Intermediate Account 1 Exam 2

basic earnings per share→only cumulative topic

(net income-preferred dividends)/weighted average common shares outstanding

Preferred Dividend Calculation

(Par Value per share \* outstanding shares)\* dividend rate

Temporary Differences (3 accounts)

Transactions treated differently between book and tax that’ll reverse over time.


1. Bad debt expense(ADA vs Write off)→ deferred tax asset
2. Depreciation Expense(Straight-line vs MACRS) → deferred tax liability
3. Unearned Revenue(Liability vs. Cash) → deferred tax asset

Deferred tax asset/liability

Always non-current

\-future deduction=DTA

\-future liability=DTL

Permanent Differences(PDs)-3 and their effect on taxable income

1. Municipal Bond Interest→ decreases taxable income
2. Meals and Entertainment→ increases taxable income
3. Fines/Penalties→ increases taxable income

Formula for calculating debit to income tax expense

(Net Income before Tax(NIBT) +/- permanent differences)\*Tax Rate= dr. income tax expense

Formula for calculating DTA or DTL

Temporary differences \* Tax rate

Temporary difference=book value-tax value

if negative→ DTL

if positive→ DTA

Formula for calculating credit to income tax payable

NIBT, after PDs +/- temporary differences=taxable income \* TR= cr. income tax payable

Effective Tax Rate Calculation (ETR)

income tax expense/NIBT

Accounting for income taxes example

Review take home 2

NOL example-($100,000) tax loss in 2021 and $80,000 taxable income in 2022. Journal entries for 2021 and 2022 at 21% tax rate.

2021 JEs

dr. DTA-NOL→$21,000(100,000\*.21)

cr. Income Tax Expense→$21,000

2022 JEs

dr. Income tax expense→$16,800(80,000\*.21)

cr. DTA→$13,440((80,000\*.8)\*.21)

cr. Income tax payable→$3,360((80,000\**.2)**.21)

Uncertainty in net operating loss(NOL)

If uncertain about ability to use NOL at some point in the future multiply DTA by the % of uncertainty.

dr. ITE

cr. valuation allowance

Cost Capitalization

\-Start-up costs and R&D are all expensed→ can’t be capitalized

\-”costs incurred to bring asset to its intended use”

\-interest and property taxes can be capitalized until “placed in service”

Direct Write-off method

dr. BDE

cr. A/R

write-off of ADA journal entry

dr. ADA

cr. A/R

recovery(or reinstatement) of write-off journal entry

1\.)

dr. A/R

cr. ADA

2\.)

dr. Cash

cr. A/R

Balance Sheet Approach

A/R balance or A/R aging→ balance in ADA

Income Statement Approach

credit sales \* %→ dr. BDE cr. ADA

Net Realizable Value of A/R equation

A/R minus ADA

What would a debit in ADA mean(ADA is a credit account)

More accounts have been written off then had been estimated

Notes Payable with weird dates (i.e period starting 2/1)

1\.) Amortization table

2\.) Journal Entries

a. record borrowing

dr. cash

cr. note payable

b. record interest payable(11/12 if 2/1)

dr. interest expense

cr. interest payable

c. record payment

dr. interest payable, interest expense, n/p

cr. cash

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Notes payable with normal dates (i.e period starting 1/1)

1\.) Amortization table

2\.) Journal entries→ NO INTEREST PAYABLE

a.) record borrowing

dr. cash

cr. note payable

b.) record payment

dr. interest expense

dr. note payable

cr. cash

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Imputed Interest Problem

  Interest based on the implicit (fair value) interest rate.


1. Amortization table at standard rate
2. Amortization table at market rate
3. Journal entries

Journal Entries for Imputed Interest

1. 1/1

dr. equipment

dr. discount on note payable

cr. note payable
2. 12/31

dr. note payable→ always comes from stated rate table

dr. interest expense→ must come from market rate table

cr. cash

cr. discount on np
3. 12/31-don’t have if borrowing cash

dr. depreciation expense

cr. accumulated depreciation

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Lease Classification Criteria

If one or more criteria are met→ finance lease

if none of the criteria are met→ operating lease


1. ownership of the asset transfers to the lessee→ have to be told
2. bargain purchase option→ have to be told
3. lease term is for major part (greater than or equal to 75%) of the life of the asset→ calculate
4. PV of lease payments greater than or equal to 90% of the fair value of the asset→ calculate
5. specialized nature→ have to be told

First lease payment entry (for either operating or finance lease)

1/1

dr. right-of-use asset→ PV of lease payments

cr. lease liability

\
dr. lease payable

cr. cash

Second lease payment entry(when payment is beginning of each year)→ financing lease

12/31

dr. Interest expense(TR\*(PV-lease payment))

cr. Interest payable

\
dr. amortization expense(PV/N)

cr. right-of-use asset

\
dr. lease liability-LT

cr. lease liability-ST

Second lease payment entry(when payment is beginning of year)→ operating lease

12/31

dr. Interest expense (TR\*(PV-lease payment))

cr. Interest payable

DIFFERENCE

dr. Amortization expense(lease payable)

cr. right-of-use asset

\
dr. lease liability-LT

cr. lease liability-ST