Income Taxes Pt. 1 Flashcards
What is intraperiod tax allocation?
it involves apportioning the total tax provision for financial accounting purposes in a period between the income or loss from: income from continuing operations, discontinued operations, accounting principle change (retrospective), other comprehensive income, and components of stockholders’ equity
any amount not allocated to continuing operations is allocated to other income statement items, other comprehensive income, or to shareholders’ equity in proportion to their individual effects on income tax or benefit for the year; such items are shown net of their related tax effects
What is interperiod tax allocation?
the objective is to recognize through the matching principle the amount of current and future tax related to events that have been recognized in financial accounting income
current year taxes: payable (liability) or refundable (asset)
future year taxes: deferred tax asset or deferred tax liability
there are two types of differences between pretax GAAP financial income and taxable income; all differences are either permanent differences or temporary differences
permanent differences - enter into pretax GAAP financial income but never enter into taxable income (and vice versa); they do not affect the deferred tax computation; they only affect the current tax computation; these differences affect only the period in which they occur; they do not affect future financial or taxable income
temporary differences - enter into pretax GAAP financial income in a period before/after they enter into taxable income; these differences should be recognized in the financial statement until the difference turns around completely
What is comprehensive allocation?
the asset and liability method (aka balance sheet approach) is required by GAAP for comprehensive allocation; under comprehensive allocation, interperiod tax allocation is applied to all temporary differences; the asset and liability method requires that either income taxes payable or a deferred tax liability (asset) be recorded for all tax consequences of the current period
total income tax expense/benefit can be depicted as follows:
total income tax expense/benefit = current income tax payable or refundable as determined on the corporate tax return +/- change in the deferred income tx asset or liability from the beginning to the end of the reporting period
total tax expense for financial statements is the combination of current tax plus or minus deferred taxes; the CPA examiners frequently provide an incorrect calculation of financial statement income times the current tax rate; this is an incorrect method to determine the total expense for the following reasons: use of financial statement income (which has permanent differences) is incorrect and the use of the current tax rate ignores future changes to the enacted rate
What are permanent differences?
a transaction that affects only income per books or taxable income, but not both; income tax expense for a period is calculated only on taxable items; in effect, permanent differences create a discrepancy between taxable income and financial accounting income that will never reverse
because they do not reverse themselves, no interperiod tax allocation is necessary for permanent differences; the income tax provision for financial accounting purposes is computed on the basis of pretax book income adjusted for all permanent differences
What are temporary differences?
they can be classified as either a deferred tax liability (DTL) or a deferred tax asset (DTA)
DTL - they are anticipated future tax liabilities derived from situations in which future taxable income will be greater than future financial accounting income due to temporary differences; all deferred tax liabilities are recognized on the balance sheet
DTA - they arise when the amount of taxes paid in the current period exceeds the amount of income tax expense in the current period; they are anticipated future benefits derived from situations in which future taxable income will be less than future financial accounting income due to temporary differences
valuation allowance (contra-account) - if it is more likely than not (a likelihood of more than 50%) that part or all of the deferred tax asset will not be realized, a valuation allowance is recognized; the net deferred tax asset should equal that portion of the deferred tax asset which, based on available evidence, is more likely than not to be realized
