Chapter 17 (Accounting for Income Taxes) Flashcards
Deferred Tax Assets and Deferred Tax Liabilities are both
- Noncurrent
- Permanent Accounts (Show up on Balance Sheet)
Adjusting entry at the end of the year is needed to
Accrue income tax expense
Permanent Differences
- In the computation of taxable income, but never in book income
- In the computation of book income, but never taxable income
Differences Resulting in Book Income Being Greater than Taxable Income (Exhibit 17.1)
- Municipal Interest Income: Tax-free interest is reported on the financial statements as income, but is not taxable
- Dividends Received Deduction: Corporations can deduct a portion of inter-corporate dividends received for tax purposes. However, all dividends received are reported as income on the financial statements
- Life Insurance Death Proceeds from Key Officers or Employees: Officer’s life insurance proceeds received are reported as income on the financial statements but are not taxable
Differences Resulting in Book Income Being Less than Taxable Income (Exhibit 17.1)
- Fines and Penalties: Reported as expenses on the income statement but are not tax deductible
- Certain meals and entertainment expenses: Reported as expenses on the income statement but are not fully tax deductible
- Life insurance premium paid for key officers or employees: Reported as an expense on the income statement, but this cost cannot be deducted for tax purposes
- Expenses incurred in securing tax-exempt income: Subtracted from earnings on the income statement but are not deductible for tax purposes
Most frequently seen circumstances:
- Municipal Interest Income
- Life Insurance Death Proceeds
- Fines and Penalties
- Life Insurance Premiums
Effective Rate Calculation
Income Tax Expense/Book Income Before Taxes
If the company ONLY has temporary differences
Effective Rate = Statutory Rate
Temporary Differences
Occur when the book treatment and the tax treatment for a given transaction are different in a given year but will be the same over the life of the firm
Installment Sales
- Deferred Tax Liability
- Installment Sales Receivable is higher for book than for tax
- Tax Treatment: Recognize revenue only when cash is received
- Book Treatment: Recognize revenue and installment sales receivable when the product is sold
Depreciation
- Deferred Tax Liability
- Carrying Value of property, plant, and equipment is higher for book than for tax
- Tax Treatment: Use accelerated method to calculate depreciation expense
- Book Treatment: Record depreciation using straight line
Unearned Revenues (Advanced Receipts)
- Deferred Tax Asset
- Unearned Revenues higher for book than for tax
- Tax Treatment: Recognize Revenue only when cash is received
- Book Treatment: Recognize revenue and decrease liability when earned
Contingent Liabilities
- Deferred Tax Asset
- Contingent Liabilities higher for book than for tax
- Tax Treatment: Deduct the loss only when amounts are known
- Book Treatment: Recognize the loss and liability when it is probable and estimable
Bad Debt Expense
- Deferred Tax Asset
- Net Accounts Receivable lower for book than for tax
- Tax Treatment: Deduct the bad debt expense only when specific amount is written off
- Book Treatment: Deduct the bad debt expense and record a contra-asset in the period of the sale
Warranty Liability
- Deferred Tax Asset
- Warranty liability higher for book than for tax
- Tax Treatment: Deduct only when the warranty service is performed
- Book Treatment: Expense the estimated cost of repair and record a liability when the product is sold
