FAR 6 - Accounting for Income Taxes

Question 1

Define deferred tax liability? TAX RETURN INCOME IS LESS THAN FINANCIAL STATEMENT INCOME

Answer 1

• You’re future taxable income is greater than your future financial accounting income.
• You will have to owe money later
• E.g. You have tax deduction first / financial statement expense later (depreciation expense, amortization of franchise, prepaid expenses)
• E.g. You have financial state income first / taxable income later (installment sales, contractor’s accounting, equity method)

Question 2

What is journal entry for deferred tax liability? You owe more taxes later. TAX RETURN INCOME IS LESS THAN FINANCIAL STATEMENT INCOME

Answer 2

Dr: Income Tax Expense - Current * Income Statement
Dr: Income Tax Expense - Deferred * Income Statement
Cr: Deferred Tax Liability * Balance Sheet
Cr: Income Tax Payable * Balance Sheet

Question 3

What is journal entry to reverse deferred tax liability? TAX RETURN INCOME IS LESS THAN FINANCIAL STATEMENT INCOME

Answer 3

Dr: Deferred tax liability
Cr: Income tax benefit - deferred

Question 4

Define deferred tax asset? TAX RETURN INCOME IS HIGHER THAN FINANCIAL STATEMENT INCOME

Answer 4

• You’re future taxable income is less than your future financial accounting income.
• You owe less money later
• E.g. You have tax deduction later / financial statement expense now (bad debt expense, warranty expense, start-up expenses)
• E.g. You have financial statement income later/ taxable income now (unearned rent, unearned interest, unearned royalties)

Question 5

What is journal entry for deferred tax asset? TAX RETURN INCOME IS HIGHER THAN FINANCIAL STATEMENT INCOME

Answer 5

Dr: Deferred Tax Asset *Balance Sheet
Dr: Income Tax Expense - Current *Income Statement
Cr: Income Tax Payable *Balance Sheet
Cr: Income Tax Benefit - Deferred *Income Statement

Question 6

What is journal entry to reverse deferred tax asset? TAX RETURN INCOME IS HIGHER THAN FINANCIAL STATEMENT INCOME

Answer 6

Dr: Income Tax Expense - deferred
Cr: Deferred Tax asset

Question 7

What is a valuation allowance?

Answer 7

A valuation allowance is a contra account used for deferred tax asset that will not be realized.

Question 8

What tax rate do you use when you have to calculate deferred taxes (temporary differences)?

Answer 8

Enacted Tax Rate

*DO NOT USE ANTICIPATED, PROPOSED, UNSIGNED RATE

Question 9

How do you record changes in tax laws or rates?

Answer 9

Changes in tax laws or rates are recognized in the period of change *CHANGE IN ESTIMATE IN INCOME FROM CONTINUING OPERATIONS.

Question 10

How are deferred tax liabilities and assets classified in U.S. GAAP?

Answer 10

CLASSIFY BASED UPON WHAT GAVE BIRTH IT

RULE 1)
E.G.) Deferred tax asset is current if warranty obligations (current operating cycle)
E.G.) Deferred tax liability is noncurrent if depreciation (property, plant, equipment)

RULE 2) Exceptions (e.g.) NOL

• CURRENT ASSETS AND CURRENT LIABILITIES ARE NETTED
• NONCURRENT ASSETS AND NONCURRENT LIABILITIES ARE NETTED

Question 11

How are deferred tax liabilities and assets classified in IFRS?

Answer 11

ALWAYS NONCURRENT