Lecture 20

Question 1

GAAP determines…

Answer 1

amount of pre-tax income to reported in IS

TAX EXPENSE

Question 2

Tax code determines…

Answer 2

amount of taxable income to be reported to taxing authority for each period

TAXES PAYABLE

Question 3

differences for revenues

Answer 3

(amounts collected in advance, ex. rent)
GAAP: included in income when EARNED

Tax code: taxable when RECEIVED

Question 4

differences for expenses

Answer 4

(ex. depr of PPE)
GAAP: different depr methods used

Tax code: ONLY MACRS accepted

Question 5

differences for tax-exempt muni bonds

Answer 5

GAAP: included in income as it is earned (passage of time)

Tax code: never included

Question 6

temporary differences

Answer 6

timing differences

over passage of time, differences wash out

Question 7

journal entry for deferred tax liability

Answer 7

income tax exp

       income tax payable
       deferred tax liability

Question 8

deferred tax liability is a ___ account

Answer 8

balance sheet

cumulative

Question 9

deferred tax liability

Answer 9

company records tax expense in IS before actual payment is made to IRS

Question 10

income tax expense =

Answer 10

current income tax payable +/- CHANGE IN deferred tax liability/asset

Question 11

ending balance in deferred tax liability /asset =

Answer 11

taxable difference * applicable enacted tax rate

Question 12

asset-liability approach

Answer 12

1. calculate current tax liability/asset
2. calculate deferred tax liability/asset
3. adjust deferred tax liability/asset to desired EB
4. tax exp follows from above calculations

Question 13

originating diffs

Answer 13

timing diffs that create/increase deferred asset/liability

Question 14

reversing diffs

Answer 14

timing diffs that remove/decrease deferred asset/liability

Question 15

deferred tax asset

Answer 15

income tax exp is less than amount of income tax payable

Question 16

journal entry for deferred tax asset

Answer 16

income tax exp
deferred tax asset

         income tax payable

Question 17

NOL

Answer 17

net operating loss

occurs for tax purposes in a year when tax-deductible EXPENSES exceed taxable REVENUE

Question 18

loss carryback

Answer 18

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)

Question 19

loss carryforward

Answer 19

firm can carry NOL forward to offset any income earned in up to 20 YEARS SUBSEQUENT TO LOSS YEAR

Question 20

valuation allowance for DTA is a ___ account

Answer 20

contra asset account

BALANCE SHEET

Question 21

what happens if it’s more likely than not to realize some portion of deferred tax benefit?

Answer 21

If prob > 50% that they wont realize some portion of benefit, deferred tax asset should be reduced by valuation allowance

Question 22

journal entry for when some of benefit won’t be realized

Answer 22

Income tax exp

      valuation allowance for DTA

Question 23

effective tax rate =

Answer 23

income tax exp / income before taxes

Question 24

if GAAP income before taxes and taxable income are the same,

Answer 24

effective tax rate = statutory tax rate

TRUE even if there are timing differences b/w taxable income and pre-tax income

Question 25

permanent differences result in

Answer 25

difference b/w effective tax rate & statutory tax rate

Question 26

permanent difference

Answer 26

rev/exp is included in one but NOT the other

will never revers, it can’t give rise to deferred tax asset/liability

Question 27

current deferred tax expense =

Answer 27

timing difference * tax rate

Question 28

when you carry forward a NOL, what happens to taxes payable in that year

Answer 28

taxes payable gets eliminated