Ch 16 Acct for income taxes

Question 1

Def tax asset

Answer 1

Temporary difference between accounting tax expense and actual tax expense.
Future deductible amount
Pretax income < taxable income

Question 2

Def Tax liability

Answer 2

Temporary difference between accounting tax expense and actual tax expense.
Future Tax Amount
Pretax income > taxable income

Question 3

Loss contingency journal entries

Answer 3

Expense

Liability

Question 4

Why temporary differences?

Answer 4

Temporary differences arise because there are two different purposes of Financial statements and tax.

GAAP wants accrual because the users of the financial statements need to understand the current health of the company

IRS wants to collect revenue, on a cash basis to raise national funds

Question 5

Permanent differences

Answer 5

Differences between GAAP and IRS expenses that tax doesn’t recognize

Example: life insurance, fees and obligations, Municipal bonds

Question 6

Which are preferable for management? deferred tax asset or liability?

Answer 6

liability because we want to delay paying taxes as long as possible.