4.3 Income Taxes Flashcards
Selected financial information for the year just ended is shown below.
- Pretax income $5,000,000
- interest received on municipal bonds $600,000
- Gains on the sale of land reported this year but not taxable until next year $1,000,000
- Tax rate for all years 40%
- Beginning balances:
** Income taxes payable $0
** Deferred tax liability $50,000
The total income tax expense reported on the income statement for the year just ended should be
A. $960,000
B. $1,360,000
C. $1,760,000
D. $2,640,000
C. $1,760,000
Taxable income consists of pretax income adjusted for those items that give rise to tax differences. Taxable income is therefore $3,400,000, ($5,000,000 pretax income - $600,000 interest received on municipal bonds - $1,000,000 gains on the sale of land), and current tax expense is 3,400,000 x 40% = 1,360,000.
The interest on municipal bonds is a permanent difference because it is tax-exempt, i.e., it is recognized in GAAP income but never in taxable income. Permanent differences have no deferred tax effects. However, the gain on the sale of land is temporary difference because it is included in GAAP income this year and is included in taxable income in the future. This temporary difference gives rise to a future taxable amount, specifically, a $400,000 deferred tax liability. ($1,000,000 gain x 40%). This credit to the deferred tax liability account is balanced by a debit to income tax expense.
Total income tax expense for the year is therefore $1,760,000 (1,360,000 current portion + 400,000 deferred portion).
Income-tax basis financial statements differ from those prepared under GAAP because they
A. Recognize certain revenue and expense in different reporting periods.
B. Do not include taxable revenues and nondeductible expenses in determining income.
C. Include detailed information about current and deferred income tax liabilities.
D. Contain no disclosures about finance and operating lease transactions.
A. Recognize certain revenue and expense in different reporting periods.
A liability that represents the accumulated difference between the income tax expense reported on the firm’s books and the income tax actually paid is
A. Value-added taxes
B. Taxes payable
C. Deferred taxes
D. Capital gains tax
C. Deferred taxes
__________ arise when temporary differences in book and taxable income result in future taxable amounts
Deferred tax liabilities
_______ arise when temporary differences in book and taxable income result in future deductible amounts.
Deferred tax assets
