Income Taxes

Question 1

Interperiod tax allocation differences between GAAP and tax code

Answer 1

GAAP isn’t the law. Tax code is.

Question 2

Income tax expense

Answer 2

plug number from taxes payable and deferred taxes (taxes not yet due as cash hasn’t been received)

Question 3

Income statement

Answer 3

always uses income tax expense

Question 4

Net operating loss

Answer 4

negative taxable income. Can be carried back two years and carried forward 20 years

Question 5

FASB 109

Answer 5

adopted asset/liability approach. Deferred tax expense is the net change in deferred tax accounts for the year, measured at the enacted tax rate in which temporary differences reverse.

Question 6

Common permanent differences

Answer 6

tax exempt interest, fines & penalties, lfie insurance premiums on key employees, dividends received deduction, depletion

Question 7

Cost depletion

Answer 7

= (year end unrecoverable depletion cost/ estimated remaining units recoverable at beg year) * units sold

Question 8

Statutory (percentage) depletion

Answer 8

Percent depletion method determined by multiplying statutory percentage by income from property. Statutory percentage is predetermined and varies depending on the type of natural resources. Varies between 5 - 22%, but deduction is not to exceed 50% (except oil and gas which can be 100%).

Question 9

MACRS

Answer 9

Modified accelerated cost recovery system - IRS table for depreciation

Question 10

Deferred tax liability examples

Future Acct Inc < taxable income

Answer 10

Prepaid expenses, A/R, SL depreciation for FR vs MACRS for tax, installment sales (Point of sale for books), completed contract for tax and % complete for books, unrealized gain on trading securities

Question 11

Deferred tax asset examples

Future Acct Inc > taxable income

Answer 11

Unearned revenue, bad debt expense, estimated warrante expense, carry forward of net operating loss, recognized estimated loss for books (lawsuit)

Question 12

J/E for Tax Accrual - assuming full tax liability paid in year 2

Answer 12

Income Tax Expense - Plug
Deferred tax asset - (F deducible Dif X F tax r)
Deferred tax liability - (F taxable dif xF tax r)
Income tax payable - tax inc x P tax r

Future and current rates will be the same unless congress passes a new rate.

Question 13

Total Income tax expense

Answer 13

= current taxable + deferred taxable

Must be on I/S or in notes

Question 14

Effective Tax rate

Answer 14

= total income tax exp/pre tax accounting inc.

Question 15

Dividends received deduction

Answer 15

Means 80% is tax free, so only 20% is taxable - this is a permanent difference

Question 16

Deferred tax liability

Answer 16

= beg def tax liability - end def tax liability

Question 17

Ending Def Tax liability

Answer 17

= tax rate X future taxable difference

Question 18

Current provision of income tax

Answer 18

= Year’s income tax payable

Question 19

Income tax expense

Answer 19

= current inc tax provision +/- deferred provision

Question 20

Deferred tax accounts

Answer 20

Current is for a current account.
Noncurrent is for a non-current account.
Except future differences associated with more than one account.

Question 21

Depreciation classification?

Current or noncurrent?

Answer 21

Non-current - because plant assets are classified as noncurrent

Question 22

Uncertainty in income tax

Answer 22

If there is at least 1/3 probability that tax position will be sustained, no legal or professional issues.

Question 23

Uncertain tax position with >50% probability of being sustained

Answer 23

Use dollar amount associated with largest amount with probability greater than 50%. Note, these are cumulative probabilities not multiplicative.

Question 24

Net operating losses

Answer 24

Deductions exceed taxable revenues. Can be carried back 2 years and forward 20 years. Value is the tax saved!

Question 25

NOL J/E

Answer 25

Income Tax Refund Receivable
Income Tax Benefit - NOL CB

If not fully used:
Deferred Tax Asset (value = $ X T%)
Income Tax Benefit - NOL CF

Question 26

NOL I/S

Answer 26

Pretax Income
Income Tax Benefit (sum of CB CF in year)
Net Income (loss)

Question 27

Ending Deferred Tax Asset =

Answer 27

= sum of future deductible differences, including NOL CF, X future tax rate.

Subtract beginning DTA balance to get the change.

Question 28

Income tax benefit(expense)

Answer 28

= Ending balance - Beginning balance