Intermediate Accounting Chapter 19 Accounting For Income Taxes

Pretax financial Income

Income before taxes

Taxable Income

Indicates the amount used to compute income taxes payable

Taxable income of a corporation

differs from accounting income due to differences in inter-period allocation and permanent differences between the two methods of income determination

The deferred tax expense is the

increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.

A major distinction between temporary and permanent differences is

temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

Product warranty liabilities

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?

An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.

Which of the following differences would result in future taxable amounts?

Expenses or losses that are tax deductible before they are recognized in financial income.

An example of a permanent difference is

a. proceeds from life insurance on officers.

b. interest expense on money borrowed to invest in municipal bonds.

c. insurance expense for a life insurance policy on officers.

Which of the following is not considered a permanent difference?

Stock-based compensation expense

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be

reported as an adjustment to tax expense in the period of change.

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

the future tax rates have been enacted into law.

Recognition of tax benefits in the loss year due to a loss carryforward requires

the establishment of a deferred tax asset

Recognizing a valuation allowance for a deferred tax asset requires that a company

consider all positive and negative information in determining the need for a valuation allowance.

Uncertain tax positions

Are positions for which the tax authorities may disallow a deduction in whole or in part.

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

it is more likely than not that the tax position will be sustained upon audit.

Major reasons for disclosure of deferred income tax information is (are)

a. better assessment of quality of earnings.

b. better predictions of future cash flows.

c. that it may be helpful in setting government policy

Accounting for income taxes can result in the reporting of deferred taxes as any of the following except

a contra-asset account.

Deferred taxes should be presented on the balance sheet

in two amounts: one for the net current amount and one for the net noncurrent amount.

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

the classification of the related asset or liability.

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

based on the classification of the related asset or liability for financial reporting purposes.

All of the following are procedures for the computation of deferred income taxes except to

measure the total deferred tax liability for taxable temporary differences

Temporary difference

Is the difference between the tax basis of an asset or liability and its report amount in the financial statement

Taxable Amounts

Increase taxable income in future years

Deductible Amounts

Decrease taxable income in the future years

Deferred Tax Liability

Is the deferred tax consequences attributable to taxable temporary differences

Represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year

Deferred Tax Liability

Current Tax expense

The amount of income taxes payable for the period

Deferred Tax Expense

Is the increase in the deferred tax livability

Deferred Tax Asset

Is the deferred tax consequence attributed to deductible temporary differences

Represents the increase in taxes refundable ( or save) in the future years as a result of deductible temporary differences exiting at the end of the current year

Deferred Tax Asset

Deferred Benefit

Results from the increase in the deferred tax asset from the beginning to the end of the accounting period

Valuation Allowance

The portion of a deferred tax asset for which It is more like that not that a company will not realized a tax benefit

Reversing Difference

Occurs when eliminating q temporary difference that originated in prior periods

Permanent Differences

Result from items that

1. enter into pretax financial income but never into taxable income

2. enter into taxable income but never into pretax financial income

Net Operating Loss (NOL)

Occurs for tax purposes in a year when tax- deductible expenses exceed taxable revenues

Current Tax Benefit

The amount of income taxes paid or payable (or refundable) for a year as determined by applying the provisions of the enacted tax law to taxable income or excess of deductions over revenues for the year

Carrybacks

Deductions or credits that cannot be utilized on the tax return during a year and that may be carried back to reduce taxable income or taxes paid in a prior year

Carryforward

Deductions or credits that cannot be utilized on the tax return during a year and that may be carried forward to reduce taxable income or taxes payable in the future year.