Accounting for Income Taxes

Question 1

what are the two components of the balance sheet income tax provision (liability)

Answer 1

1. current tax expense

2. deferred tax expense - result from differences between book and tax income

Question 2

how is the deferred tax expense calculated

Answer 2

it is the net change of DTAs and DTLs based on differences between financial and tax accounting methods

Question 3

Where are the book-tax differences located on the tax return

Answer 3

Schedule M1 or M3 (form 1120)

Question 4

What type of difference causes a change in the current tax payable

Answer 4

permanent - do not create DTAs/DTLs

Question 5

what are the 2 ways DTLs are created

Answer 5

1. deferred income payments

2. accelerated deductions for tax purposes

Question 6

why do people view DTLs as “good” in most cases

Answer 6

they defer taxes until future periods, which usually is value-maximizing

Question 7

What does ASC 740 require for DTAs created by tax related carryovers

Answer 7

the realization of the DTA must be more likely than not (>50%) - must have taxable income to offset with DTA
must be recognized at its expected realizable value

Question 8

How is a DTA created by a tax related carryover adjusted to its expected realizable value

Answer 8

with a asset valuation account

each $ change of valuation account translates to a $ change of tax expense

Question 9

What is the journal entry for an asset valuation account

Answer 9

Income Tax Expense xxxx

Val. Allowance Acct xxxx