Deferred Taxes Flashcards
What is a deferred tax asset?
Future Taxable Income will be less than Future Book Income
Tax Expense < Book Expense
Therefore:
Tax Income > Book Income
Examples:
- Warrany Expenses for book today
- Rent - Prepaid, Royalty, Interest Income
- Bad Debt Expenses
- Contingent Liabilities
What is a deferred tax liability?
Future Taxable Income is greater than Future Book Income
Book Expense < Tax Expense
Therefore:
Book Income > Tax Income
Examples:
- Depreciation methods
- Investments accounted for equity method
- Accrual sales for book
- Prepaid expenses
- Goodwill
Which period’s tax rate is used to calculate a deferred tax asset or liability?
The future ENACTED TAX RATE not the current one.It is never discounted to present value.
What valuation allowance is used with respect to a deferred tax asset?
If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this
What is deferred income tax expense?
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities
GAAP Method for calculating is the Asset and Liability Approach
Note: IFRS uses the Liability approach only
How are deferred tax assets classified as current or non-current on the balance sheet?
Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet
Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet
Liability Method is used to report deferred income tax expense & calculate current & deferred income tax asset/liability.
+Pretax Book Income
+/- Permanent Difference
=Book Income
+/- Temporary Difference***
= Taxable Income
x Current Tax Rate
= Current Tax Expense
****Temporary Diff x Tax Rate = Deferred Tax Asset/Liab
***Current Tax Expense = Taxable Inc x Tax Rate
Permanent Differences
Permanent Difference is a difference that will appear on either the F/S or tax return but not on both.
Examples:
- Municipal Bond Interest (not taxable)
- Dividends received reduction (not a book deduction)
- Life insurance expense (not tax deductible)
- Life insurance proceeds
- Fines
- Federal income tax payments
- 50% meals & entertainment for tax (100% for book)
Net Operating Losses Rule?
NOLs may be carried back 2 years & forward 20 years
Journal Entry:
DR: Income Tax Refund Receivable (taxes from prev yrs)
DR: Deferred Tax Asset (temp diff x tax rate)
CR: Income Tax Benefit (I/S)
Effective Tax Rate
(Formula)
Effective Tax Rate = Income Tax Expense / Net Income
or
Income Tax Expense
/ Net Income
= Effective Tax Rate
How are deferred tax assets/liabilities presented in the balance sheet for IFRS?
Under IFRS, all deferred tax assets/liabilities are classified as Non-Current only.
How is a deferred tax asset/liability determined to be either current or non-current.
A deferred tax asset/liability determined to be either current/liability based on the basis. If the basis is current, then it will be current. If the basis is non-current it will be non-current.
