Chapter 19
Learning Objectives
Accounting for Income Taxes
1.  Pretax financial income vs. taxable income
2.  Temporary diff that result in future taxable amounts
3.  Temp. diff that result in future deductible amounts
4.  Purpose of a deferred tax asset valuation allowance
5.  Describe presentation of income tax expense
6.  Describe temporary and permanent differences
7.  Tax rates, tax rate changes on deferred inc. taxes
8.  Accounting for loss carryback and carryforward
9.  Presentation of deferred income taxes
10.  Indicate basic principles of asset-liability method
Annual reports: Chipotle (Note 3), Coca-Cola (Note 17)
1
Accounting for Income Taxes
2
Learning Objectives 1, 2, 3
§  Temporary differences between book
net income and taxable income
§  Deferred Tax Liabilities
§  Deferred Tax Assets
3
Dollar Corporation
Income Statement
For the year ended December 31, 2011
Dollar Corporation
Income Statement
For the year ended December 31, 2011
Revenue
Service Revenue
Revenue
$ 100,000
Service Revenue
Expenses
$ 100,000
Expenses
Salary Expense
30,000
Insurance Expense
20,000
Advertising Expense
10,000
Total Operating Expenses
4
Salary Expense
Insurance Expense
Description
Income
Tax Expense
Advertising
Expense
Income
PayableExpenses
TotalTax
Operating
60,000
30,000
Debit 20,000
Credit
9,000 10,000
9,000
60,000
Operating Income
40,000
Operating Income
40,000
Interest Expense
Net Income Before Taxes [NIBT]
10,000
30,000
Interest Expense
Net Income Before Taxes [NIBT]
10,000
30,000
Income Tax Expense (30% tax rate)
Net Income
9,000
$ 21,000
Income Tax Expense (30% tax rate)
5
Net Income
9,000
$ 21,000
6
1
Accounting for Income Taxes
Two Different Calculations
§  If book (GAAP) revenues and expenses
equal tax (IRS) revenues and expenses
§  Income Tax Exp. = Income Tax Payable
§  Life is simple
§  We go home at 6:20
§  But GAAP never equals IRS
§  Income Tax Expense
§  Calculated using GAAP (book numbers)
§  Income Tax Payable
§  Calculated using tax law (IRS numbers)
§  Also called “Current tax expense”
Income Tax Expense = GAAP NIBT × tax rate
Income Tax Payable = IRS NIBT × tax rate
NIBT = Net Income Before Taxes
7
8
Dollar Corporation
Income Statement
For the year ended December 31, 2011
Accounting for Income Taxes
Revenue
§  GAAP rev and exp ≠ IRS rev and exp
§  Income Tax Exp. ≠ Income Tax Payable
Service Revenue
Salary Expense
Deferred Tax account used to reconcile difference
Insurance Expense
Description
Advertising
Expense
Income
Tax Expense
TotalTax
Operating
Income
PayableExpenses
Operating Income
Interest Expense
Net Income Before Taxes [NIBT]
Income Tax Expense (30% tax rate)
9
Description
Income Tax Expense
Debit
9,000
Income Tax Payable
Debit
9,000
Deferred Tax Liability [or Asset]
X,000
Income Tax Payable (IRS)
Description
Income Tax Expense (GAAP)
Credit
X,000
Income Tax Payable (IRS)
X,000
40,000
10,000
30,000
9,000
$ 21,000
10
§  Accrual basis (GAAP) vs. cash basis (IRS)
§  Depreciation (straight-line vs. MACRS)
Credit
Deferred Tax Liability [or Asset]
60,000
9,000
§  Most revenues and expenses on
income statement (GAAP) are same as
revenues and expenses on tax return
§  Differences
Credit
X,000
Debit
9,000
Net Income
30,000
Debit 20,000
Credit
9,000 10,000
Accounting for Income Taxes
9,000
Description
Income Tax Expense (GAAP)
$ 100,000
Expenses
11
12
2
Deferred Tax Account
Deferred Tax Account
§  Difference is temporary
§  Created at start of timing difference
§  Allocated over time
§  Ending balance zero
§  Will resolve over time (timing difference)
§  If time period long enough no difference
§  Over time, both GAAP, IRS recognize
§  Same amount of revenue
§  Same amount of expense
13
14
Income Statement Differences
GAAP and IRS
Deferred Tax [Liability / Asset]
§  Similar to accrual and deferral accounts
§  Earned revenue on account
Cash moves in different period than revenue or expense
Category
Type
Sample Names
Description
Accounts Receivable
Accrued Revenue
Asset
•  Accounts Receivable
•  Royalties Receivable
Service Revenue
150,000
GAAP (Accrual Basis): Provided service on account, record revenue
Deferred Expense
Asset
•  Prepaid Rent
•  Supplies
Accrued Expenses
Liability
•  Accounts Payable
•  Interest Payable
Deferred Revenue
Liability
•  Unearned Revenue
•  Memberships
Description
No entry
15
Income Statement Differences
GAAP and IRS
Debit
100,000
Debit
Credit
Credit
IRS (Cash Basis): Wait to record revenue until cash collected
16
Income Statement Differences
GAAP and IRS
§  Customer payments in advance
Description
Cash
Debit
150,000
§  Estimate warranty exp at time of service
Credit
Description
Warranty Expense
Debit
20,000
Credit
Unearned Revenue (liability)
100,000
GAAP (Accrual Basis): Customer advance payments are liability
Warranty Payable
20,000
GAAP (Accrual Basis): Match warranty expense to revenue earned
Description
Cash
Description
No entry
Debit
100,000
Credit
Revenue
IRS (Cash Basis): Customer advance payments are revenue
100,000
17
IRS (Cash Basis): Record expense when cash paid
Debit
Credit
18
3
Book Vs. Tax Depreciation
Deferred Tax [Liability / Asset]
Depreciation Variables
Cost
$41,000 Life (time)
Salvage value
5 years
1,000
Depreciable cost
$40,000
Year
Straight-Line
Double-Declining
1
8,000
16,400
2
8,000
9,840
3
8,000
5,904
4
8,000
3,542
5
8,000
4,314
Total
$40,000
$40,000
§  Deferred Tax Liability created when
§  According to GAAP you have underpaid
taxes due in current period
§  Deferred Tax Asset created when
§  According to GAAP you have overpaid
taxes due in current period
19
Deferred Tax Liability
20
Deferred Tax Liability
§  Created when
§  Current period
§  According to GAAP you have underpaid
taxes due in current period
§  Obligation to pay more in future
§  Similar to Future Taxes Payable (liability)
Description
Income Tax Expense (GAAP)
Debit
3,000
§  GAAP NIBT > IRS NIBT
§  Inc. Tax Exp. (GAAP) > Inc. Tax Pay. (IRS)
§  Will reverse in future
§  Future periods
§  IRS NIBT > GAAP NIBT
§  Inc. Tax Pay. (IRS) > Inc. Tax Exp. (GAAP)
Credit
Deferred Tax Liability
2,000
Income Tax Payable (IRS)
1,000
21
22
Deferred Tax Liability
GAAP Revenue: Accrual Basis
Deferred Tax Liability
Temporary difference: GAAP revenue > IRS revenue
•  Credit sales 2012, $30
•  Cash collected on account
•  2013, $20
•  2014, $10
2012
2013
2014
Total
Cash sales
Sales on account
$100
$ 30
$130
None
$130
None
$360
$ 30
Cash collections
$100
$150
$140
$390
23
2012
2013
2014
Total
Cash sales
$100
$130
$130
$360
Sales on account
$ 30
None
None
$ 30
Cash collections
$100
$150
$140
$390
Revenue: GAAP
2012
$130
2013
$130
2014
$130
Total
$390
Revenue: Taxable
$100
$150
$140
$390
Expenses: Same
$60
$60
$60
$180
24
4
Deferred Tax Liability
IRS Revenue: Cash Basis
Deferred Tax Liability
Temporary difference: GAAP revenue > IRS revenue
In 2012 GAAP sees revenue IRS does not see
2012
2013
2014
Total
2012
2013
2014
Total
Cash sales
$100
$130
$130
$360
Cash sales
$100
$130
$130
$360
Sales on account
$ 30
None
None
$ 30
Sales on account
$ 30
None
None
$ 30
Cash collections
$100
$150
$140
$390
Cash collections
$100
$150
$140
$390
2012
2013
2014
Total
2012
2013
2014
Total
Revenue: GAAP
$130
$130
$130
$390
Revenue: GAAP
$130
$130
$130
$390
Revenue: Taxable
$100
$150
$140
$390
Revenue: Taxable
$100
$150
$140
$390
Expenses: Same
$60
$60
$60
$180
Expenses: Same
$60
$60
$60
$180
25
•  In 2012 GAAP sees revenue IRS does not see
•  GAAP knows 2012 Income Tax Payable understated
•  In 2012 record liability for future taxes to be paid
Deferred Tax Liability
2012
2013
2014
$130
$130
$130
Revenue: Taxable
− 100
150
140
Timing Difference
$ 30
$ (20)
$ (10)
× 40%
× 40%
× 40%
$ 12
$ (8)
$ (4)
Revenue: GAAP
Tax rate
Deferred Tax Liability
$12
Timing Difference
×
Tax Rate
30
×
40%
=
GAAP: Accrual Basis
2012 2013 2014 Total
Revenue
$130 $130 $130 $390
Expenses
60
60
60
180
NIBT
70
70
70
210
$28
$28
$28
$84
Income Tax Expense: 40%
Change in Deferred Tax Account (2012)
Def Tax Account =
27
Deferred Tax Liability
IRS: Cash Basis
2012 2013 2014 Total
Revenue
$100 $150 $140 $390
Expenses
60
60
60
180
NIBT
40
90
80
210
$16
$36
$32
$84
Income Tax Payable: 40%
28
Deferred Tax Liability: 2012
GAAP: Accrual Basis
2012 2013 2014 Total
Revenue
$130 $130 $130 $390
Deferred Tax Liability
2012
2013
2014
Expenses
60
60
60
180
Income Tax Expense
$28
$28
$28
NIBT
70
70
70
210
Income Tax Payable
$16
$36
$32
$28
$28
$28
$84
Deferred Tax Liability
$12
($8)
($4)
Income Tax Expense: 40%
26
Deferred Tax Liability
IRS: Cash Basis
Income Tax Expense
Revenue
Income Tax Payable
Expenses
Deferred Tax Liability
NIBT
Income Tax Payable: 40%
2012
2013 Total2014
2012
2013 2014
$28 $390 $28
$100$28
$150 $140
60$16 60 $36
60 180 $32
40$12 90 ($8)
80 210($4)
$16
$36
$32
$84
29
Description
Income Tax Expense (GAAP)
Deferred Tax Liability ($30 × 40%)
Debit
28
Credit
12
Income Taxes Payable (IRS)
16
2012: Record income tax expense, income tax payable, deferred tax liab.
30
5
Income Statement
For the year ended December 31, 2012
Deferred Tax Liability
Revenue
Expense
Deferred Tax Liability
12
Income Tax Expense
2012
28
Net Income
Income Statement
December 31, 2012
12
Assets
Liabilities
Creation of Deferred Tax Liability (2012)
DTL
=
Timing Difference
×
Tax Rate
$12
=
$30
×
40%
31
Deferred Taxes
12
Income Tax Payable
16
Equity
Deferred Tax Liability: 2013
32
Deferred Tax Liability
Deferred Tax Liability
2012
2013
2014
Income Tax Expense
$28
$28
$28
Income Tax Payable
$16
$36
$32
Deferred Tax Liability
$12
($8)
($4)
Deferred Tax Liability
12
2012
8
2013
4
Description
Income Tax Expense (GAAP)
Deferred Tax Liability ($20 × 40%)
Debit
28
Credit
Reversing of Deferred Tax Liability (2013)
8
Income Taxes Payable (IRS)
36
2013: Record income tax expense, income tax payable, deferred tax liab.
33
Income Statement
For the year ended December 31, 2013
DTL
=
Timing Difference
×
Tax Rate
$8
=
$20
×
40%
34
Deferred Tax Liability: 2014
Revenue
Deferred Tax Liability
Expense
Income Tax Expense
Net Income
Income Statement
December 31, 2013
Assets
Liabilities
Deferred Taxes
Income Tax Payable
Equity
2012
2013
2014
Income Tax Expense
$28
$28
$28
Income Tax Payable
$16
$36
$32
Deferred Tax Liability
$12
($8)
($4)
28
Description
Income Tax Expense (GAAP)
Deferred Tax Liability ($10 × 40%)
4
36
35
Debit
28
4
Credit
Income Taxes Payable (IRS)
32
2014: Record income tax expense, income tax payable, deferred tax liab.
36
6
Income Statement
For the year ended December 31, 2014
Deferred Tax Liability
Revenue
Expense
Deferred Tax Liability
12
2013
8
2014
4
Income Tax Expense
2012
28
Net Income
Income Statement
December 31, 2014
0
Assets
Liabilities
Reversing of Deferred Tax Liability (2014)
DTL
=
Timing Difference
×
Tax Rate
$4
=
$10
×
40%
Deferred Taxes
0
Income Tax Payable
37
32
Equity
38
39
40
Deferred Tax Asset
§  Created when
Inc Tax Exp =
$85,560
=
GAAP NIBT
×
Tax Rate
$285,200
×
30%
§  According to GAAP you have overpaid
taxes due in current period
§  Reduces cash paid in future
§  Similar to Prepaid Taxes (asset)
IRS taxable income = $285,200 – 45,760 = $239,440
Description
Income Tax Expense
Debit
1,000
Deferred Tax Asset
2,000
Income Tax Payable
41
Credit
3,000
42
7
Deferred Tax Asset
Deferred Tax Asset
Temporary difference: GAAP expense > IRS expense
§  Current period
§  IRS NIBT > GAAP NIBT
§  Inc. Tax Pay. (IRS) > Inc. Tax Exp. (GAAP)
GAAP: Warranty Expense accrued in period of service
IRS: Warranty Expense recorded when cash paid
§  Will reverse in future
§  Future periods
§  GAAP NIBT > IRS NIBT
§  Inc. Tax Exp. (GAAP) > Inc. Tax Pay. (IRS)
2012
2013
2014
Total
Revenue
Warranty exp accrual
$130
$ 50
$130
$ 50
$130
$ 50
$390
$150
Cash paid warranty
$ 10
$ 40
$100
$150
Other expenses
$ 10
$ 10
$ 10
$ 30
43
Deferred Tax Asset
GAAP Expense: Accrual Basis
44
Deferred Tax Asset
IRS Expense: Cash Basis
2012
2013
2014
Total
2012
2013
2014
Total
Revenue
$130
$130
$130
$390
Revenue
$130
$130
$130
$390
Warranty exp accrual
$ 50
$ 50
$ 50
$150
Warranty exp accrual
$ 50
$ 50
$ 50
$150
Cash paid warranty
$ 10
$ 40
$100
$150
Cash paid warranty
$ 10
$ 40
$100
$150
Other expenses
$ 10
$ 10
$ 10
$ 30
Other expenses
$ 10
$ 10
$ 10
$ 30
2012
2013
2014
Total
2012
2013
2014
Total
Revenue
$130
$130
$130
$390
Revenue
$130
$130
$130
$390
Expense: GAAP
$ 60
$ 60
$ 60
$180
Expense: GAAP
$ 60
$ 60
$ 60
$180
Expense: IRS
$ 20
$ 50
$110
$180
Expense: IRS
$ 20
$ 50
$110
$180
45
46
Deferred Tax Asset
Deferred Tax Asset
Temporary difference: GAAP expense > IRS expense
In 2012 GAAP sees expense IRS does not see
2012
2013
2014
Total
Revenue
$130
$130
$130
$390
Expense: GAAP
$ 60
$ 60
$ 60
$180
Expense: IRS
$ 20
$ 50
$110
$180
Expense: GAAP
Expense: IRS
Timing Difference
Tax rate
Deferred Tax Asset
2012
2013
2014
$ 60
$ 60
$ 60
20
50
110
$ 40
$ 10
$ (50)
× 40%
× 40%
× 40%
$ 16
$ 4
$ (20)
Creation of Deferred Tax Account (2012)
Def Tax Account =
47
$16
=
Timing Difference
×
Tax Rate
40
×
40%
48
8
•  In 2012 GAAP sees expense IRS does not see
•  GAAP knows 2012 Income Tax Payable overstated
•  In 2012 record asset for overpayment of taxes
Deferred Tax Asset
GAAP: Accrual Basis
2012 2013 2014 Total
GAAP: Accrual Basis
2012 2013 2014 Total
Revenue
Expenses
$130 $130 $130 $390
60
60
60 180
Revenue
Expenses
$130 $130 $130 $390
60
60
60 180
NIBT
Income Tax Expense: 40%
70
70
70
210
NIBT
$28
$28
$28
$84
Income Tax Expense: 40%
70
70
70
210
$28
$28
$28
$84
Deferred Tax Asset
IRS: Cash Basis
2012 2013 2014 Total
Revenue
$130 $130 $130 $390
Expenses
NIBT
Income Tax Payable: 40%
20
50
110
180
110
80
20
210
$ 44
$ 32
$ 8
$84
Income Tax Payable
Expenses
Deferred Tax Asset
NIBT
49
Deferred Tax Asset: 2012
2013
110$16 80
Income Tax Payable: 40%
$ 44
$ 32
$4
20
($20)
210
$ 8
$84
50
Deferred Tax Asset: 2012
Deferred Tax Asset
2012
2012
2013 Total2014
2012
2013 2014
$28 $390 $28
$130$28
$130 $130
20$44 50 $32
110 180 $ 8
IRS: Cash Basis
Income Tax Expense
Revenue
Deferred Tax Asset
2014
Income Tax Expense
$28
$28
$28
Income Tax Payable
$44
$32
$ 8
Deferred Tax Asset
$16
$4
($20)
16
2012
16
Description
Income Tax Expense (GAAP)
Deferred Tax Asset ($40 × 40%)
Debit
28
Credit
Creation of Deferred Tax Asset (2012)
16
Income Taxes Payable (IRS)
44
2012: Record income tax exp, income tax payable, deferred tax asset
51
Income Statement
For the year ended December 31, 2012
DTA
=
Timing Difference
×
Tax Rate
$16
=
$40
×
40%
52
Deferred Tax Asset: 2013
Revenue
Deferred Tax Asset
Expense
Income Tax Expense
Net Income
Income Statement
December 31, 2012
Assets
Deferred Tax Asset
Liabilities
Income Tax Payable
Equity
2012
2013
2014
Income Tax Expense
$28
$28
$28
Income Tax Payable
$44
$32
$ 8
Deferred Tax Asset
$16
$4
($20)
28
Description
Income Tax Expense (GAAP)
Deferred Tax Asset ($10 × 40%)
16
44
53
Debit
28
4
Credit
Income Taxes Payable (IRS)
32
2013: Record income tax exp, income tax payable, deferred tax asset
54
9
Income Statement
For the year ended December 31, 2013
Deferred Tax Asset: 2013
Revenue
Expense
Deferred Tax Asset
2012
16
2013
4
Income Tax Expense
28
Net Income
Income Statement
December 31, 2013
20
Assets
Deferred Tax Asset (16 + 4)
Reversing of Deferred Tax Asset (2013)
DTA
=
Timing Difference
×
Tax Rate
$4
=
$10
×
40%
Income Tax Payable
55
Deferred Tax Asset: 2014
2013
32
Equity
56
Deferred Tax Asset: 2014
Deferred Tax Asset
2012
20
Liabilities
Deferred Tax Asset
2014
Income Tax Expense
$28
$28
$28
2012
Income Tax Payable
$44
$32
$ 8
2013
Deferred Tax Asset
$16
$4
($20)
16
4
2014
20
0
Description
Income Tax Expense (GAAP)
Debit
28
Deferred Tax Asset ($50 × 40%)
Credit
Reversing of Deferred Tax Asset (2014)
20
Income Taxes Payable (IRS)
8
2014: Record income tax exp, income tax payable, deferred tax asset
57
DTA
=
Timing Difference
×
Tax Rate
$20
=
$50
×
40%
58
Income Statement
For the year ended December 31, 2014
Revenue
Expense
Income Tax Expense
28
Net Income
Income Statement
December 31, 2014
Assets
Deferred Tax Asset
Liabilities
Income Tax Payable
Equity
0
8
59
60
10
Calculate Income Tax Expense as plug figure
What Creates Deferred Tax
Liability or Asset?
Calculate Income Tax Payable
§  Deferred Tax Liability
Income Taxes Payable [current tax expense]
± Change in deferred tax accounts
Income Taxes Payable (IRS)
Work backwards to solve for Income Tax Expense
Credit
Debit
Plug
Given
Income Taxes Payable (IRS)
Given
Plug
Deferred Tax Asset
55,090
63
Credit
Deferred Tax Liability [or Asset]
Description
Income Tax Expense
19,080
$600
$900
Description
Income Tax Expense
61
Deferred Tax Liability
$600
300
Income Tax Expense
§  IRS NIBT > GAAP NIBT
§  IRS rev higher (customer pays in advance)
§  IRS exp lower (warranty exp when paid)
Debit
74,170
× 30%
Calculate Income Tax Expense
§  Deferred Tax Asset
Plug
$2,000
× Tax rate
Income Taxes Payable [current tax expense]
§  GAAP NIBT > IRS NIBT in current period
§  GAAP rev higher (sales on account)
§  GAAP exp lower (straight-line vs. MACRS)
Description
Income Tax Expense
Taxable income (IRS)
Income Tax Payable
Work backwards to solve for Income Tax Expense
Debit
34,870
62
Credit
31,870
66,740
64
See solution on following slide
65
66
11
Deferred Tax Asset
Valuation Allowance
Learning Objective 4
§  Explain purpose of a deferred tax asset
valuation allowance
§  Reduce book value of def. tax asset
§  “More likely than not” some or all of
deferred tax asset may not be realized
§  Probability of 50% or more
§  Account name
§  Allowance to Reduce Deferred Tax
Asset to Expected Realizable Value
Expected future taxes payable < deferred tax asset
67
68
Learning Objective 5
§  Describe presentation of income tax
expense in income statement
Assets
Deferred Tax Asset
Allowance to Reduce Deferred Tax Asset
Deferred Tax Asset, Net
$200,500
60,150
$140,350
69
Income Statement Presentation
70
Income Statement Presentation
§  Disclose components
Dollar Corporation
Income Statement
For the year ended December 31, 2011
§  Current (Income Taxes Payable)
§  Changed in Deferred Tax accounts
Calculate Income Tax Expense
Income Taxes Payable [current tax exp]
$20,000
± Change in Deferred Tax accounts
Income Tax Expense
− 5,000
$15,000
Revenues
$ 130
Expenses
60
Net Income Before Taxes
70
Income Tax Expense
Current
Change in Deferred Tax Accounts
Income Tax Expense
71
Net Income
$16
14
30
$ 40
72
12
Learning Objective 6
§  Describe various temporary and
permanent differences
73
Accounting for Income Taxes
74
Permanent Differences
§  GAAP and tax will differ because of
§  Recorded in EITHER
§  Temporary differences (timing differences)
§  Permanent differences
§  GAAP income before taxes OR
§  IRS taxable income
§  But not both
Not temporary: Does not resolve in later period
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Examples of
Permanent Difference
Permanent Differences
§  One time event
§  Only affects period in which they occur
§  Does not give rise to future taxable or
deductible amounts
§  No deferred tax account created
§  Tax free income from U.S., Muni bonds
§  Interest and dividends received
§  Expenses related to tax free income
§  Life insurance on executive officers
§  Premiums paid
§  Proceeds received
§  Fines, penalties from violation of law
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78
13
Permanent Difference
Permanent Difference
§  IRS rules determine cash paid for taxes
§  FASB: Cash inflows, outflows important
§  In the long run, income tax expense
(GAAP) must equal cash paid for taxes
§  Therefore tax rules drive GAAP
calculation of income tax expense
Income tax expense (GAAP) is a plug number
calculated using income tax payable (IRS) and
reconciling temporary and permanent differences
§  Income Tax Payable
§  Determined directly using IRS rules
§  Income Tax Expense
§  Determined indirectly as plug figure
§  To plug for Income Tax Exp reconcile
§  Income Tax Payable
§  Temporary and permanent book / tax differ.
Formula for permanent diff also works for temporary diff
79
Temporary Difference
No IRS / GAAP Difference
Dollar or
Corporation
Income Statement
For the year ended December 31, 2011
Calculate Income Tax Expense as plug figure
Calculate Income Tax Payable
Taxable income (IRS)
$2,000
× Tax rate
× 30%
Income Taxes Payable [current tax expense]
Revenue
Service Revenue
$600
± Change in deferred tax accounts
Income Tax Expense
Description
Income Tax Expense
Salary Expense
30,000
$600
Insurance Expense
20,000
300
Advertising Expense
10,000
Total Operating Expenses
$900
Debit
Plug
Operating Income
Credit
Deferred Tax Liability [or Asset]
Given
Income Taxes Payable (IRS)
Given
Net Income Before Taxes
Income Tax Expense (30% tax rate)
81
Net Income
9,000
$ 21,000
Revenues
$100,000
60,000
Salary Expense
30,000
Expenses
Insurance Expense
20,000
Tax rate
Advertising Expense
10,000
82
40,000
Interest Expense
Net Income Before Taxes
10,000
30,000
Revenues
Expenses
Net Income Before Taxes (NIBT)
Income Tax Expense
9,000
$ ??,???
30%
Income Statement
60,000
Operating Income
Net Income
30,000
Data for Net Income Calculation
$ 100,000
Expenses
Income Tax Expense (30% tax rate)
10,000
Income Tax Expense
No Permanent Difference
Revenue
Total Operating Expenses
60,000
40,000
Interest Expense
Permanent
Difference
Dollar Corporation
Income Statement
For the year ended December 31, 2011
Service Revenue
$ 100,000
Expenses
Calculate Income Tax Expense
Income Taxes Payable [current tax expense]
80
83
Net Income
$100,000
60,000
40,000
12,000
$28,000
84
14
Income Tax Expense
Permanent Difference #1
Income Tax Expense
Permanent Difference #2
Data for Net Income Calculation
Revenues (municipal bond interest)
Expenses (GAAP = IRS)
Tax rate
Data for Net Income Calculation
$100,000
Revenues (GAAP = IRS)
60,000
Expenses (fines and penalties)
30%
Tax rate
$100,000
60,000
30%
Income Statement
Income Statement
Revenues
$100,000
Revenues
$100,000
Expenses
60,000
Expenses
60,000
Net Income Before Taxes (NIBT)
40,000
Net Income Before Taxes (NIBT)
40,000
Income Tax Expense
Net Income
0
$40,000
Income Tax Expense
85
Net Income
30,000
$10,000
86
Learning Objective 7
§  Explain effect of various tax rates and
tax rate changes on deferred income
taxes
Income Tax Expense = Income Tax Payable ± Change Deferred Tax Account
87
88
89
90
Future Tax Rates
§  Use tax rates enacted by law
§  If current law includes different rates in
future use rate enacted for future year
§  2010 – 2014:
15%
§  2015 – 2020:
20%
§  2020 and beyond: 25%
§  When change in tax rate enacted record
effect on existing deferred income tax
accounts immediately
15
Learning Objective 8
§  Apply accounting procedures for a loss
carryback and a loss carryforward
91
92
Loss Carryback
Two Years
Net Operating Losses
§  Net operating loss (NOL)
§  Losses applied to earliest year first
§  Any loss remaining carried forward
§  Tax-deductible expenses exceed taxable
revenues
§  Use NOL of current year to offset
taxable income in past or future years
§  Carryback two years
§  Carryforward twenty years
93
94
95
96
Loss Carryforward
Twenty Years
§  NOL remaining after carryback
§  May elect to forgo carryback
16
Learning Objective 9
§  Describe presentation of deferred
income taxes in financial statements
97
Balance Sheet Presentation
98
Income Statement Presentation
§  Classify deferred tax liability or asset as
current or noncurrent based on
classification of related asset or liability
or when timing difference resolved
§  Classify all deferred tax accounts on
balance sheet in two categories:
§  Allocate income tax expense to
§  Continuing operations
§  Discontinued operations
§  Extraordinary items
§  Prior period adjustments
§  Disclose components of income tax
expense for continuing operations
§  Net current (asset or liability)
§  Net noncurrent amount (asset or liability)
99
§  Current tax expense (inc. taxes payable)
§  Deferred tax expense (change in balance)
100
Learning Objective 10
§  Indicate basic principles of asset-liability
method
101
102
17
Asset-Liability Method
Asset-Liability Method
§  Current tax liability or asset recognized
for net estimated taxes payable or
refundable on tax return for current year
§  Deferred tax liability or asset is
recognized for net estimated future tax
effects attributable to temporary
differences and carryforwards
§  Measurement of current and deferred
tax liabilities and assets based on
current tax law
§  Value of deferred tax assets reduced, if
necessary, by amount of tax benefits
not expected to be realized
103
Asset-Liability Method
104
End of Chapter
105
Appendix 19A
106
Comprehensive: 2011
§  Comprehensive example
§  Began operations in 2011
§  Gross profit per contract, $80,000
§  Customers pay on installment basis
§  GAAP: All gross profit in year of sale
§  IRS: Cash basis
§  Collect 1/5 of revenue in cash each year
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108
18
Comprehensive: 2011
Comprehensive: 2011
§  Purchased equipment, $540,000
§  In 2011, completed seven contracts
§  GAAP: Straight-line depreciation
§  IRS: MACRS depreciation
§  GAAP gross profit, $560,000 (7 × $80,000)
§  IRS cash collected $112,000 ($560,000 / 5)
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110
Comprehensive: 2011
Comprehensive: 2011
§  Two-year product warranties
§  In 2011 product warranty liability accrued per
GAAP rules, $200,000
§  Cash paid for warranty work
§
§
§
§
§  2011, $44,000 (actual)
§  2012, $56,000 (estimated)
§  2013, $100,000 (estimated)
2011: Nontaxable bond interest rev, $28,000
2011: Nondeductible fines paid $26,000
2011: GAAP pretax income, $412,000
Tax rates
§  2011, 50%
§  2012 and later, 40%
§  Taxable income expected in all future years
111
Comprehensive: 2011
112
Comprehensive: 2011
§  Calculate income tax payable in 2011
§  Calculate deferred income taxes
113
114
19
Comprehensive: 2011
Comprehensive: 2011
§  Calculate deferred income taxes
§  Calculate income tax expense
115
Comprehensive: 2011
Description
Debit Credit
Plug
Income tax expense
174,000
Deferred tax asset
62,400
Income taxes payable
50,000
Deferred tax liability
186,400
2011: Record income tax expense, income tax payable, def tax accounts
116
Comprehensive: 2011
§  Financial Statement Presentation
§  Financial Statement Presentation
117
118
20