Income Taxes- Income Tax basis

Question 1

What is tested?

Answer 1

• Know how to calculate current and deferred
• Permanent difference
• Temporary difference
• What rates to use
• When to use valuation allowance

Question 2

What are the two components of tax?

Answer 2

Current Tax Provision (Current Income Tax Expense/Benefit). Based on Taxable Income.

Deferred Income Tax Expense/Benefit: Changes in assets/liabilities (creation of DTL/DTA)

Question 3

What is inter period tax allocation?

Answer 3

Requires allocation of taxes of a period of time

Timing difference between income for financial reporting and income on the tax return.

This results in deferred tax liabilities and deferred tax liabilities.

Question 4

Example Problem: Assume that Skywalker, has $160 of operating revenues and $40 of operating expenses. Additional information:

Temporary Difference: Included in GAAP revenue is $20 worth of service with payment expected next year. This revenue is not taxed until received in cash.

Permanent difference: In addition to the operating results, there is $10 of tax-exempt interest on bonds by the State of Texas. There is no federal income tax levied on such interest.

Answer 4

GAAP Income: $130
Permanent Difference: (10)
Adjusted net income. $120
Temporary Difference $(20) x .30 = $6
Taxable Income: $100. X.30= 30

Journal Entry:
Income Tax Expense. $36
Deferred Income Tax. ($6)
Income Tax Payable. $30

Question 5

How do you determine income tax expense:

Answer 5

1) Determine current income tax payable
2) Calculate deferred tax liabilities (DTL) and DTA
- Based on changes in accrual based assets and liabilities
- Based on enacted rate
3) Tax Expense (provision)
- has a current and deferred component

Question 6

When is a temporary difference created?

Answer 6

When asset or liabilities reported on the tax return is different from the GAAP financial statement. That will result in a future taxable or deductible amount.

Question 7

TABLE OF DTA/DTL

Answer 7

GAAP ASSET > TAX VALUE
NOW: GOOD
FUTURE: BAD
RESULT: DTL (Taxable)

GAAP LIABILITIES > TAX VALUE
NOW: BAD
FUTURE: GOOD
RESULT: DTA (deductible)

GAAP ASSET < TAX VALUE
NOW: BAD
FUTURE: GOOD
RESULT: DTA (deductible)

GAAP LIABILITIES < TAX VALUE
NOW: GOOD
FUTURE: BAD
RESULT: DTL (Taxable)