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