will reverse during the next year and add to taxable income. These differences relate to noncurrent assets. Deferred income taxes based on these temporary differences should be classified in Hut’s balance sheet as a:
noncurrent liability.
noncurrent asset.
current liability.
current asset.
noncurrent liability.
Temporary differences that will add to taxable income relate to future taxable amounts. Future taxable amounts are associated with deferred tax liabilities. All deferred tax assets and liabilities are classified as noncurrent.
Temporary Difference
A temporary difference is a difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Temporary differences arise from items that are treated differently under GAAP than under the tax law, and the difference will reverse (create an offsetting amount) in the future, such as installment sales, warranty expense, and depreciation expense under different methods.
Characteristics of temporary differences:
- They will be recognized in both accounting income and taxable income.
- They give rise to deferred income tax liability (DTL) or a deferred tax asset (DTA) due to differences in the timing of the recognition.
- They will reverse in one or more future periods.
Some events recognized in financial statements do not have tax consequences, such as certain revenues that are exempt from taxation and certain expenses that are not deductible. Events that do not have tax consequences give rise to permanent differences.
FASB ASC Glossary
2341
2341.02
Accounting for income taxes under FASB rules is based on the “liability method.” Under the liability method, accounting for income taxes has two primary objectives—to recognize the amount of taxes currently payable or refundable and to recognize deferred tax liabilities and assets for the future tax consequences of temporary differences.
2341.03
Temporary differences arise when items are treated differently in the financial statements and the income tax return with the expectation that those differences will offset in the future. The following are examples of typical temporary differences:
a. Installment sales and the related asset recognized under GAAP at the time of the sale but deferred for income tax purposes until collected
b. Warranty expense and the related liability recognized under GAAP at the time of sale but deferred for income tax purposes until paid
c. Liability recognized for an advance payment that is taxable on receipt of cash but deferred under GAAP until earned
d. Depreciation recognized more rapidly for income tax purposes than under GAAP
2341.04
Other differences in the determination of financial and taxable income are permanent in nature in that they are not expected to reverse in the future. Examples are items that are included in either taxable or financial income, but which will never enter into the determination of the other, such as the following:
a. Interest received on investments in municipal securities that is included in the determination of financial income but is not taxable
b. Insurance premiums paid on policies for which the company is beneficiary that are not deductible for tax purposes
c. Depletion in excess of cost that is deductible for income tax purposes but is not included in the determination of financial income
2341.05
The term “liability method” comes from the fact that the balance sheet elements are calculated first and, from those figures, the amount of income tax expense is derived. For example, if a company determined that its current income tax payable was $100,000 and that its deferred tax liability balance resulting from temporary differences increased during the year by $30,000, the entry to record income taxes for the year would be:
Income Tax Expense 130,000
Income Tax Payable 100,000
Deferred Income Tax Liability, noncurrent 30,000
The elements of the balance sheet—in this case, liabilities—are first determined, and they become the basis for determining the amount of the income tax expense.
2341.06
The following basic principles are applied in accounting for income taxes at the date of the financial statements:
a. A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns 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 by a valuation allowance if, based on available evidence, some or all of the deferred tax asset balance is not expected to be realized.
2341.07
The annual computation of deferred taxes results from applying the following steps:
a. Identify all cumulative temporary differences and operating and tax credit carryforwards.
b. Measure the total deferred tax liability for taxable temporary differences.
c. Measure the total deferred tax asset for deductible temporary differences, loss carryforwards, and each type of tax credit carryforward.
d. Reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.
2341.08
The measurement of deferred tax liabilities and assets is done using the enacted tax rate or rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Due to the significant reduction in the corporate tax rate, the FASB issued Accounting Standards Update (ASU) 2018-02 related to the Tax Cuts and Jobs Act of 2017.
2341.09
All deferred tax assets and liabilities, along with any related valuation allowance, are classified as noncurrent on the balance sheet.
FASB ASC 740-10-45-4
