Income Tax accounting Flashcards
How are deferred tax liabilities presented under US GAAP
classify according to the same classification as the related asset. ex. if related asset is non-current asset, then classify as non-current liability.
Rule 1: All current deferred tax liabilities and assets must be offset and presented as one amount.
Rule 2: All noncurrent deferred tax liabilities and assets of a particular tax jurisdiction must be offset and presented as one amount.
Current Income Tax Expense Formula
Taxable Income * Effective Tax rate. This means there is a permanent difference.
Deferred tax expense formula
current period temporary diferrence * enacted tax rate.
Deferred income tax liability
Future enacted tax rate * Future Taxable amount.
Example tip
At the end of year 1, Cody Co. reported a profit on a partially completed construction contract by applying the percentage-of-completion method. By the end of year 2, the total estimated profit on the contract at completion in year 3 had been drastically reduced from the amount estimated at the end of year 1. Consequently, in year 2, a loss equal to one-half of the year 1 profit was recognized. Cody used the completed-contract method for income tax purposes and had no other contracts. The year 2 balance sheet should include a deferred tax:
Asset ?
Liability?
Choice “a” is correct, No - Yes.
Rule: Whenever income is recognized in the financial statement before it is reported as taxable income, a deferred tax liability should be reported. Even though a loss was recognized in year 2, on a cumulative basis the financial statement have recognized income which has not yet been recognized for tax purposes. Accordingly, a deferred liability will still exist at the end of year 2 (however, it will be less than the deferred liability reported at the end of year 1)
Dunn Co.’s income statement reported $90,000 income before provision for income taxes. To compute the provision for federal income taxes, the following data are provided:
Rent received in advance $ 16,000
Income from exempt municipal bonds 20,000
Depreciation deducted for income tax purposes in excess of depreciation reported for financial statement purposes 10,000
Enacted corporate income tax rate 30%
What amount of current income tax liability should be reported in Dunn’s December 31 balance sheet?
retax financial income $ 90,000
Permanent difference:
Tax exempt bonds income (20,000)
Pretax financial income subject to tax 70,000
Temporary differences:
Rent (taxable when received) 16,000
Depreciation (tax deduction) (10,000)
Taxable income 76,000
Tax rate × 30%
Tax liability $ 22,800
example of permanent diff=ences
1- Tax - exempt dif
2- Life Insurance proceeds on officers key man policy
3- Life Insurance Premiums when corporation is beneficiary
4- certain penalties, fines, bribes, kickbacks
nondeductible portion of meal and entertainment expense
5- Nondeductible portion of meal and entertainment expenses
6- didividend received, deduction for corporations
7- Excess percentage depletion
For Year 1, Clark Corp. reported depreciation of $300,000 in its income statement. On its Year 1 income tax return, Clark reported depreciation of $500,000. Clark’s income statement also included $50,000 accrued warranty expense that will be deducted for tax purposes when paid. Clark’s enacted tax rates are 30% for Year 1 and Year 2, and 25% for Year 3 and Year 4. The depreciation difference and warranty expense will reverse over the next three years as follows:
Depreciation
difference Warranty
expense
Year 2 $ 80,000 $ 10,000
Year 3 70,000 15,000
Year 4 50,000 25,000
$ 200,000 $ 50,000
Depreciation creates a Deferred tax Liability and warranty expense creates a deferred tax asset.
Depreciation - Warranty accrual * enacted tax rate.
for year 2 (80-10) * .30 Year 3 (70-15) *.25 Year 4 (50-25)*.25 total = 41 000
How are deferred tax liabilities classified under US GAAP ?
2 Rules:
Rule 1: They should be classified as based on the classification
of the related asset and liability. ex
-deferred Tax liability related to depreciation are classified as non-current because they relate to non-current asset
- Deferred Tax asset related to warranty accruals should be classified as non-current, because they relate to warranty expenses.
Rule 2:
Other deferred tax items not related to an asset or liability should be classified based on the expected reversal date of the temporary dif
ex:
a- Deferred tax asset related to carryforward
b- cost expensed in GAAP fin statement but amortized and deducted in Tax statement,.
c- % of completion method used for GAAP vs completed contract method used for Tax.
For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There were no other differences between its taxable and financial statement income. Cable’s effective tax rate for the current year is 45%, but a 40% rate has already been passed into law for next year. In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability)
Choice “b” is correct. Pre-tax income was $100,000 more than taxable income for the current period, resulting from the timing difference which is to be settled next year. Next year’s enacted tax rate will be 40%. Cable must recognize a $40,000 ($100,000 × 40%) tax liability in the current period which will be paid (settled) next year.
DTA and DTL under IFRS
Under IFRS, Deferred Tax Asset and Deferred Tax Liability are reported as non-current on the balance sheet regardless of the asset class of the related instruments.
effective tax rate formula
Income Tax Expense/Pretax Income
Purpose of valuation allowance
account for amount not expected to be realized, meaning not expected to be used. This amount is added to total Tax expense.
Ex: Tax expense = Financial income * Tax rate + Valuation allowance.
