FAR 6 - Accounting for Income Taxes

Question 1

What is intraperiod tax allocation?

Answer 1

1) Income from continuing operations - shown gross, then net of tax
2) Discontinued operations - net of tax
3) Accounting principle change (retrospective) - net of tax
4) Other Comprehensive Income (PUFER) - net of tax

Question 2

What is Income Tax Expense? - Simple formula

Answer 2

B/S ITEMS - Owe now + Owe later

Income Statement - Owe now + Owe Later = Expense

Question 3

What is Journal Entry for Income Tax Expense? - Simple J/E

Answer 3

Dr: Tax Expense
Cr: Owe now/liability
Cr: Owe later/ liability

Question 4

Do permanent difference affect current or deferred computations?

Answer 4

Permanent difference ONLY affect CURRENT TAXES.

• NO DEFERRED TAXES

Question 5

Do temporary difference affect current or deferred computations?

Answer 5

Temporary difference affect BOTH CURRENT AND DEFERRED TAXES

• DEFERRED TAXES REQUIRED

Question 6

What is the required method for GAAP for comprehensive allocation?

Answer 6

BALANCE SHEET APPROACH

Question 7

What is Income Tax Expense - Complex Formula

Answer 7

B/S ITEMS - Owe now + Owe later

Owe now = Current income tax payable or refundable as determined on the corporate tax return (Form 1120)

Owe later = Change in the deferred income tax asset or liability from the beginning to the end of the reporting period

Income Statement - Owe now + Owe Later = Total Income Expense

Question 8

What are examples of permanent differences?

Answer 8

1) Tax-exempt interest (municipal, state)
2) Life insurance proceeds on officer’s key man policy
3) Life insurance premiums when corporation is beneficiary
4) Certain penalties, fines, bribes, kickbacks, etc.
5) Nondeductible portion of meal and entertainment expense
6) Dividends-received deduction for corporations
7) Excess percentage depletion over cost depletion

Question 9

What is the journal entry for permanent difference tax expense and payable?

Answer 9

Remember CURRENT only, NO DEFERRED!

Dr: Income Tax Expense
Cr: Income Tax Payable

Question 10

What are examples of future tax liability for deferred taxes (taxable income later)?

AKA DEFERRED TAX LIABILITY

Answer 10

You have to pay more taxes later because you are not recognizing the full amount of sales. It becomes a liability because you owe taxes later.

1) Installment Sales
2) Contractors accounting (% vs completed)
3) Equity method

Question 11

What are examples of prepaid tax benefit for deferred taxes (taxable income first)?

AKA DEFERRED TAX ASSET

Answer 11

• You get unearned income now that won’t be recognized in F/S because you haven’t earned it yet.
• You have to report full income amount and pay taxes as soon as you get money.

1) Prepaid rent (Unearned Rent)
2) Prepaid interest (Unearned Interest)
3) Prepaid royalties (Unearned Royalties)

*IRC calls it “prepaid”. GAAP Calls it “unearned”

Question 12

What are examples of future tax benefit for deferred taxes (tax deduction later)?

AKA DEFERRED TAX ASSET

Answer 12

• You are estimating bad debt expense, warranty expense, and start-up expenses for financial statements but paying taxes on it now.
• You will get credit for paying taxes on all the estimated expenses later.

1) Bad debt expense
2) Est. liability / warranty expense
3) Start - up expenses

Question 13

What are examples of future tax liability for deferred taxes (tax deduction now)?

AKA DEFERRED TAX LIABILITY

Answer 13

You deduct taxes now and will have to pay more taxes later.

1) Depreciation expense
2) Amortization of franchise
3) Prepaid expenses (cash basis for tax)