Lecture 20 Flashcards
GAAP determines…
amount of pre-tax income to reported in IS
TAX EXPENSE
Tax code determines…
amount of taxable income to be reported to taxing authority for each period
TAXES PAYABLE
differences for revenues
(amounts collected in advance, ex. rent)
GAAP: included in income when EARNED
Tax code: taxable when RECEIVED
differences for expenses
(ex. depr of PPE)
GAAP: different depr methods used
Tax code: ONLY MACRS accepted
differences for tax-exempt muni bonds
GAAP: included in income as it is earned (passage of time)
Tax code: never included
temporary differences
timing differences
over passage of time, differences wash out
journal entry for deferred tax liability
income tax exp
income tax payable
deferred tax liability
deferred tax liability is a ___ account
balance sheet
cumulative
deferred tax liability
company records tax expense in IS before actual payment is made to IRS
income tax expense =
current income tax payable +/- CHANGE IN deferred tax liability/asset
ending balance in deferred tax liability /asset =
taxable difference * applicable enacted tax rate
asset-liability approach
- calculate current tax liability/asset
- calculate deferred tax liability/asset
- adjust deferred tax liability/asset to desired EB
- tax exp follows from above calculations
originating diffs
timing diffs that create/increase deferred asset/liability
reversing diffs
timing diffs that remove/decrease deferred asset/liability
deferred tax asset
income tax exp is less than amount of income tax payable
journal entry for deferred tax asset
income tax exp
deferred tax asset
income tax payable
NOL
net operating loss
occurs for tax purposes in a year when tax-deductible EXPENSES exceed taxable REVENUE
loss carryback
firm can carry NOL back 2 YEARS to offset any income earned in those years and receive refunds for taxes paid
must apply to earlier year first (2005 before 2006)
loss carryforward
firm can carry NOL forward to offset any income earned in up to 20 YEARS SUBSEQUENT TO LOSS YEAR
valuation allowance for DTA is a ___ account
contra asset account
BALANCE SHEET
what happens if it’s more likely than not to realize some portion of deferred tax benefit?
If prob > 50% that they wont realize some portion of benefit, deferred tax asset should be reduced by valuation allowance
journal entry for when some of benefit won’t be realized
Income tax exp
valuation allowance for DTA
effective tax rate =
income tax exp / income before taxes
if GAAP income before taxes and taxable income are the same,
effective tax rate = statutory tax rate
TRUE even if there are timing differences b/w taxable income and pre-tax income
permanent differences result in
difference b/w effective tax rate & statutory tax rate
permanent difference
rev/exp is included in one but NOT the other
will never revers, it can’t give rise to deferred tax asset/liability
current deferred tax expense =
timing difference * tax rate
when you carry forward a NOL, what happens to taxes payable in that year
taxes payable gets eliminated
