1、,Accounting and Reporting Income Taxes,Chapter 19,Intermediate Accounting12th EditionKieso, Weygandt, and Warfield,Prepared by Coby Harmon, University of California, Santa Barbara,Fundamentals of Accounting for Income Taxes,Future taxable amounts and deferred taxesFuture deductible amounts and defer
2、red taxesIncome statement presentationSpecific differencesRate considerations,Accounting for Net Operating Losses,Financial Statement Presentation,Review of Asset-Liability Method,Loss carrybackLoss carryforwardLoss carryback exampleLoss carryforward example,Balance sheetIncome statement,Accounting
3、for Income Taxes,Corporations must file income tax returns following the guidelines developed by the Internal Revenue Service (IRS), thus they:,LO 1 Identify differences between pretax financial income and taxable income.,Fundamentals of Accounting for Income Taxes,calculate taxes payable based upon
4、 IRS code, calculate income tax expense based upon GAAP.,Amount reported as tax expense will often differ from the amount of taxes payable to the IRS.,Tax Code,Exchanges,Investors and Creditors,Financial Statements,Pretax Financial Income,GAAP,Income Tax Expense,Taxable Income,Income Tax Payable,Tax
5、 Return,vs.,IRS,Fundamentals of Accounting for Income Taxes,LO 1 Identify differences between pretax financial income and taxable income.,Illustration Assume the company reports revenue in 2007, 2008, and 2009 of $130,000, respectively. The revenue is reported the same for both GAAP and tax purposes
6、. For simplification, assume the company reports one expense, depreciation, over the three years applying the straight-line method for financial reporting purposes (GAAP) and MACRS (IRS) for the tax return. What is the effect on the accounts of using the two different depreciation methods?,LO 1 Iden
7、tify differences between pretax financial income and taxable income.,Fundamentals of Accounting for Income Taxes,Revenues,Expenses (S/L depreciation),Pretax financial income,Income tax expense (40%),$130,000,30,000,$100,000,$40,000,$130,000,2008,30,000,$100,000,$40,000,$130,000,2009,30,000,$100,000,
8、$40,000,$390,000,Total,90,000,$300,000,$120,000,GAAP Reporting,Revenues,Expenses (MACRS depreciation),Pretax financial income,Income tax payable (40%),$130,000,2007,40,000,$90,000,$36,000,$130,000,2008,30,000,$100,000,$40,000,$130,000,2009,20,000,$110,000,$44,000,$390,000,Total,90,000,$300,000,$120,
9、000,Tax Reporting,2007,LO 1 Identify differences between pretax financial income and taxable income.,Book vs. Tax Difference,Income tax expense (GAAP),Income tax payable (IRS),Difference,$40,000,36,000,$4,000,$40,000,2008,40,000,$0,$40,000,2009,44,000,$(4,000),$120,000,Total,120,000,$0,Comparison,20
10、07,Are the differences accounted for in the financial statements?,Year,Reporting Requirement,2007,2008,2009,Deferred tax liability account increased to $4,000,No change in deferred tax liability account,Deferred tax liability account reduced by $4,000,Yes,LO 1 Identify differences between pretax fin
11、ancial income and taxable income.,Book vs. Tax Difference,Balance Sheet,Assets:,Liabilities:,Equity:,Income tax expense 40,000,Income Statement,Revenues:,Expenses:,Net income (loss),2007,2007,Deferred taxes 4,000,Where does the “deferred tax liability” get reported in the financial statements?,Incom
12、e tax payable 36,000,LO 1 Identify differences between pretax financial income and taxable income.,Financial Reporting for 2007,A Temporary Difference is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will res
13、ult in taxable amounts or deductible amounts in future years.,Future Taxable Amounts,Future Deductible Amounts,Deferred Tax Liability 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 Asset repr
14、esents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.,Illustration 19-22 Examples of Temporary Differences,LO 2 Describe a temporary difference that results in future taxable amounts.,Temporary Diff
15、erences,E19-1 South Carolina Corporation has one temporary difference at the end of 2007 that will reverse and cause taxable amounts of $55,000 in 2008, $60,000 in 2009, and $65,000 in 2010. South Carolinas pretax financial income for 2007 is $300,000, and the tax rate is 30% for all years. There ar
16、e no deferred taxes at the beginning of 2007.InstructionsCompute taxable income and income taxes payable for 2007.Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.,LO 2 Describe a temporary difference that results in future taxable amou
17、nts.,Future Taxable Amounts and Deferred Taxes,LO 2 Describe a temporary difference that results in future taxable amounts.,Future Taxable Amounts and Deferred Taxes,a.,a.,Illustration Columbia Corporation has one temporary difference at the end of 2007 that will reverse and cause deductible amounts
18、 of $50,000 in 2008, $65,000 in 2009, and $40,000 in 2010. Columbias pretax financial income for 2007 is $200,000 and the tax rate is 34% for all years. There are no deferred taxes at the beginning of 2007. Columbia expects to be profitable in the future. InstructionsCompute taxable income and incom
19、e taxes payable for 2007.Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.,LO 3 Describe a temporary difference that results in future deductible amounts.,Future Deductible Amounts and Deferred Taxes,LO 3 Describe a temporary difference
20、 that results in future deductible amounts.,Future Deductible Amounts and Deferred Taxes,a.,a.,Deferred Tax AssetValuation Allowance,A company should reduce a deferred tax asset by a valuation allowance if it is more likely than not that it will not realize some portion or all of the deferred tax as
21、set. “More likely than not” means a level of likelihood of at least slightly more than 50 percent.,LO 4 Explain the purpose of a deferred tax asset valuation allowance.,Future Deductible Amounts and Deferred Taxes,E19-14 Jennifer Capriati Corp. has a deferred tax asset balance of $150,000 at the end
22、 of 2006 due to a single cumulative temporary difference of $375,000. At the end of 2007 this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2007 is $820,000. The tax rate is 40% for all years. No valuation account is in existence at the end of 2006.In
23、structionsAssuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entries required for 2007.,Future Deductible Amounts and Deferred Taxes,LO 4 Explain the purpose of a deferred tax asset valuation allowance.,Future Deductible Amounts
24、and Deferred Taxes,LO 4 Explain the purpose of a deferred tax asset valuation allowance.,Deferred Tax AssetValuation Allowance,E19-14 Balance Sheet Presentation,LO 4 Explain the purpose of a deferred tax asset valuation allowance.,Future Deductible Amounts and Deferred Taxes,Income tax payable or re
25、fundable,LO 5 Describe the presentation of income tax expense in the income statement.,Income Statement Presentation,Change in deferred income tax,Income tax expense or benefit,+-,=,Illustration 19-20,In the income statement or in the notes to the financial statements, a company should disclose the
26、significant components of income tax expense (current and deferred).,Formula to Compute Income Tax Expense,Taxable temporary differences - Deferred tax liabilityDeductible temporary differences - Deferred tax Asset,Temporary Differences,Specific Differences,Text Illustration 19-22 Examples of Tempor
27、ary Differences,LO 6 Describe various temporary and permanent differences.,Permanent differences are caused by items that (1) enter into pretax financial income but never into taxable income or (2) enter into taxable income but never into pretax financial income.,Permanent differences affect only th
28、e period in which they occur, they do not give rise to future taxable or deductible amounts. There are no deferred tax consequences to be recognized.,Text Illustration 19-24 Examples of Permanent Differences,Specific Differences,LO 6 Describe various temporary and permanent differences.,Do the follo
29、wing generate: Future Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityA Permanent Difference,1. The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes.,Future Taxable Amount,2. A l
30、andlord collects some rents in advance. Rents received are taxable in the period when they are received.,Future Deductible Amount,3. Expenses are incurred in obtaining tax-exempt income.,Permanent Difference,4. Costs of guarantees and warranties are estimated and accrued for financial reporting purp
31、oses.,Future Deductible Amount,Specific Differences,LO 6 Describe various temporary and permanent differences.,Do the following generate: Future Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityA Permanent Difference,5. Sales of investments are accounted for by the
32、 accrual method for financial reporting purposes and the installment method for tax purposes.,Future Taxable Amount,6. Proceeds are received from a life insurance company because of the death of a key officer (the company carries a policy on key officers).,Future Deductible Amount,7. Estimated losse
33、s on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.,A Permanent Difference,Specific Differences,LO 6 Describe various temporary and permanent differences.,E19-4 Zurich Company reports pretax financial inco
34、me of $70,000 for 2007. The following items cause taxable income to be different than pretax financial income. (1) Depreciation on the tax return is greater than depreciation on the income statement by $16,000. (2) Rent collected on the tax return is greater than rent earned on the income statement
35、by $22,000. (3) Fines for pollution appear as an expense of $11,000 on the income statement.Zurichs tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2007.Instructions Prepare the journal entry to reco
36、rd income tax expense, deferred income taxes, and income taxes payable for 2007.,Permanent Differences,LO 6 Describe various temporary and permanent differences.,Permanent Differences,LO 6 Describe various temporary and permanent differences.,A company must consider presently enacted changes in the
37、tax rate that become effective for a particular future year(s) when determining the tax rate to apply to existing temporary differences.Revision of Future Tax RatesWhen a change in the tax rate is enacted, companies should record its effect on the existing deferred income tax accounts immediately.,T
38、ax Rate Considerations,Specific Differences,LO 7 Explain the effect of various tax rates and tax rate changes on deferred income taxes.,Net operating loss (NOL) = tax-deductible expenses exceed taxable revenues.The federal tax laws permit taxpayers to use the losses of one year to offset the profits
39、 of other years (carryback and carryforward).,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.,Loss Carryback,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.,Back 2 ye
40、ars and forward 20 yearsLosses must be applied to earliest year first,Loss Carryforward,May elect to forgo loss carryback andCarryforward losses 20 years,BE19-12 (Carryback) Valis Corporation had the following tax information.,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for
41、a loss carryback and a loss carryforward.,In 2007 Valis suffered a net operating loss of $450,000, which it elected to carry back. The 2007 enacted tax rate is 29%. Prepare Valiss entry to record the effect of the loss carryback.,Accounting for Net Operating Losses,$135,000,LO 8 Apply accounting pro
42、cedures for a loss carryback and a loss carryforward.,E19-12 Journal Entry for 2007,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.,BE19-13 (Carryback and Carryforward) Zoop Inc. incurred a net operating loss of $500,000 in 2007. Com
43、bined income for 2005 and 2006 was $400,000. The tax rate for all years is 40%. Zoop elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for a loss carryb
44、ack and a loss carryforward.,Accounting for Net Operating Losses,$160,000,LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.,Deferred Tax Asset,E19-13 Journal Entries for 2007,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for a loss carryback and a
45、loss carryforward.,BE19-14 (Carryback and Carryforward with Valuation Allowance) Use the information for Zoop Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary
46、at the end of 2007.,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.,E19-14 Journal Entries for 2007,Accounting for Net Operating Losses,LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.,Whether the compan
47、y will realize a deferred tax asset depends on whether sufficient taxable income exists or will exist within the carryforward period.,Valuation Allowance Revisited,LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.,Text Illustration 19-37 Possible Sources of Taxable Incom
48、e,If any one of these sources is sufficient to support a conclusion that a valuation allowance is unnecessary, a company need not consider other sources.,Text Illustration 19-38 Evidence to Consider in Evaluating the need for a Valuation Account,Balance Sheet Presentation,Financial Statement Present
49、ation,LO 9 Describe the presentation of deferred income taxes in financial statements.,An individual deferred tax liability or asset is classified as current or noncurrent based on the classification of the related asset or liability for financial reporting purposes.,Companies should classify deferred tax accounts on the balance sheet in two categories: one for the net current amount, and one for the net noncurrent amount.,
