intermediate nbj ch19

8/17/2019 Intermediate Nbj Ch19

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Accounting for Income

Taxes

Chapter19

An electronic presentation

by Norman Sunderman

Angelo State University

An electronic presentation

by Norman Sunderman

Angelo State University

COPYRIGHT © 2007 Thomson South-Western, a part o The Thomson Corporat!on"Thomson, the Star #o$o, an% South-Western are tra%emar&s use% here!n un%er #!'ense"

Intermediate AccountingIntermediate Accounting 10th edition 10th edition

Nikolai Bazley onesNikolai Bazley ones


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2

1! Understand permanent and temporary

di""erences!

#! $%plain the conceptual issues

regarding interperiod ta% allocation!

&! 'ecord and report de"erred ta%

liabilities!

(! 'ecord and report de"erred ta% assets!)! $%plain an operating loss carryback

and carry"or*ard!

Objectives


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+! Account "or an operating loss carryback!

,! Account "or an operating loss

carry"or*ard!

-! Apply intraperiod ta% allocation!

.! Classi"y de"erred ta% liabilities and

assets!

Objectives


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4

1! Because there are di""erences bet*een *hen anevent is recognized "or ta% purposes and *hen itis recognized "or "inancial purposes/ there *ill be

di""erences bet*een ta% e%pense on the incomestatement and ta%es actually paid!

#! he obective o" accounting "or income ta%es onthe accrual basis is to recognize the amount o"

current and de"erred ta%es payable or re"undableat the date o" the "inancial statements!

1! Because there are di""erences bet*een *hen anevent is recognized "or ta% purposes and *hen itis recognized "or "inancial purposes/ there *ill be

di""erences bet*een ta% e%pense on the incomestatement and ta%es actually paid!

#! he obective o" accounting "or income ta%es onthe accrual basis is to recognize the amount o"

current and de"erred ta%es payable or re"undableat the date o" the "inancial statements!

ContinuedContinued

ContinuedContinued

Differences Between Taxable and

Financial Income


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&! hese di""erences re2uire the use o" 3e"erredIncome a% accounts to re"lect the ta%conse2uences o" events recognized in di""erent

periods "or "inancial and ta% reporting!(! 'ecognition o" de"erred ta% liabilities and

de"erred ta% assets is re2uired "or domestic"ederal income ta%es/ and "oreign/ state/ and local4including "ranchise5 ta%es based on income!

&! hese di""erences re2uire the use o" 3e"erredIncome a% accounts to re"lect the ta%conse2uences o" events recognized in di""erent

periods "or "inancial and ta% reporting!(! 'ecognition o" de"erred ta% liabilities and

de"erred ta% assets is re2uired "or domestic"ederal income ta%es/ and "oreign/ state/ and local4including "ranchise5 ta%es based on income!

Differences Between Taxable and

Financial Income


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he obective o" "inancial

reporting is to provide

use"ul in"ormation about

companies to decisionmakers!

he obective o" "inancial

reporting is to provide

use"ul in"ormation about

companies to decisionmakers!

Income

State-

ment

Income

Tax

Return

Overview and Definitions


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Income

State-

ment

Income

Tax

Return

6rees Corporation

Income Statement

6or 7ear $nded 1#8&180,

'evenues 91-0/000

Cost o" goods sold 4,-/0005

:ross pro"it 910)/000

;ther e%penses 4+0/0005


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Income

State-

ment

Income

Tax

Return

6rees Corporation

Income a% 'eturn

6or 7ear $nded 1#8&180,

'evenues 91,0/000

Cost o" goods sold 4,0/0005

:ross pro"it 9100/000

;ther e%penses 4+0/0005


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1! Should corporations be re2uired to makeinterperiod income ta% allocations "ortemporary di""erences/ or should there be nointerperiod ta% allocation=

#! I" interperiod ta% allocation is re2uired/ shouldit be based on a comprehensive approach "orall temporary di""erences or on a partialapproach "or certain temporary di""erences=

&! Should interperiod ta% allocation be appliedusing the asset8liability method or the de"erredmethod=

Conceptual Issues


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he 6ASB concluded that>>

Interperiod income ta% allocation o"

temporary di""erences is appropriate! he comprehensive allocation approach is

to be applied!

he asset8liability method o" income ta%

allocation is to be used!

Conceptual Issues


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Some items o" revenue and

e%pense that a corporation

reports "or "inancialaccounting purposes are

never reported "or income

ta% purposes! hese

permanent differences neverreverse in a later accounting

period!

Permanent Differences


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'evenues that are recognized "or"inancial reporting purposes but are

never ta%able1! Interest on state and local government

bonds

#! ?i"e insurance proceeds payable to acorporation upon death o" insured

'evenues that are recognized "or"inancial reporting purposes but are

never ta%able1! Interest on state and local government

bonds

#! ?i"e insurance proceeds payable to acorporation upon death o" insured

ContinuedContinuedContinuedContinued


15


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$%penses that are recognized "or"inancial reporting purposes but are

never deductible "or income ta%

purposes1! ?i"e insurance premiums on o""icers

#! 6ines resulting "rom a violation o" the

la*&! $%penses incurred in obtaining ta%>

e%empt income

$%penses that are recognized "or"inancial reporting purposes but are

never deductible "or income ta%

purposes1! ?i"e insurance premiums on o""icers

#! 6ines resulting "rom a violation o" the

la*

&! $%penses incurred in obtaining ta%>

e%empt income




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Corporations receive a ,0

deduction "or dividends received i"

less than #0 o" a U!S! corporation is

o*ned/ an -0 deduction "or

dividends received i" -0 or less o" a

U!S! corporation is o*ned/ and a

100 deduction "or dividends

received i" more than -0 o" a U!S!

corporation is o*ned!

Corporations receive a ,0

deduction "or dividends received i"

less than #0 o" a U!S! corporation is

o*ned/ an -0 deduction "or

dividends received i" -0 or less o" a

U!S! corporation is o*ned/ and a

100 deduction "or dividends

received i" more than -0 o" a U!S!

corporation is o*ned!

Dividend eceived Deduction

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A temporary difference

causes a di""erence

bet*een a

corporation@s preta%

"inancial income and

ta%able income that

originates in one ormore years and

reverses in later

years!

Temporar! Differences

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1! 6or e%ample/ a depreciable asset may be

depreciated using DAC'S over the

prescribed ta% li"e "or income purposes/ but

using straight>line depreciation over a longer

li"e "or "inancial reporting purposes!

1! 6or e%ample/ a depreciable asset may be

depreciated using DAC'S over the

prescribed ta% li"e "or income purposes/ but

using straight>line depreciation over a longerli"e "or "inancial reporting purposes!

6uture a%able Income Eill Be Figher han

6uture


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#! :ross pro"it on installment sales normally is

recognized at the point o" sale "or "inancial

reporting purposes/ but "or income ta%

purposes/ in certain situations it is recognized

as cash is collected!

#! :ross pro"it on installment sales normally is

recognized at the point o" sale "or "inancial

reporting purposes/ but "or income ta%

purposes/ in certain situations it is recognizedas cash is collected!


6uture


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&! It is assumed that investment income

reported under the e2uity method "or

"inancial purposes/ but not received as a

dividend/ *ill eventually be received as

dividends or as a gain *hen the stock is sold!

&! It is assumed that investment income

reported under the e2uity method "or

"inancial purposes/ but not received as a

dividend/ *ill eventually be received asdividends or as a gain *hen the stock is sold!


6uture


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(!


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+!


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1! 6or e%ample/ items such as rent/ interest/ and

royalties received in advance are ta%able

*hen received but are not reported "or"inancial reporting purposes until the service

actually has been provided!

1! 6or e%ample/ items such as rent/ interest/ and

royalties received in advance are ta%able

*hen received but are not reported "or

"inancial reporting purposes until the service

actually has been provided!

6uture


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#!


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&! Bad debts e%pense estimated "or "inancial

reporting/ but not deductible until the

receivable is *ritten o"" "or ta% purposes!(!


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)! Accrued litigation losses "or "inancial

reporting/ but not deducted until paid "or ta%

purposes!

+! ?osses on investments classi"ied as tradingsecurities!

,! Unrealized pro"it on sale and leaseback "or

"inancial reporting and a pro"it on the sale "or

ta% purposes!

)! Accrued litigation losses "or "inancialreporting/ but not deducted until paid "or ta%

purposes!

+! ?osses on investments classi"ied as tradingsecurities!

,! Unrealized pro"it on sale and leaseback "or

"inancial reporting and a pro"it on the sale "or

ta% purposes!

6uture


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1! A current ta% liability or asset isrecognized "or the estimated income ta%obligation or re"und on its income ta%

return "or the current year!#! A de"erred ta% liability or asset is

recognized "or the estimated "uture ta%e""ects o" each temporary di""erence!


Conceptual Issues

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30/77

&! he measurement o" de"erred ta%

liabilities and assets is based on

provisions o" the enacted ta% la*H the

e""ects o" "uture changes in ta% la* orrates are not anticipated!

(! he measurement o" de"erred ta%

assets is reduced/ i" necessary/ by theamount o" any ta% bene"its that are

not e%pected to be realized!

Conceptual Issues

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1! he applicable income ta%

rates!

#! Ehether a valuation

allo*ance should beestablished "or de"erred

ta% assets!

he FASB addressed t*o issues regardingthe measurement o" de"erred ta%

liabilities or de"erred ta% asset in its

"inancial statements!

#easurement

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Step 1. Deasure the income ta% obligation by

applying the applicable ta% rate to the

current ta%able income!

Step 2. Identi"y the e%isting temporary di""erences

and classi"y each as eitherta%able or

deductible!

Step 3. Deasure the de"erred ta% liability "or eachta%able temporary di""erence using the

applicable ta% rate!


$teps in ecording and

eporting of Current and

Deferred Taxes


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In #00,/ rack Company purchased an asset

at a cost o" 9+/000! 6or "inancial reporting

purposes/ the asset has a (>year li"e/ no

residual value/ and is depreciated by theunits>o">output method over +/000 units

4#00, 1/+00 units5! 6or income ta% purposes

the asset is depreciated under DAC'S using

the &>year li"e 4&&!&& "or #00,5! he ta%ableincome is 9,/)00 and the income ta% rate "or

#00, is &0!

In #00,/ rack Company purchased an assetat a cost o" 9+/000! 6or "inancial reporting

purposes/ the asset has a (>year li"e/ no

residual value/ and is depreciated by the

units>o">output method over +/000 units

4#00, 1/+00 units5! 6or income ta% purposes

the asset is depreciated under DAC'S using

the &>year li"e 4&&!&& "or #00,5! he ta%ableincome is 9,/)00 and the income ta% rate "or

#00, is &0!

Basic %ntries

his button *ill be used laterhis button *ill be used later

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35/77

In the "uture ta%able income *ill be higher

than "inancial income/ so the ta%able amount

times the ta% rate is the de"erred ta% liability!

In the "uture ta%able income *ill be higher

than "inancial income/ so the ta%able amount

times the ta% rate is the de"erred ta% liability!

Financial Income Tax

Year Depreciation Depreciation Difference

#00, 91/+00 9#/000 (00

Deferred Tax &iabilit!

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36/77

Step 1. 9,/)00 4ta%able income5 % &0 Step 2. he depreciation di""erence is identi"ied as

the only ta%able temporary di""erence!

Step 3. he 91#0 total de"erred ta% liability is

calculated by multiplying the total ta%able

temporary di""erence 49(005 times the "uture

ta% rate 4&05!

Steps 4 and 5. No de"erred ta% asset/ so notre2uired!

Step 6. A ournal entry is made!


Basic %ntries

37


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Income a% $%pense 4plug5 #/&,0

Income a%es


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Assume the same "acts as in Slide &(/ e%cept that the

income ta% rate "or #00, "or (0/ but Congress has

enacted ta% rates o" &) "or #00-/ && "or #00./

and &0 "or #010 and beyond!

Assume the same "acts as in Slide &(/ e%cept that the

income ta% rate "or #00, "or (0/ but Congress has

enacted ta% rates o" &) "or #00-/ && "or #00./

and &0 "or #010 and beyond!

6inancial Income a%

7ear 3epreciation 3epreciation

#00, 9#/-00 9#/++,

#00- 1/100 --.

#00. )00 (((

Click here to review Slide 3! then click

the "utton on Slide 3 to return#

%xample '"#ultiple ates

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#00, #00- #00.

3e"erred a% ?iability

6inancial depreciation 9#/-00 91/100 9)00

Income ta% depreciation4#/++,5 4--. 5 4((( 5a%able amount 9 1&& 9 #11 9 )+ G 9(00

Income ta% rate 0!&) 0!&& 0!&0

3e"erred ta% liability 9 (, 9 ,0 9 1, G 91&(

Income a% $%pense 4plug5 &/1&(

3e"erred a% ?iability 1&(

Income a%es


41/77

Klemper Company sells a

product on *hich it provides a

&>year *arranty! 6or

"inancial reporting purposes/

the company estimates its

"uture *arranty costs and

records a *arrantye%pense8liability at year>end!

6or income ta% purposes/ the

company deducts its *arranty

costs *hen paid!

Klemper Company sells a

product on *hich it provides a

&>year *arranty! 6or

"inancial reporting purposes/

the company estimates its

"uture *arranty costs and

records a *arranty

e%pense8liability at year>end!

6or income ta% purposes/ the

company deducts its *arranty

costs *hen paid!

Deferred Tax Asset

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42/77

At the beginning o" #00,/ the company had a

de"erred ta% asset o" 9&&0 related to its *arranty

plan! At the end o" #00,/ the company estimates that

its ending *arranty liability is 91/(00! In #00,/ thecompany has ta%able income o" 9)/000 and a ta% rate

o" &0! he ending 3e"erred Asset should be 91/(00

L &0/ or 9(#0!

At the beginning o" #00,/ the company had a

de"erred ta% asset o" 9&&0 related to its *arranty

plan! At the end o" #00,/ the company estimates that

its ending *arranty liability is 91/(00! In #00,/ thecompany has ta%able income o" 9)/000 and a ta% rate

o" &0! he ending 3e"erred Asset should be 91/(00

L &0/ or 9(#0!

Income a% $%pense 4plug5 91/(10

3e"erred a% Asset 49(#0 > 9&&05 .0

Income a%es


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Deferred Tax Asset and (aluation

Allowance

I" it is more likely than

not that a de"erred ta%

asset *ill not be realized/

a valuation allo*ancemust be established!

I" it is more likely than

not that a de"erred ta%

asset *ill not be realized/

a valuation allo*ance

must be established!

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)egative %vidence

Negative evidence indicating the need "or a valuationallo*ance include

1! A history o" operating loss or ta% credit carry"or*ardse%piring unused!

#! ?osses e%pected in early "uture years 4by a presentlypro"itable entity5!

&! Unrecognized loss contingencies that/ i" un"avorablyresolved/ *ould adversely a""ect "uture operations andpro"it levels on a continuing basis in "uture years!

(! A carryback/ carry"or*ard period that is so brie" that it*ould limit realization o" ta% bene"its!

45


45/77

Positive %vidence


46/77

Deferred Tax Assets and

(aluation Allowance

At the end o" #00,/ Klemper Corporation

decides that it is more likely than not that

9+00 o" the ending temporary di""erence

*ill not be realized! 4&0 ta% rate5

At the end o" #00,/ Klemper Corporation

decides that it is more likely than not that

9+00 o" the ending temporary di""erence

*ill not be realized! 4&0 ta% rate5

Income a% $%pense 1-0

Allo*ance to 'educe 3e"erreda% Asset to 'ealizable Malue 1-0

47


47/77

o""s 4deductible item5 LL LL

LL

?ess a%able temporary items LL

a% e%empt interest LL


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%xample *"Pages +*+ , +-.

Assume the "ollo*ing "or Sand Company "or #00,

Interest on municipal bonds 91/)00

:ross pro"it on installment sales>"inancial 10/000

:ross pro"it on installment sales>ta%able #/000'ent revenue>"inancial &/000

'ent revenue>ta%able ./000

ta% "inancial income ,)/)003e"erred ta% liability>an! 1/ #00, &00

3e"erred gross pro"it>installment sales>#00+ 1/000

Dake the ournal entry "or #00,!

49


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50/77

Deferred Tax Assets and

&iabilities

Income a% $%pense 4plug5 ##/#003e"erred a% Asset 1/-00

3e"erred a% ?iability #/(00

a%es


51/77

6ASB concluded in FASB

Statement o. 1!" that

:AA< "or operating

carrybacks and

carry"or*ards are!!!

6ASB concluded in FASB

Statement o. 1!" that

:AA< "or operating

carrybacks andcarry"or*ards are!!!

Conceptual Issues

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52/77

1! A corporation must recognize the ta% bene"it o"an operating loss carryback in the period o" the

loss as an asset on its balance sheet and as a

reduction o" the operating loss on its income

statement!

#! A corporation must recognize the ta% bene"it o"

an operating loss carry"or*ard in the period o"

the loss as a de"erred ta% asset! Fo*ever/ itmust reduce the de"erred ta% asset by a

valuation allo*ance i" it is more likely than not

that the corporation *ill not realize some or all

o" the de"erred ta% asset!

Conceptual Issues


53/77

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54/77

Donk Company reports a preta% operating loss o"9.0/000 in #00, "or both "inancial reporting and

income ta% purposes/ and that reported preta%

"inancial income and ta%able income "or the previous

# years had been #00)>>9(0/000 4ta% rate #)5H and#00+>>9,0/000 4ta% rate &05!

Donk Company reports a preta% operating loss o"9.0/000 in #00, "or both "inancial reporting and

income ta% purposes/ and that reported preta%

"inancial income and ta%able income "or the previous

# years had been #00)>>9(0/000 4ta% rate #)5H and#00+>>9,0/000 4ta% rate &05!

Income a% 'e"und 'eceivable #)/000

Income a% Bene"it 6rom

;perating ?oss Carryback #)/000

#00) 9(0/000 % 0!#) G#00) 9(0/000 % 0!#) G 910/000910/000

#00+ 9)0/000 % 0!&0 G#00+ 9)0/000 % 0!&0 G 1)/0001)/000

9#)/0009#)/000

Operating &oss Carr!bac/


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Income $tatement

An operating loss is reduced by the bene"it/

not by the total carryback!


56/77

?ake Company reports a preta% operating loss o"

9+0/000 in #00, "or both "inancial reporting and

income ta% purposes! he income ta% rate is &0

and no change in the ta% rate has been enacted "or

"uture years! he de"erred ta% asset is calculated to

be 91-/000 49+0/000 % 0!&05!

?ake Company reports a preta% operating loss o"

9+0/000 in #00, "or both "inancial reporting and

income ta% purposes! he income ta% rate is &0

and no change in the ta% rate has been enacted "or"uture years! he de"erred ta% asset is calculated to

be 91-/000 49+0/000 % 0!&05!

3e"erred a% Asset 1-/000 Income a% Bene"it 6rom

;perating ?oss Carry"or*ard 1-/000


Operating &oss Carr!forward

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57/77

I" the company establishes a valuation allo*ance "or

the entire amount o" the de"erred ta% asset/ it also

makes the "ollo*ing ournal entry at the end o" #00,!

I" the company establishes a valuation allo*ance "or

the entire amount o" the de"erred ta% asset/ it also

makes the "ollo*ing ournal entry at the end o" #00,!

Income a% Bene"it 6rom ;perating

?oss Carry"or*ard 1-/000

Allo*ance to 'educe 3e"erred a%

Asset to 'ealizable Malue 1-/000

Operating &oss Carr!forward


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58/77

In #00-/ ?ake Company operates success"ully and

earns preta% operating income o" 9100/000 "or both

"inancial reporting and ta% purposes!

In #00-/ ?ake Company operates success"ully and

earns preta% operating income o" 9100/000 "or both

"inancial reporting and ta% purposes!

Income a% $%pense 1#/000

Allo*ance to 'educe 3e"erred a%

Asset to 'ealizable Malue 1-/000

Income a%es


59/77

Income ta% allocation

*ithin a period is

mandatory under:AA

Income ta% allocation

*ithin a period is

mandatory under

:AA

Intraperiod Tax Allocation

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60/77


Income ta% may appear in "ive di""erent placesin the "inancial statements "or a period!

1! Income "rom continuing operations

#! 3iscontinued operations

&! $%traordinary items

(!


61/77

Income "rom continuing operations

9#,0/000 4revenues5 O 91.0/000 4e%penses5P 9-0/000

:ain on disposal o" discontinued Segment L 1-/000?oss "rom operations o" discontinued Segment L 4)/000 5

$%traordinary loss on bond redemption 410/000 5

Cumulative e""ect o" change in accounting

principle 4accelerated depreciation to S8?5 1)/000


62/77

Kallo*ay Company

is subect to income

ta% rates o" #0 onthe "irst 9)0/000 o"

income and &0 on

all income in e%cesso" 9)0/000!

Kallo*ay Company

is subect to income

ta% rates o" #0 onthe "irst 9)0/000 o"

income and &0 on

all income in e%cesso" 9)0/000!

?et@s take a look atKallo*ay

Company@s income

statement "or #00,!

?et@s take a look atKallo*ay

Company@s income

statement "or #00,!



63


63/77


64/77


65/77

No*/ let@s e%amineKallo*ay Company@s

income statement "or

#00,!

No*/ let@s e%amineKallo*ay Company@s

income statement "or

#00,!

Intraperiod Tax Allcoation

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66/77

40!#0 % 9)0/0005 J40!#0 % 9)0/0005 J

40!&0 % 9&0/000540!&0 % 9&0/0005

Kallo*ay Company

Income Statement

"or 7ear $nded 3ecember &1/ #00,

'evenues 4listed separately5 9#,0/000

$%penses 4listed separately5 41.0/0005


67/77

Kallo*ay Company

Income Statement

"or 7ear $nded 3ecember &1/ #00,

'evenues 4listed separately5 9#,0/000$%penses 4listed separately5 41.0/0005


68/77

Income be"ore e%traordinary item 9,0/100

$%traordinary loss "rom tornado4net o" 9&/000 income ta% credit5 4,/0005

Net Income 9+&/100


69/77

A corporation must report

its de"erred ta% liabilities

and assets in t*o

classi"ications!!!

A corporation must report

its de"erred ta% liabilities

and assets in t*o

classi"ications!!!

Qa net current

amount and a net

noncurrent

amount!

Qa net current

amount and a net

noncurrent

amount!

Balance $0eet Presentation

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70/77

3e"erred ta% liabilities andassets are classi"ied as

current or noncurrent

based upon their related

assets or liabilities "or"inancial reporting!

3e"erred ta% liabilities and

assets are classi"ied as

current or noncurrent

based upon their related

assets or liabilities "or"inancial reporting!

Balance $0eet Presentation


71/77

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72/77

Current and )oncurrent

'elated

Asset or?iability Classi"ication

Installment sales Accounts 'eceivable Current

Inventory di""erences Inventory CurrentAllo*ance "or 3oubt"ul Accounts 'eceivable Current3epreciation di""erences


73/77

%ccount Related &alance

Deferred Tax %ccount' &alance Sheet %ccount

$eferred %a# &iabilities

Installment sales 9 +/000 credit Accounts receivable

3epreciation 91#/000 credit


74/77

he ne%t slide presents an

illustration that includes

several temporarydi""erences! Assume ta%able

income o" 9,00/000 at a

&0 ta% rate!

he ne%t slide presents an

illustration that includes

several temporarydi""erences! Assume ta%able

income o" 9,00/000 at a

&0 ta% rate!


75/77

76

Current and Deferred Amounts


76/77

Current and Deferred Amounts

on I)CO#% $TAT%#%)T

a%es


77/77

Chapter19

Tas& (or'e Ima$e Ga##er) '#!p art !n'#u%e% !n th!s e#e'tron!' presentat!on !s use% *!th the perm!ss!on o +Te'h In'"

intermediate nbj ch19

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