Chapter 16

What are the 5 terms commonly used for US GAAP

income statement, accounting income, income tax expense, book value, book

what are the 5 terms commonly used for IRS reporting

tax filing, taxable income, income tax payable, tax basis, tax

deferred tax asset is usually a

debit account

deferred tax liability is usually a

credit account

why are there differences between accounting income and taxable income (2)

1. bc there are different rules between US GAAP and IRS Reporting

   1. they have different objectives

what is the purpose of US GAAP

for shareholder/creditor to make informed decision about the company

what is the purpose of IRS reporting

government wants revenue, to ensure compliance, and influence behaviors

what is temporary differences

diff. between taxable income and pretax accounting income that occur when tax rule and accounting rules recog. income in diff. period

temporary differences…in one period and…in one or more subsequent periods

originate, reverse

what is a DTL

when tax law allow company to postpone paying taxes on activity reported on current period’s income statement

the company anticipates that activity associated with DTL will lead to

future taxable amounts

what is DTA

when tax law require company to pay more tax than is indicated by the activities reported in the current period’s income statement

DTA activities reflect the…

benefit of future deductible amounts

what are the 4 steps to determining income tax expense

1. calculate income tax payable using taxable income

2. calculate ending balances for DTA or DTL (diff multiply by tax rate)

3. calculate changes in DTA or DTL (if acct have bb)

   1. Plug income tax expense (use acct income if provided)

when do we use income tax benefit

when income tax expense is a credit

acct income > taxable income

DTL

acct income < taxable income

DTA

Examples of gain DTL (2)

1. installment sales of property

2. unrealized gain from recording investment at fair value

examples of loss DTL (2)

1. accelerated depreciation on tax return in excess of straight-line depr in income statement

2. prepaid expenses (tax deductible when paid)

Example of gain DTA (3)

1. rent collected in advance

2. subscriptions collected in advance

3. other revenue collected in advance

Example of loss DTA (2)

1. estimated expenses and losses

2. unrealized loss from recording investments at fair value or inventory at LCM

US GAAP uses what method

accrual

IRS reporting uses what method

cash

future taxable amount indicates

DTL

future deductible amount indicates

DTA

use…to determine income tax payable

taxable income

use…, if given, to determine income tax expense

accounting income

the deferred tax liability each year is

the tax rate times the temp diff btw the financial statement carrying amt of receivable and its tax basis

to determine taxable income, add back to pretax accounting income any… on the income statement, then subtract…on tax return

depreciation expense, tax deduction for depr

the tax basis of an asset or liability is

its original value for tax purposes, reduced by any amounts included to date on tax return

lower taxable income now means what later

higher taxable income, which equates to DTL

higher taxable income now means what later

lower taxable income, which equates to DTA

when is valuation allowance needed

if it is more likely than not that some or all of a DTA will not be realized

how is valuation allowance recorded on the bs

contra asst

when valuation allowance increases, what account also increases

income tax expense

the key factor is…

whether there will be sufficient future taxable income for benefit to apply

valuation is reported at a… amount on BS

net

what is the difference between US GAAP and IFRS in terms of valuation allowance

valuation allowance is only recorded under US GAAP bc DTA not recorded in IFRS unless not likely or probably to be recognized making valuation non-existent

what is permanent differences

book tax income differences that will not reverse in a later year

what are examples of permanent differences (2)

municipal bonds and proceeds from life insurance

no DTL or DTA is created for permanent differences bc

the difference will not be reconciled in the future

a permanent difference that reduces pretax income will

increase the effective tax rate

permanent differences that increases pretax income will

reduce the effective tax rate

we only recognize…not anticipated rates

enacted tax rates

in the yr of rate change, DTA and DTL should be… with the effect shown in…

adjusted, income tax expense

what is net operating loss

negative taxable income where tax deductible expenses exceed taxable revenues

what are NOL carryforward

they offset future taxable income as future deductions

a max of…taxable income in a given year can…

80%, carryforward indefinately

NOL carryforward is recognized as a

DTA

we debit a DTL sometimes bc

we need to remove the DTL before we can recognize DTA

all DTLs, DTAs, and valuation allowance against DTAs are classified as

non-current

when deferred tax account relate to same tax paying component of company and same tax jurisdiction, they are…

netted

what do we have to make disclosure notes for (4)

1. income tax exp calculation (if not explicit)

2. DTA, DTL explain what relate to (depr diff?)

3. NOl carryforward (how much NOL carryforward left?)

4. effective tax rate reconciliation (why diff?)

what is the 2 step decision process for uncertainty in income taxes

1. tax benefit may only be reflection in financials for questionable position if it more likely than not that position will win

2. tax benefits should be measured as largest amount of benefit that is cumulatively greater than 50% likely to be realized

if step 1 on the 2 step decision process of uncertainty in income taxes are not met…

debit full tax expense amount, credit uncertain position as liability - uncertain tax position