Lesson 10 Flashcards
What is pretax financial income?
Referred to has income before taxes. It is a financial reporting term. Corporations determine pretax according to GAAP.
What is taxable income?
It indicates the amount used to compute income taxes payable. Companies determine taxable income according to the IRS tax code. It is a tax accounting term, and it indicates the amount used to compute income taxes payable.
What is a temporary difference?
It is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements, which results in taxable amounts or deductible amount in the future.
Taxable amounts ___________ taxable income in future years. Deductible amounts __________ taxable income in future years.
Increase
Decrease
What is a deferred tax liability?
It is the deferred tax consequences attributable to taxable temporary differences.
It represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.
What are the 2 components of income tax?
- Current tax expense
- Deferred tax expense
What is current tax expense?
The amount of income taxes payable for the period.
What is deferred tax expense?
It is the increase in the deferred tax liability balance from the beginning to the end of the accounting period.
For tax purposes, the warranty tax deduction is ________ allowed until paid.
Not
The company recognizes no warranty liability on a tax basis balance sheet.
What is a deferred tax asset?
A positive tax consequence.
They are tax deductions that will result from the future settle of the liability.
It represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.
What is a valuation allowance?
A company should reduce a deferred tax asset by a valuation allowance based on evidence that it is more likely than not that it will not realize some portion or all of the deferred tax asset.
What is a valuation allowance?
A company should reduce a deferred tax asset by a valuation allowance based on evidence that it is more likely than not that it will not realize some portion or all of the deferred tax asset.
Use the following information regarding Cooper Company:
Cooper’s tax rate is 20%
Taxable Income for three years: 2020 - $500,000; 2021 - $375,000; 2022 - $400,000
On January 2, 2020, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below:
2020: $264,000
2021: $360,000
2022: $120,000
2023: $56,000
2024: $0
Additionally, on January 2, 2021, $360,000 was collected in advance for rental of a building for a three-year period. The entire $360,000 was reported as taxable income in 2021, but $240,000 of the $360,000 was reported as unearned revenue at December 31, 2021 for book purposes.
What is the net deferred tax liability or asset (benefit) for 2021?
$8,000 Deferred tax asset (benefit)
The net deferred tax benefit is calculated as the difference between the deferred tax (benefit) and the deferred tax liability calculated below: The deferred tax asset (benefit) at the end of 2021 is $48,000 ($240,000 future deductible amount x 20% tax rate) minus: The deferred tax (asset or benefit) at the beginning of 2021 is zero (There was no difference in rent during 2020) equals $48,000 Deferred Tax Liability for equipment: * MACRS depreciation in 2020 = 264,000 * MACRS depreciation in 2021 = 360,000 * = total MACRS depreciation = 624,000 * Less: 2 years of FASB depreciation – 320,000 * Net Difference = $304,000 future taxable amount The deferred tax liability or expense at the end of 2021 is $60,800 ($304,000 future taxable amount x 20% tax rate) minus: The deferred tax liability or expense at the beginning of 2021 is $20,800 equals: 40,000 The $20,800 is the difference between the beginning of 2021 deferred tax of $60,800 less the $40,000 ending of 2021 deferred tax. Deferred tax (benefit) of $48,000 minus: Deferred tax expense of $40,000 equals: net deferred tax (benefit) for 2021 of ($8,000)
What is required for a company when recognizing a valuation allowance for a deferred tax asset?
Consider all positive and negative information in determining the need for a valuation allowance.
What is Income tax payable is based (computed) on?
Taxable income
