F6- Def.Taxes

Question 1

What is a temporary difference related to deferred taxes?

Answer 1

GAAP says to recognize a revenue/expense in one period

• Tax laws say to recognize it in another
• Affect the deferred tax & the computation

Question 2

What is a deferred tax asset?

Answer 2

Deduction will reduce future income taxes expense.

Question 3

What is a deferred tax liability?

Answer 3

Income will be taxable in a future period and will increase future tax expense

Question 4

Which period’s tax rate is used to calculate a deferred tax asset or liability?

Answer 4

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

Question 5

What valuation allowance is used with respect to a deferred tax asset?

Answer 5

• If it is probable 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

Question 6

What effect do permanent differences have on deferred income taxes?

Answer 6

They have no tax impact.

Question 7

What is deferred income tax expense?

Answer 7

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

Question 8

How are deferred tax assets classified as ‘Current’ on the balance sheet?

Answer 8

• 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

Question 9

Comprehensive Allocation

Answer 9

• Balance Sheet Approach

- Asset/Liability method is required by GAAP for comprehensive allocation

Question 10

Acct. for Interperiod Tax Allocation

Answer 10

• Total Income tax expense (GAAP inc. tax exp) or benefit for the yr is the sum of:
• Current Inc. tax exp./benefit
  +
• Deferred Inc. tax exp/benefit

Question 11

Total Inc Tax Exp/Benefit

Answer 11

Current Inc Tax Payable or refundable as determined on the corporate tax return
[Owe Now]

-/+

Change in the deferred Inc tax asset or liab. from the beg. to the end of the reporting pd.
[Owe in future]

Question 12

Permanent Differences

Answer 12

• Transaction that affects only income per books or taxable income but not both.
• Inc. Tax Exp. for a period is calc. only on taxable items.

Question 13

No Deferred Taxes

[Perm. Taxes]

Answer 13

• B/C do not reverse themselves
• No interperiod tax allocation is necessary
• Inc. Tax provision for Fin. acct purposes is computed on the basis of pretax book inc adjusted.

Question 14

Perm. Differences Examples

Answer 14

• Tax-Exempt interest
• Life Insur. proceeds on officer’s key man policy
• Life Insur. premium when corp is beneficiary
• Certain penalties, fines, bribes, kickbacks
• Nondeductible portion of meal & entertainment Exp
• Dividends-received deduction for corporations
• Excess % depletion over cost depletion

Question 15

Deferred Tax Liabilities

Answer 15

Future tax accounting income > Future Financial accounting income

Question 16

Deferred Tax Asset

Answer 16

Future Tax accounting income < Future financial accounting income.

Question 17

The net of income tax payable & any changes in the deferred tax asset & deferred tax liab. accounts.

Answer 17

• Total income tax expense for financial accounting purposes

Question 18

Uncertain Tax Positions

Answer 18

• Some level of uncertainty of the sustainability of a particular tax position taken by a company.
• US GAAP requires a more-likely-than-not level of confidence before reflecting a tax benefit in an entity’s Fin. St.

Question 19

How are deferred tax assets classified as ‘Non-Current’ on the balance sheet?

Answer 19

• Will impact Income Tax Expense 12 months or more from the Balance Sheet Date.
• All non-current amounts are netted and reported as a single amount on the Balance Sheet

Question 20

What changes will cause an increase in def. Income Tax Liab.?

Answer 20

• Increase in Prepaid Insurance
  &
• Increase in Rent Receivable

Both would cause an increase in Deferred Tax Liab.

Question 21

What would effect current income Tax Exp. for Year 3?

Answer 21

Change in Income Tax Rate for Year 3

Question 22

Justification for the method of determining periodic Def. Tax Exp. is based on the concept of?

Answer 22

Recognition of Assets & Liabilities

Question 23

A Temp. Difference arises when Extraordinary items is included this yr after being recogn. in last yr.
[US GAAP]

Answer 23

Extraordinary Gains & Losses are both considered temp. differences.

Question 24

Reporting a Current Def. Tax Asset, will reversal of temp differences result in taxable or deductible amounts?

Answer 24

Will be deductible and reporting a Profit of the year.

Question 25

The Deferred. Income Taxes based on the differences in Current Assets that will reverse should be classified in a B/S ?
[IFRS]

Answer 25

-Report as a Non-current Asset

Under IFRS:

-All Def. Tax Assets/Liab. are reported as NON-Current on the B/S

Question 26

What should be disclosed in a company’s financial statements related to Deferred Taxes?

Answer 26

• The types & amounts of existing Temporary Differences

- The nature & amount of each type of operating loss & tax credit carry forward.

Question 27

What items is not subject to the application of intra-period income tax allocation?

Answer 27

-GAAP does not req. tax allocation for:

Operating Income.

Question 28

Find the Deferred Income Tax Expense

Answer 28

Multiply the ‘Difference” between F.S Inc & Taxable Income:

by the Tax Rate %

Question 29

Find the Deferred Inc. Tax Liability

Answer 29

-Multiply the Future/Enacted Tax Rate by the Cumulative Temp Differences.
(Future Taxable Amts)

Question 30

Depreciated Def. Tax Liability

Answer 30

Multiply the Future/ Enacted Tax Rate by the ‘Exceeded Dep. Amount’

Question 31

When Dep. Expense Exceeds its tax basis is the Temp. Difference a Deferred Tax Asset or Liability?

Answer 31

A Deferred Tax Liability

Question 32

When calculating the total differences between book and tax income:

Answer 32

• Subtract the permanent differences from the total before applying a future enacted tax rate

Question 33

Deferred Income Tax Expense Calc. GAAP Approach

Answer 33

The Asset and Liability Approach

Question 34

Deferred Income Tax Expense Calc. IFRS Approach

Answer 34

• Liability approach only