CH 18: Income Taxes

Occurs when Asset GAAP Basis > Asset Tax Basis

DTL

Temporary difference caused by a DTL=

Asset GAAP basis - Asset Tax Basis

Temporary difference that increases future taxable income (when the difference is reversed in future years)

DTL

Temporary difference that causes taxable income now to be lower (than GAAP basis) but will be greater later

DTL

DTL to credit =

Taxable temporary difference x tax rate in year of reversal

What is the entry to record a DTL?

d Inc Tax Exp
c DTL

What are the examples of DTLs? (6)

Installment sales
Investment account under FV-NI
Basis of equity method investment
Prepaid expenses
Fixed assets higher on GAAP
Purchase Intangible assets (higher for GAAP)

What is the entry to account for current tax payables

d Int tax exp
c Current tax pay

What is the JE to record at the end of the year for DLTs

d Income Tax Exp
c DTL and Inc Tax Exp

When the DTL is realized, what JE is is recorded at YE

d Income Tax Exp and DTL
c Income tax exp

Taxable temporary difference that occurs when Liability GAAP Basis > Liability Tax Basis

DTA

Taxable temporary difference that decreases future taxable income when the difference is reversed

DTA

Taxable temporary difference resulting in Higher Taxable income TODAY that will be lower in the future

DTA

Taxable temporary difference due to a DTA=

Deductible temporary difference x tax rate in effect year of reversal

What is the entry to record a DTA

d DTA
c Inc Tax Exp

Ex of temporary difference caused by a ___: Advances from customers received for services to be performed in the future are deterred for GAAP, but are taxable when collected.

DTA

Ex of temporary difference caused by a ___: Bad debts are estimated and expensed at the time of sale for GAAP purposes, but are deductible when the account is formally written off for tax purposes.

DTA

Ex of temporary difference caused by a ___: Costs related to a potential product recall are accrued for GAAP purposes but are not deductible for tax purposes unless costs are actually incurred and paid

DTA

Ex of temporary difference caused by a ___: Six month prepayment of a prepaid expense for GAAP purposes, but deductible when paid for tax purposes

DTL

Because DTA’s are an ASSET on the books, you must test for impairment using:

valuation allowance

contra asset account is recorded for the portion of the deferred tax asset that more likely than not (>50%) will not be realized

valuation allowance

What is the JE to record initial Valluation allowance

Inc Tax Exp
Valuation Allowance (cr)

differences that never reverse; do not result in DTA or DTL (temp diff); income tax exp =income tax for period

permanent differences

What are examples of permanent differences that come from GAAP Revenue? (2)

Interest Rev on Exempt Muni Bond
Proceeds from Life Insurance Policy

What are examples of permanent differences that come from GAAP Expense? (2)

Fines and expenses related to legal violations
Premiums paid on life insurance policies

___ permanent differences that are revenue from GAAP to get tax rev

subtract

___ permanent differences that are expenses from GAAP to get tax income

Add

Companies must disclose a reconciliation between the US ___ rate and the ___rate

Statutory and Effective

Permanent differences impact the ___ tax rate

effective

legally imposed rate

statutory rate

income tax expense / pretax GAAP income

effective rate

effective tax rate =

income tax exp / pretax GAAP inc

What affects rate reconciliation? (4)

Permanent differences
State income tax
Tax Credits
Change in Valuation Allowance

True or False: A permanent difference never reverses

True

True or False: Considering only permanent differences, income tax expense on the I/S would equal income taxes on the tax return

True

True or False: Corporate bond interest revenue is an example of a permanent difference

False

True or False: The effective tax rate often differs from the statutory tax rate due to permanent differences

True

Recognize adjustments in NI in the period that the new tax rate is:

enacted into law

What is the tax rate decrease due to: DTA balance decreases and income tax exp ___.

increases

What is the tax rate decrease due to: DTL balance decreases and income tax exp ___.

decreases

Due to a decrease in the enacted tax rate effective for the following year, a company with a net DTA balance will recognize a:

decrease in income tax expense in the current year

negative taxable income for the period; company has no tax obligation for the period

Net Operating Loss (NOL)

NOL can be carried forward:

indefinitely

NOL can offset a maximum of ___ of taxable income in future years

80%

The effects of an NOL result in a:

DTA

Because an NOL is a DTA ___ is required

valuation allowance

If you accrue rev for GAAP, you create a:

DTL

If you accrue exp, you create a:

DTA

If you have a temporary difference that leads to a DTL, ___ the difference from GAAP to get Taxable income

subtract

If you have a temporary difference that leads to a DTA, ___ the difference from GAAP to get Taxable income

add

For a permanent difference that is an expense, ___ permanent difference

add

For a permanent difference that is an revenue , ___ permanent difference

subtract