Income Tax

Question 1

Objectives of Income Tax accounting

Answer 1

• Recognize amount of taxes payable or refundable for the current year
• Recognize deferred tax liabilities & assets for future tax consequences of events recognized in financial statements or tax returns

Question 2

Current Tax Asset or Liability

Answer 2

Recognized for the estimated taxes payable or refundable on tax returns in the current year

Question 3

Deferred Tax Asset or Liability

Answer 3

Recognized for the estimated future tax effects attributable to temporary differences and carryforwards

Question 4

Income Taxes Currently Payable

Answer 4

Taxable income multiplied by the tax rate

Question 5

Net Operating Loss (NOL)

Answer 5

Excess of tax-deductible expenses over taxable revenues on its tax return

Question 6

Notes about NOLs

Answer 6

• Maybe questions about carry backs but they are now not permissible
• Can be carried forward indefinitely
• NOLs beginning in 2017 are limited to 80% of taxable income

Question 7

Income Reconciliation

Answer 7

Pretax Financial Income
+ Excess of taxable revenues over revenues per book
- Excess of deductible amounts over expenses per book
- Excess of revenues per books over taxable revenue
+ Excess of expenses per books over deductible amounts
= Taxable Income

Question 8

Temporary Differences - Deferred Tax Liability (DTL)

Answer 8

• Revenues and gains included in the financial statements, but not Tax income
• Accrual revenue for financial statements and installment revenue for taxable income

Question 9

Temporary Differences - Deferred Tax Asset (DTA)

Answer 9

• Revenues and gains in Tax income but not financial statement income
• Prepaid rent included in tax income but not financial statement income

Question 10

Permanent Differences

Answer 10

• State & Municipal Bond Interest Income - Subtract
• Life Insurance Proceeds on Officer’s policy - Subtract
• Fines, penalties, bribes, kickbacks - Add
• Nondeductible portion of a meal (50%) - Add
• Life Insurance Premiums (beneficiary) - Add
• Percentage Depletion - Cost Depletion - Add
• Investment Interest expense in excess investment income - Add
• Dividend received deductions - Subtract
• Officer’s Compentation
• Contributions
• Tax free investment
• Lobbing/Political

Question 11

Journal Entry to record Income tax expense

Answer 11

Income Tax Expense

—–Income Taxes Payable

Question 12

Deferred Tax Liabilities

Answer 12

• Straight line for books vs accelerated for tax
• Investment accounted for under equity method for books but cost method for tax
• Accrual sales for books for books vs installment sales for tax
• Prepaid expenses for books vs cash for tax
• Goodwill tested or impairment vs 15 year amortization for tax

If tax is greater then subtract - if less then add

Question 13

Deferred Tax liability journal entry

Answer 13

Income Tax expense - current
Income Tax expense - deferred
———Deferred Tax Liability
———-Income Tax Payable

Question 14

Deferred Tax Assets

Answer 14

• Bad debt expense for books vs allowance for tax
• Warranty expense allowance for books vs warranty expense payouts for tax
• Rent, royalty, interest received in advance for books vs taxable when received for tax
• Contingent liabilities( probable & estimatable) for books, not for tax

If book is greater then add if less then subtract

Question 15

Deferred Tax Asset journal entry

Answer 15

Deferred Tax Asset
Income Tax Expense - Current
———-Income Tax Payable
———-Income Tax benefit - deferred

Question 16

If a question has both a deferred tax asset and liability

Answer 16

Net them against each other

Question 17

Note about Permanent Differences

Answer 17

Because they are permanent and don’t reverse there is never a deferred tax asset or liability

Question 18

Which rate should a deferred anus use

Answer 18

Because it is deferred you can’t use current year rate, use the subsequent rate

Question 19

Note about deferred tax liability temporary difference

Answer 19

If the method for tax produces more profit then you have a liability but if is less then you have an asset

Question 20

Equity Method - Tax Gayness

Answer 20

• Multiply % of ownership
• Dividend received deduction (if 80% multiply 20%)
• Subsequent tax rate

Question 21

Effective Tax rate

Answer 21

• Subtract or add temporary difference from net income before taxes and multiply by tax rate
• Divide that by net income before taxes

Question 22

Note about DTL and DTA

Answer 22

• If DTL increases at year end then add if it decreases then subtract
• If DTA increases at year end then decrease if it decreases then add