Deferred Income Taxes Flashcards
A corp. owns shares in T corp., another domestic corp. During the year, T corp. pays $10,000 in dividends to A corp.
What is the taxable impact to A corp?
A corp reports the dividends as revenue. Though it can deduct a portion based on ownership.
< 20% ownership = 70% deduction
> 20% but < 80% own = 80% deduction
> 80% ownership = 100% deduction
Dividends-received deduction is a permanent tax difference; it is never taxed.
C corp whose tax rate is 30%, owns 40% of M corp. C is applying the equity method for financial reporting. This year, M reports net income of $100,000 and C recognizes 40% as income. M pays a total dividend of $20,000, and C receives its share this year.
What does C recognize as related income tax expense?
Since C owns 40% of M the DRD is 80%.
During the year 40% of the dividends or 8,000 is distributed to C.
8000 x .8 = 6400 deduction
8000-6400 = 1,600 taxable x .30 tax rate = 480
Income tax expense - current 480
Income tax payable- current 480
C also has income of $32,000 from the investment in M (40,000 net income - 8,000 dividends) because of the DRD only 20% of $32,000 will be taxed in the future. With a 30% tax rate that leads to $1,920 of future tax
Deferred income tax expense $1,920
Deferred income tax liability 1,920
At the end of year 1, A reports a deferred income tax liability of $24,000. At the end of year 2, the balance in this same account $31,000.
In year 2, what amount should the entity report as its deferred income tax expense on the income statement?
Deferred income tax expense is 31,000 - 24,000 = 7,000
In year 1, an entity has a temporary difference of $40,000 that will not be taxable until year 5. The enacted tax rate is 30% so the entity recognizes a deferred income tax liability of $12,000. In year 2, this same entity has another temporary tax difference of 60,000, which will also not be taxable until year 5. Then enacted tax rate is now 34%.
For year 2, what amount should be recognized on income statement as the deferred income tax expense?
Year 1 deferred income tax liability is 12,000
income deferred is 100,000 total x 34% or 34,000 deferred income tax liability
34,000 - 12,000 =22,000 deferred income tax expense
At the end of year 1, an entity has a deferred income tax liability of $50,000 and a deferred income tax asset of $20,000. At the end of year 2, it has a deferred income tax liability of $73,000 and a deferred income tax asset of $30,000.
What is the net amount of deferred income tax expense to be recognized in Year 2?
net of year 1 50,000 liability - 20,000 assets = 30,000 liability
net of year 2 73,000 liability - 30,000 assets = 43,000 liability
43,000 - 30,000 = 13,000 deferred tax expense year 2
An entity reports $300,000 in income on its financial records prior to any income tax expense.
What are the two reasons that the entity’s taxable income would be different than $300,000?
temporary tax differences
Permanent tax differences
What is the cause of deferred income taxes?
deferred income taxes are caused by temporary tax differences
X has net income on its F/S of $300,000. of this amount $200,000 is to be taxed immediately. The remaining $100,000 is a temporary tax difference that will be taxed a few years into the future. The tax rate is 30%.
What are the j/e’s needed to record this entity’s income taxes?
Income tax expense - current 60,000
Income tax payable - current 60,000
Income tax expense - deferred 30,000
Deferred tax liability 30,000
M has net income on its financial records $600,000. Of this amount $300,000 is to be taxed immediately, while $100,000 is tax free. The remaining $200,000 is a temporary tax difference that will be taxed a few years into the future. The tax rate is 30%.
What are the j/e’s need to record this entity’s income taxes?
Income tax expense - current 90,000
Income tax payable - current 90,000
Income tax expense - deferred 60,000
Deferred tax liability 60,000
An entity has income of $500,000, of which $400,000 is taxed immediately in year 1 and $100,000 is scheduled to be taxed in year 5. For year 1, the enacted tax rate is 34% and the enacted tax rate for the years following year 1 is 36%. However, due to current political discussion in congress, the enacted tax rate is expected to increase to 37% in year 2.
In determining deferred taxes at the end of year 1, what tax rate is used for year 5?
36% must be used because the 37% is not enacted
R has net income on its financial records in year 1 of $400,000, which includes an expense of $100,000 that cannot be deducted for tax purposes until year 4. The enacted tax rate is 30%
What are the journal entries that will be made in Year 1 to recognize this entity’s income taxes?
income tax expense - current 150,000
income tax payable - current 150,000
deferred tax asset 30,000
deferred income tax benefit 30,000
L has a net income on its financial records in year 1 of $700,000. However, $200,000 of expenses cannot be deducted for tax purposes until year 5. The enacted tax rate is 30%.
How are the related income taxes recognized on Year 1 income statements?
income tax expense - current 270,000
income tax payable - current 270,000
deferred tax asset 60,000
deferred income tax benefit 60,000
Income tax expense - current 270,000
deferred tax benefit (60,000)
total income tax provision 210,000
when is a deferred income tax liability recognized?
when is a deferred income tax asset recognized?
if an entity has a temporary tax difference that will cause taxable income to be higher in the future it has a deferred tax liability
if an entity has a temporary tax difference that will cause taxable income to be lower in the future it has a deferred tax asset
What are some common of permanent tax differences?
state and munii bond interest
life insurance proceeds
life insurance premiums where the entity is beneficiary
dividends received deduction
federal income taxes
penalties and fines
half of the entity’s meal and entertainment expense
What are some common examples of temporary tax differences that usually lead to the recognition of deferred income tax liability?
installment sale method
MACRS
equity method to report an investment on the financial records
What are some common examples of temporary tax differences that usually lead to the recognition of deferred income tax asset?
warranty expense
bad debt expense
unearned revenues
An entity has $200,000 of income. Depreciation for tax is $6,000 greater than for the financial records, and warranty expenses of $4,000 were recognized; however no payments were made this year. The enacted tax rate is 30%.
What j/e’s should be made to reflect the income tax effects of the above?
200,000 - 6,000 + 4,000 = 198,000 income for tax
income tax expense - current 59,400
income tax payable - current 59,400
6,000 depreciation creates an 1,800 DTL and 4,000 warranty expense creates 1,200 DTA
deferred income tax asset 1,200
deferred income tax expense 600
Deferred income tax liability 1,800
An entity has $400,000 of income on its financial records. However, application of the installment method for tax purposes has deferred $20,000 of income. In addition, bad debt expenses of $11,000 were recognized for the financial records, although no uncollectible accounts were written off during the year. The enacted tax rate is 30%.
What income tax j/e’s should be recorded by this entity?
400,000 - 20,000 + 11,000 = 391,000
income tax expense - current 117,300
income tax payable - current 117,300
20,000 installment sales creates an 6,000 DTL and 11,000 bad debt expense creates 3,300 DTA
deferred income tax asset 3,300
deferred income tax expense 2,700
Deferred income tax liability 6,000
An entity can have both a deffered tax liability and a deferred tax asset. In some cases, a reported deferred tax account must be reduced by an offsetting allowance balance. Do deferred income tax liabilities and deferred income tax assets ever need to be reduced by an allowance balance?
DTL - never reduced
DTA - the asset must pass a “more likely than not” if it does not pass it must be reduced by an offsetting valuation allowance
A deferred income tax asset account may require the recognition of an offsetting allowance account. When is that allowance required?
future tax income must be anticipated since an asset will reduce tax income in the future.
if there is a greater than 50% chance that the entity will be able to utilize no allowance is necessary
if there is less than 50% chance that the entity will not be able to utilize an allowance is required
How does an entity determine the likelihood it will have future taxable income, so that the benefit of the asset can be achieved?
history of profits and losses
recent profit trends
current contracts or firm sales backlogs
At the end of year 1, an entity calculates that it needs to recognize a deferred tax liability of $23,000 a deferred tax asset of $15,000 and a related valuation allowance for deferred taxes of $3,000.
What is the amount that should be recognized on the income statement for deferred income tax expense?
Deferred income tax asset 15,000
Deferred income tax expense 11,000
Valuation allowance 3,000
Deferred income tax liability 23,000
At the end of year 1, an entity needs to recognized a deferred income tax liability of $30,000 that was created by depreciation being higher this year for tax purposes than for book purposes. It is expected that the related temporary difference will reverse over years 2 through 4, causing taxable income to be $10,000 higher than accounting income for each year.
At the end of year 1, how much of the deferred income tax liability should be reported as a current liability?
zero since the depreciation relates to fixed assets and fixed assets are not current assets so the liability will be classified as a long-term liability
An entity has a deferred income tax asset of $20,000. This future benefit was created by the recognition of warranty expense. Of the related warranty payable, 80% is a current liability and 20% is a long-term liability.
How is the deferred tax asset reported?
80% current = 16,000
20% long-term = 4,000
At the end of year 1, an entity has a deferred income tax asset (current) of $16,000, a deferred income tax asset (noncurrent) of $44,000, a deferred income tax liability (current) of $20,000, and a deferred income tax liability (noncurrent) of $30,000.
How should these items be reported on its balance sheet?
current tax deferrals should be netted
16,000 Current DTA - 20,000 current DTL = 4,000 Current DTL
noncurrent tax deferrals should also be netted
44,000 noncurrent DTA - 30,000 noncurrent DTL = 14,000 noncurrent DTA
