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1、Intermediate Accounting 17 Accounting and Reporting Income TaxesAccounting and Reporting Income TaxesChapter 17Accounting for Income TaxesFundamentals of Accounting for Income TaxesFuture taxable amounts and deferred taxesFuture deductible amounts and deferred taxesIncome statement presentationSpeci
2、fic differencesRate considerationsAccounting for Net Operating LossesFinancial Statement PresentationReview of Asset-Liability MethodLoss carrybackLoss carryforwardLoss carryback exampleLoss carryforward exampleBalance sheetIncome statementFundamentals of Accounting for Income TaxesCorporations must
3、 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.calculate taxes payable based upon IRS code, calculate income tax expense based upon GAAP.Amount reported as tax e
4、xpense will often differ from the amount of taxes payable to the IRS.Fundamentals of Accounting for Income TaxesTax CodeExchangesInvestors and CreditorsFinancial StatementsPretax Financial IncomeGAAPIncome Tax ExpenseTaxable IncomeIncome Tax PayableTax Returnvs.?LO 1 Identify differences between pre
5、tax financial income and taxable income.Fundamentals of Accounting for Income TaxesIllustration 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. For simplification, assume the company reports one ex
6、pense, 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 Identify differences between pretax financial income and tax
7、able income.RevenuesExpenses (S/L depreciation)Pretax financial incomeIncome tax expense (40%)$130,00030,000$100,000$40,000$130,000200830,000$100,000$40,000$130,000200930,000$100,000$40,000$390,000Total90,000$300,000$120,000GAAP ReportingRevenuesExpenses (MACRS depreciation)Pretax financial incomeIn
8、come tax payable (40%)$130,000200740,000$90,000$36,000$130,000200830,000$100,000$40,000$130,000200920,000$110,000$44,000$390,000Total90,000$300,000$120,000Tax Reporting2007LO 1 Identify differences between pretax financial income and taxable income.Book vs. Tax DifferenceIncome tax expense (GAAP)Inc
9、ome tax payable (IRS)Difference$40,00036,000$4,000$40,000200840,000$0$40,000200944,000$(4,000)$120,000Total120,000$0Comparison2007Are the differences accounted for in the financial statements?YearReporting Requirement200720082009Deferred tax liability account increased to $4,000No change in deferred
10、 tax liability accountDeferred tax liability account reduced by $4,000YesLO 1 Identify differences between pretax financial income and taxable income.Book vs. Tax DifferenceBalance SheetAssets:Liabilities:Equity:Income tax expense 40,000Income StatementRevenues:Expenses:Net income (loss)20072007Defe
11、rred taxes 4,000Where does the “deferred tax liability” get reported in the financial statements?Income tax payable 36,000LO 1 Identify differences between pretax financial income and taxable income.Financial Reporting for 2007A Temporary Difference is the difference between the tax basis of an asse
12、t or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts or deductible amounts in future years. Future Taxable AmountsFuture Deductible AmountsDeferred Tax Liability represents the increase in taxes payable in future years as a result
13、of taxable temporary differences existing at the end of the current year.Deferred Tax Asset represents 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 Differen
14、cesLO 2 Describe a temporary difference that results in future taxable amounts.Temporary DifferencesE19-1 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 p
15、retax financial income for 2007 is $300,000, and the tax rate is 30% for all years. There are 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 taxe
16、s payable for 2007.LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesLO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred Taxesa.a.Illustration Columbia Corporation has one t
17、emporary difference at the end of 2007 that will reverse and cause deductible amounts 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
18、 expects to be profitable in the future. 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 3 Describe a temporary difference that results in future deductible amount
19、s.Future Deductible Amounts and Deferred TaxesLO 3 Describe a temporary difference that results in future deductible amounts.Future Deductible Amounts and Deferred Taxesa.a.Deferred Tax AssetValuation AllowanceA company should reduce a deferred tax asset by a valuation allowance if it is more likely
20、 than not that it will not realize some portion or all of the deferred tax asset. “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 TaxesE19-14 Jenni
21、fer Capriati Corp. has a deferred tax asset balance of $150,000 at the end 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%
22、 for all years. No valuation account is in existence at the end of 2006.InstructionsAssuming 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 TaxesLO 4 Explain the purpose
23、 of a deferred tax asset valuation allowance.Future Deductible Amounts and Deferred TaxesLO 4 Explain the purpose of a deferred tax asset valuation allowance.Deferred Tax AssetValuation AllowanceE19-14 Balance Sheet PresentationLO 4 Explain the purpose of a deferred tax asset valuation allowance.Fut
24、ure Deductible Amounts and Deferred TaxesIncome tax payable or refundableLO 5 Describe the presentation of income tax expense in the income statement.Income Statement PresentationChange in deferred income taxIncome tax expense or benefit+-=Illustration 19-20In the income statement or in the notes to
25、 the financial statements, a company should disclose the significant components of income tax expense (current and deferred).Formula to Compute Income Tax ExpenseSpecific DifferencesTaxable temporary differences - Deferred tax liabilityDeductible temporary differences - Deferred tax AssetTemporary D
26、ifferencesText Illustration 19-22 Examples of Temporary DifferencesLO 6 Describe various temporary and permanent differences.Specific DifferencesPermanent differences are caused by items that (1) enter into pretax financial income but never into taxable income or (2) enter into taxable income but ne
27、ver into pretax financial income.Permanent differences affect only the 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 DifferencesLO 6 Describe various tem
28、porary and permanent differences.Specific DifferencesDo the following generate: Future Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityA Permanent Difference1. The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is use
29、d for financial reporting purposes.Future Taxable Amount2. A landlord collects some rents in advance. Rents received are taxable in the period when they are received.Future Deductible Amount3. Expenses are incurred in obtaining tax-exempt income.Permanent Difference4. Costs of guarantees and warrant
30、ies are estimated and accrued for financial reporting purposes.Future Deductible AmountLO 6 Describe various temporary and permanent differences.Specific DifferencesDo the following generate: Future Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityA Permanent Diffe
31、rence5. Sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.Future Taxable Amount6. Proceeds are received from a life insurance company because of the death of a key officer (the company carries a policy on key off
32、icers).Future Deductible Amount7. Estimated losses 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 DifferenceLO 6 Describe various temporary and permanent differences.Permanent DifferencesE19-
33、4 Zurich Company reports pretax financial income 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 gre
34、ater than rent earned on the income statement 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.
35、Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.LO 6 Describe various temporary and permanent differences.Permanent DifferencesLO 6 Describe various temporary and permanent differences.Specific DifferencesA company must co
36、nsider presently enacted changes in the 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 def
37、erred income tax accounts immediately. Tax Rate ConsiderationsLO 7 Explain the effect of various tax rates and tax rate changes on deferred income taxes.Accounting for Net Operating LossesNet operating loss (NOL) = tax-deductible expenses exceed taxable revenues.The federal tax laws permit taxpayers
38、 to use the losses of one year to offset the profits of other years (carryback and carryforward). LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating LossesLoss CarrybackLO 8 Apply accounting procedures for a loss carryback and a loss carryforwa
39、rd.Back 2 years and forward 20 yearsLosses must be applied to earliest year firstLoss CarryforwardMay elect to forgo loss carryback andCarryforward losses 20 yearsAccounting for Net Operating LossesBE19-12 (Carryback) Valis Corporation had the following tax information.LO 8 Apply accounting procedur
40、es for 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$135,000LO 8 Apply accounting
41、procedures for a loss carryback and a loss carryforward.Accounting for Net Operating LossesE19-12 Journal Entry for 2007LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating LossesBE19-13 (Carryback and Carryforward) Zoop Inc. incurred a net opera
42、ting loss of $500,000 in 2007. Combined 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.LO 8 Apply accounting procedures for a loss carryback
43、 and a loss carryforward.Accounting for Net Operating Losses$160,000LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Deferred Tax AssetAccounting for Net Operating LossesE19-13 Journal Entries for 2007LO 8 Apply accounting procedures for a loss carryback and a loss carry
44、forward.Accounting for Net Operating LossesBE19-14 (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 jo
45、urnal entries necessary at the end of 2007.LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating LossesE19-14 Journal Entries for 2007LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Valuation Allowance RevisitedWhethe
46、r the company will realize a deferred tax asset depends on whether sufficient taxable income exists or will exist within the carryforward period.LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Text Illustration 19-37 Possible Sources of Taxable IncomeIf any one of these
47、 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 AccountFinancial Statement PresentationBalance Sheet PresentationLO 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 financi