F5 M7 Flashcards
Income Taxes Part 2
recognition to tax benefits steps
1) more likely than not threshold must be met
2) recognize largest amt that has > 50% (expected cumulative outcomes) likelihood of being realized upon settlement with tax authority
enacted tax rate
-measurement based on applicable tax rate
-use enacted tax rate to apply to taxable items in period items expected to be paid or realized
liability method
requires deferred tax account balance be adjusted for any changes in enacted tax rates
changes in tax laws
1) amt of adjustment measured by change tax rates to remaining cumulative temporary differences
2) adjustments goes into income tax expense as component of income from continuing operations
3) entity must reflect impact of enacted change in annual effective tax rate calc in interim period
change in valuation allowance
-the ability to realize a deferred tax asset is recognized in income from continuing operations
change in tax status of an enterprise
1) when enterprise changes from nontaxable to taxable, DTL or DTA recognized for temporary differences and included in continuing op
2) if taxable entity becomes nontaxable, DTL or DTA eliminated and included in continuing op.
the income tax expense/benefit - deferred calc
=ending balance of DTL or DTA - beginning balance
change in tax rate calculation steps for deferred tax
1) beginning deferred tax balance +/-(pretax income - taxable income) = total deferred tax
2) total deferred tax * new enacted tax rate
3) subtract step 2 from the beginning balance net of tax
how are deferred tax assets and liabilities reported on the B/S?
-non-current
-net of taxes
net operating losses arising in 2018, 2019, and 2020
carried back five years (to oldest year first) and carried forward indefinitely
-not subject to taxable income limitation
NOLS carried forward to beginning of 2021 or later
limited to 80% of taxable income before NOL deduction
-cannot be carried back but carried forward indefinitely
net operating loss carrybacks
1) if losses carried back, tax receivables use the enacted rate in PY
2) any realizable loss carryback recognized in determining loss on prior net income
3) claim for refund of past taxes shown on B/S as separate item from deferred taxes
4) income tax refund receivable considered current asset
journal entry to record current net operating loss that can be used to obtain refund (taxes previously paid)
Dr. Tax refund receivable
Cr. Tax benefit
operating loss carryforwards
1) tax effect recognized to extent its more likely than not that tax benefit will be realized
2) treated as deferred tax assets in period they occur
3) NOLS valued using enacted future tax rate expected to be used
4) tax credit carryforwards valued at amt payable to be offset in future
journal entry to record deferred tax benefit
Dr. Deferred tax asset
Cr. Tax benefit
Note: tax benefit is reduction of book loss
DTA reduces tax payable in future
tax benefit reduces NOL of current period
journal entry to record income taxes for CY given NOL carryback
Dr. Income tax refund receivable
Dr. Deferred tax asset
Cr. DTA valuation allowance
Cr. Income tax benefit (plug)
calculation for deferred tax asset valuation if NOL carryback used
1) amt of NOL carryforward after applying it to PYs
2) subtract expected income in next year
3) multiply enacted tax rate for next year
dividends received deduction based on ownership %
Own 0-19% - 50% exclusion
Own 20% - 80% - 65% exclusion
Own over 80% - 100% exclusion
calculation of current and total income tax expense with DRD
=taxable income/pretax income - (DRD * ownership %)
-DRD is permanent difference because deductible
-remainder of DRD if any is a temporary difference
B/S disclosures for net deferred tax assets/liabilities
1) all deferred tax liabilities
2) all deferred tax assets
3) valuation allowance for deferred tax assets
4) net change during year in total valuation allowance
5) tax effect of each type of temporary difference and carryforward that is significant to DTA or DTL
I/S disclosures for income tax expense/benefit allocated to continuing operations
1) current tax expense/benefit
2) deferred tax expense/benefit
3) investment tax credits
4) government grants (cause reduction of income tax expense)
5) tax expense allocated shareholder’s equity items
6) adjustments of deferred taxes from changes in tax rates
7) adjustments of beg. DTA valuation due to changes in expectations
installment sales DTA or DTL?
DTL, because recognize income on GAAP financials, and income on tax return only when received
-as such, GAAP financial income > tax return income
-owe more in taxes later than in current period
rents and royalties in advance a DTL or DTA?
DTA, because tax return recognizes revenue when received, whereas GAAP financials recognize it when earned
-as such tax return income > GAAP financial income
-owe less taxes in future than in current year
bad debt expense a DTL or DTA?
DTL, because write off of bad debt expense reduce tax return liability and pay more taxes later. On GAAP financials, uses allowance method to account for bad debt expense
warranty liability a DTL or DTA?
DTA, because on GAAP financials you accrue warranty expense, but on tax return, it is not deductible until warranty claims have been paid
-owe more now, owe less later
is an NOL a DTL or DTA?
a DTA, because a portion of carryover either not absorbed in PYs if carried back or if carried forward instead of carryback, recognize a tax benefit in future
is an accrued expense a DTL or DTA?
a DTA, because on tax return, there is no deduction for it until it is paid, but it is fully expensed on GAAP financials
is goodwill a DTL or DTA?
DTA, if tax deductible goodwill is greater than book goodwill
is depreciation a DTL or DTA?
a DTL, tax return depreciation generally tends to be higher than GAAP financials, so owe more in the future
