Chapter 18 Flashcards
Accounting for Income Taxes
What method does FASB believe is the most consistent for accounting for income taxes
asset-liability method
What are the basic principals for the asset-liability method in terms of accounting for income taxes
A. a current tax liability or asset is recognized for the estimated tax payable for the current year (Income tax payable)
B. A DTA or DTL is recognized for the estimated future tax effects attributable to temporary differences and carry-forwards
C. The measurement of current and deferred assets/liabilities is based on provisions of the enacted tax law
D. The measurement of DTA is reduced if necessary by the amount not expected to be realized
How are future changes in tax laws/rates treated
they are ignored, you only use the enacted tax law
IRS income tax payable is a result of
amount paid to IRS on tax returns
Financial statement income tax expense is a result of
GAAP
tax consequences that will become taxable in the future are
DTL
tax consequences that will become deductable in the future are
DTA
The difference in rules for GAAP and IRS usually result in a…
temporary difference
What is a temporary difference
A difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the F.S that will result in a future taxable/deductible amount
If accounting income> Taxable income then…
lower IRS tax now and higher later
DTL
if accounting income < taxable income then…
tax payable greater now and smaller later
DTA
For a DTL is revenue reported on IS or Tax return first
I.S before the tax return
For a DTL are expenses reported on IS or Tax return first
tax return
For a DTA is revenue reported on IS or Tax return first
Tax return first
For a DTA are expenses reported on IS or Tax return first
IS
What are originating temporary differences
the initial balance between the book basis and the tax basis of an asset or liability
what is the reversing difference
occurs when eliminating a temporary difference that happened in prior periods and then removing the related tax effect from the deferred tax account
What are permanent difference
when an income item is included in taxable/accounting income but will never be included in the computation of the other
what period do permanent differences affect
only the period in which they occur
What are examples of permanent differences that are on F.S but not tax return
- Interest received on municipal bonds
- expenses incurred in obtaining tax-exempt income
-life insurance proceeds for key officers - fines and expenses resulting from a violation of law
Items recognized for tax purposes but not for financial purposes
- percentage of depletion
- deduction of dividends received from US corps
What tax rate must a company consider
resently enacted changes in the tax rate that are currently effective or become effective in the future
if new rates are not enacted for future years what rate should be used
current rate
when a new tax rate is enacted how should companies account existing deferred income acounts
adjust immediately and prospectivly
when does a NOL occur
when tax-deductible expenses are greater than taxable revenue
when NOL is used to offset future taxable income it is…
loss carry forward and reduces future tax payable amount
what were the old rules of NOL
carryback 2 years and carryforward 20 years
what is the new policy for NOL
carry forwards can be indefinitely carried forward for up to 80% starting dec 2017
what is the journal entry for a loss carry forward without a valuation allowance
DTA
Income tax expense
What is a DTA called on the income statement
Income Tax benefit
Deferred
a deferred tax asset can only be realized if…
company has taxable income in the future
What is a valuation allowace
contra asset account created when it is more than likely that a portion of DTA will NOT be realized
how is a deferred tax asset reported on the balance sheet
it is recorded at net realizable value
What is the J.E for valuation allowance
income tax expense
Valuation allowance - DTA
whether a company will realize a DTA depends on
whether sufficient taxable income exists or will exist within the carryforward period
Uncertain tax position
