Volume 2
19-1
CHAPTER
19
ACCOUNTING FOR INCOME TAXES
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
19-2
Learning Objectives
1.
Identify differences between pretax financial income and taxable income.
2.
Describe a temporary difference that results in future taxable amounts.
3.
Describe a temporary difference that results in future deductible amounts.
4.
Explain the non-recognition of a deferred tax asset.
5.
Describe the presentation of income tax expense in the income statement.
6.
Describe various temporary and permanent differences.
7.
Explain the effect of various tax rates and tax rate changes on deferred
income taxes.
8.
Apply accounting procedures for a loss carryback and a loss carryforward.
9.
Describe the presentation of income taxes in financial statements.
10. Indicate the basic principles of the asset-liability method.
19-3
Accounting for Income Taxes
Fundamentals of
Accounting for
Income Taxes
Future taxable
amounts and
deferred taxes
Future deductible
amounts and
deferred taxes
Income statement
presentation
Specific
differences
Rate
considerations
19-4
Accounting for Net
Operating Losses
Loss carryback
Loss carryforward
Loss carryback
example
Loss carryforward
example
Financial Statement
Presentation
Statement of
financial position
Income statement
Tex reconciliation
Review of AssetLiability Method
Fundamentals of Accounting for Income Taxes
Corporations must file income tax returns following the
guidelines developed by the appropriate taxing authority,
thus they:

calculate taxes payable based upon tax regulations,

calculate income tax expense based upon IFRS.
Amount reported as tax expense will often differ from the
amount of taxes payable to the taxing authority.
19-5
LO 1 Identify differences between pretax financial income and taxable income.
Fundamentals of Accounting for Income Taxes
Financial Statements
Tax Return
Illustration 19-1
vs.
Tax
Authority

Taxable Income

Tax Code
Income Tax Payable
Exchanges
Investors and Creditors
Pretax Financial Income
IFRS
Income Tax Expense
19-6
LO 1 Identify differences between pretax financial income and taxable income.
Fundamentals of Accounting for Income Taxes
Illustration: Chelsea, Inc. reported revenues of $130,000 and
expenses of $60,000 in each of its first three years of operations.
For tax purposes, Chelsea reported the same expenses to the tax
authority in each of the years. Chelsea reported taxable revenues
of $100,000 in 2011, $150,000 in 2012, and $140,000 in 2013.
What is the effect on the accounts of reporting different amounts of
revenue for IFRS versus tax?
19-7
LO 1 Identify differences between pretax financial income and taxable income.
Book vs. Tax Difference
Illustration 19-2
IFRS Reporting
2011
2012
2013
Total
Revenues
$130,000
$130,000
$130,000
$390,000
Expenses
60,000
60,000
60,000
180,000
Pretax financial income
$70,000
$70,000
$70,000
$210,000
Income tax expense (40%)
$28,000
$28,000
$28,000
$84,000
Illustration 19-3
Tax Reporting
2011
2012
2013
Total
Revenues
$100,000
$150,000
$140,000
$390,000
Expenses
60,000
60,000
60,000
180,000
Pretax financial income
$40,000
$90,000
$80,000
$210,000
Income tax payable (40%)
$16,000
$36,000
$32,000
$84,000
19-8
LO 1 Identify differences between pretax financial income and taxable income.
Book vs. Tax Difference
Illustration 19-4
Comparison
Income tax expense (IFRS)
Income tax payable (tax authority)
Difference
2011
2012
2013
Total
$28,000
$28,000
$28,000
$84,000
16,000
36,000
32,000
84,000
$12,000
$(8,000)
$(4,000)
Are the differences accounted for in the financial statements?
19-9
Year
Reporting Requirement
2011
Deferred tax liability account increased to $12,000
2012
Deferred tax liability account reduced by $8,000
2013
Deferred tax liability account reduced by $4,000
$0
Yes
LO 1 Identify differences between pretax financial income and taxable income.
Financial Reporting
Statement of Financial Position
Assets:
Income Statement
2011
2011
Revenues:
Expenses:
Liabilities:
Deferred taxes
Income tax payable
Equity:
12,000
16,000
Income tax expense
28,000
Net income (loss)
Where does the “deferred tax liability” get reported in the financial
statements?
19-10
LO 1 Identify differences between pretax financial income and taxable income.
Temporary Differences
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 result in taxable amounts or deductible
amounts in future years.
Future Taxable 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.
Future Deductible Amounts
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 Differences
19-11
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
Illustration: In Chelsea’s situation, the only difference between the
book basis and tax basis of the assets and liabilities relates to
accounts receivable that arose from revenue recognized for book
purposes. Chelsea reports accounts receivable at $30,000 in the
December 31, 2011, IFRS-basis statement of financial position.
However, the receivables have a zero tax basis.
Illustration 19-5
19-12
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
Illustration: Reversal of Temporary Difference, Chelsea Inc.
Illustration 19-6
Chelsea assumes that it will collect the accounts receivable and report
the $30,000 collection as taxable revenues in future tax returns.
Chelsea does this by recording a deferred tax liability.
19-13
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
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.
Illustration 19-4
Income tax expense (IFRS)
Income tax payable (tax authority)
Difference
19-14
2010
2011
2012
Total
$28,000
$28,000
$28,000
$84,000
16,000
36,000
32,000
84,000
$12,000
$(8,000)
$(4,000)
$0
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration: Because it is the first year of operations for Chelsea,
there is no deferred tax liability at the beginning of the year.
Chelsea computes the income tax expense for 2011 as follows:
Illustration 19-9
19-15
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration: Chelsea makes the following entry at the end of 2011
to record income taxes.
Income Tax Expense
19-16
28,000
Income Tax Payable
16,000
Deferred Tax Liability
12,000
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration: Computation of Income Tax Expense for 2012.
Illustration 19-10
19-17
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
Deferred Tax Liability
Illustration: Chelsea makes the following entry at the end of 2012
to record income taxes.
Income Tax Expense
28,000
Deferred Tax Liability
8,000
Income Tax Payable
36,000
Illustration 19-11
19-18
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
E19-1: Starfleet Corporation has one temporary difference at the
end of 2010 that will reverse and cause taxable amounts of $55,000
in 2011, $60,000 in 2012, and $75,000 in 2013. Starfleet’s pretax
financial income for 2010 is $400,000, and the tax rate is 30% for all
years. There are no deferred taxes at the beginning of 2010.
Instructions
a) Compute taxable income and income taxes payable for 2010.
b) Prepare the journal entry to record income tax expense,
deferred income taxes, and income taxes payable for 2010.
19-19
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Taxable Amounts and Deferred Taxes
Ex. 19-1:
Current Yr.
INCOME:
2010
Financial income (GAAP)
400,000
Temporary Diff.
Taxable income (IRS)
b.
19-20
2012
2013
(190,000)
55,000
60,000
75,000
210,000
55,000
60,000
75,000
a.
Tax rate
Income tax
2011
30%
a.
Income tax expense (plug)
63,000
30%
16,500
30%
18,000
30%
22,500
120,000
Income tax payable
63,000
Deferred tax liability
57,000
LO 2 Describe a temporary difference that results in future taxable amounts.
Future Deductible Amounts and Deferred Taxes
Illustration: During 2011, Cunningham Inc. estimated its warranty
costs related to the sale of microwave ovens to be $500,000, paid
evenly over the next two years. For book purposes, in 2011
Cunningham reported warranty expense and a related estimated
liability for warranties of $500,000 in its financial statements. For
tax purposes, the warranty tax deduction is not allowed until
paid.
Illustration 19-12
19-21
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Illustration: Reversal of Temporary Difference, Cunningham Inc.
Illustration 19-13
When Cunningham pays the warranty liability, it reports an expense for tax
purposes. Cunningham reports this future tax benefit in the December 31,
2010, statement of financial position as a deferred tax asset.
19-22
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
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.
19-23
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration: Hunt Co. accrues a loss and a related liability of
$50,000 in 2011 for financial reporting purposes because of pending
litigation. Hunt cannot deduct this amount for tax purposes until the
period it pays the liability, expected in 2012.
Illustration 19-14
19-24
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration: Assuming that 2011 is Hunt’s first year of operations,
and income tax payable is $100,000, Hunt computes its income tax
expense as follows.
Illustration 19-16
19-25
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration: Hunt makes the following entry at the end of 2011 to
record income taxes.
Income Tax Expense
80,000
Deferred Tax Asset
20,000
Income Tax Payable
19-26
100,000
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration: Computation of Income Tax Expense for 2012.
Illustration 19-17
19-27
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset
Illustration: Hunt makes the following entry at the end of 2012 to
record income taxes.
Income Tax Expense
160,000
Deferred Tax Asset
20,000
Income Tax Payable
140,000
Illustration 19-18
19-28
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Illustration: Columbia Corporation has one temporary difference at
the end of 2010 that will reverse and cause deductible amounts of
$50,000 in 2011, $65,000 in 2012, and $40,000 in 2013. Columbia’s
pretax financial income for 2010 is $200,000 and the tax rate is 34%
for all years. There are no deferred taxes at the beginning of 2010.
Columbia expects to be profitable in the future.
Instructions
a) Compute taxable income and income taxes payable for 2010.
b) Prepare the journal entry to record income tax expense,
deferred income taxes, and income taxes payable for 2010.
19-29
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Illustration
Current Yr.
INCOME:
2010
Financial income (GAAP)
200,000
Temporary Diff.
Taxable income (IRS)
a.
Tax rate
Income tax
b.
2012
2013
155,000
(50,000)
(65,000)
(40,000)
355,000
(50,000)
(65,000)
(40,000)
34%
34%
34%
(17,000)
(22,100)
(13,600)
34%
a.
120,700
Income tax expense
68,000
Deferred tax asset
52,700
Income tax payable
19-30
2011
120,700
LO 3 Describe a temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Deferred Tax Asset (Non-Recognition)
A company should reduce a deferred tax asset if it is probable that
it will not realize some portion or all of the deferred tax asset.
“Probable” means a level of likelihood of at least slightly more
than 50 percent.
19-31
LO 4 Explain the non-recognition of a deferred tax asset.
Future Deductible Amounts and Deferred Taxes
E19-14: Callaway Corp. has a deferred tax asset balance of
$150,000 at the end of 2010 due to a single cumulative temporary
difference of $375,000. At the end of 2011 this same temporary
difference has increased to a cumulative amount of $500,000.
Taxable income for 2011 is $850,000. The tax rate is 40% for all
years. No valuation account is in existence at the end of 2010.
Instructions
Assuming that it is probable that $30,000 of the deferred tax asset
will not be realized, prepare the journal entries required for 2011.
19-32
LO 4 Explain the non-recognition of a deferred tax asset.
Future Deductible Amounts and Deferred Taxes
E19-14:
INCOME:
2009
Financial income (GAAP)
Current Yr.
2010
2011
725,000
Temporary difference
375,000
125,000
(500,000)
Taxable income (IRS)
375,000
850,000
(500,000)
-
Tax rate
Income tax
40%
150,000
40%
340,000
40%
(200,000)
40%
-
Income tax expense
290,000
Deferred tax asset
50,000
Income tax payable
Income tax expense
30,000
Deferred tax asset
19-33
340,000
30,000
LO 4 Explain the non-recognition of a deferred tax asset.
Income Statement Presentation
Formula to Compute Income Tax Expense
Illustration 19-20
Income tax
payable or
refundable
+
-
Change in
deferred income
tax
=
Income tax
expense or
benefit
In the income statement or in the notes to the financial
statements, a company should disclose the significant
components of income tax expense attributable to continuing
operations.
19-34
LO 5 Describe the presentation of income tax expense in the income statement.
Income Statement Presentation
Given the previous information related to Chelsea Inc.,
Chelsea reports its income statement as follows.
Illustration 19-21
19-35
LO 5 Describe the presentation of income tax expense in the income statement.
Specific Differences
Temporary Differences

Taxable temporary differences - Deferred tax liability

Deductible temporary differences - Deferred tax Asset
Text Illustration 19-22:
Examples of Temporary Differences
19-36
LO 6 Describe various temporary and permanent differences.
Specific Differences
Permanent Differences

Enter into pretax financial income but never into taxable
income or

Enter into taxable income but never into pretax financial
income.

Affect only the period in which they occur.

Do not give rise to future taxable or deductible amounts.
Text Illustration 19-24: Examples of Permanent Differences
19-37
LO 6 Describe various temporary and permanent differences.
Specific Differences
Do the following generate:
 Future Deductible Amount = Deferred Tax Asset
 Future Taxable Amount = Deferred Tax Liability
 Permanent Difference
E19-6
1. An accelerated depreciation system is used for tax purposes,
and the straight-line depreciation method is used for financial
reporting purposes.
Future
Taxable
Amount
2. A landlord 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 purposes.
Future
Deductible
Amount
19-38
LO 6 Describe various temporary and permanent differences.
Specific Differences
Do the following generate:
 Future Deductible Amount = Deferred Tax Asset
 Future Taxable Amount = Deferred Tax Liability
 Permanent Difference
5. Sales of investments are accounted for by the accrual
method for financial reporting purposes and the installment
method for tax purposes.
E19-6
Future
Taxable
Amount
6. Interest is received on an investment in tax-exempt
governmental obligations.
Permanent
Difference
7. 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.
Future
Deductible
Amount
19-39
LO 6 Describe various temporary and permanent differences.
Permanent Differences
E19-4: Havaci Company reports pretax financial income of €80,000
for 2010. 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 by €27,000.
3. Fines for pollution appear as an expense of €11,000 on the
income statement.
Havaci’s 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 2010.
19-40
LO 6 Describe various temporary and permanent differences.
Permanent Differences
E19-4:
Current Yr.
Deferred
Deferred
INCOME:
2010
Asset
Liability
Financial income (GAAP)
€ 80,000
Excess tax depreciation
(16,000)
Excess rent collected
27,000
Fines (permanent)
11,000
Taxable income (IRS)
102,000
Tax rate
Income tax
Income tax expense
(€ 27,000)
(27,000)
16,000
30%
30%
30%
€ 30,600
(€ 8,100)
€ 4,800
-
27,300
Deferred tax asset
8,100
Deferred tax liability
Income tax payable
19-41
€ 16,000
4,800
30,600
LO 6 Describe various temporary and permanent differences.
Tax Rate Considerations
Future tax Rates
A company must consider 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 Rates
When a change in the tax rate is enacted, companies should
record its effect on the existing deferred income tax accounts
immediately.
19-42
LO 7 Explain the effect of various tax rates and tax
rate changes on deferred income taxes.
Accounting for Net Operating Losses
Net operating loss (NOL) = tax-deductible expenses
exceed taxable revenues.
Tax laws permit taxpayers to use the losses of one year to
offset the profits of other years (carryback and
carryforward).
19-43
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
Loss Carryback

Back 2 years and forward 20 years.

Losses must be applied to earliest year first.
Illustration 19-29
19-44
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
Loss Carryforward

May elect to forgo loss carryback and

Carryforward losses 20 years.
Illustration 19-30
19-45
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
BE19-12: Conlin Corporation had the following tax information.
Taxable
Income
Year
2008
$
Tax
Rate
Taxes
Paid
300,000
35%
$
105,000
2009
325,000
30%
97,500
2010
400,000
30%
120,000
In 2011 Conlin suffered a net operating loss of $480,000,
which it elected to carry back. The 2011 enacted tax rate is
29%. Prepare Conlin’s entry to record the effect of the loss
carryback.
19-46
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
BE19-12
Financial income
2008
$
300,000
2009
$
2010
325,000
$
2011
400,000
Difference
Taxable income (loss)
300,000
325,000
Rate
Income tax
$
35%
105,000 $
$
300,000
400,000
30%
97,500 $
30%
120,000
(480,000)
29%
NOL Schedule
Taxable income
$
Carryback
325,000
$
(325,000)
Taxable income
300,000
-
Rate
Income tax (revised)
35%
105,000 $
30%
$
Refund
19-47
$
$
97,500
400,000
(480,000)
(155,000)
480,000
245,000
$
30%
73,500
46,500
29%
-
$144,000
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
E19-12: Journal Entry for 2011
Income tax refund receivable
Benefit due to loss carryback
19-48
144,000
144,000
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
BE19-13: Rode Inc. incurred a net operating loss of €500,000
in 2010. Combined income for 2008 and 2009 was €350,000.
The tax rate for all years is 40%. Rode elects the carryback
option. Prepare the journal entries to record the benefits of the
loss carryback and the loss carryforward.
19-49
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
BE19-13
2008-2009
Financial income
$
2010
2011
350,000
Difference
Taxable income (loss)
350,000
(500,000)
Rate
Income tax
$
40%
140,000
$
350,000
(500,000)
(350,000)
350,000
40%
NOL Schedule
Taxable income
Carryback
19-50
Taxable income
-
Rate
Income tax (revised)
40%
-
$
(150,000)
40%
(60,000)
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
E19-13: Journal Entries for 2010
Income tax refund receivable
140,000
Benefit due to loss carryback
Deferred tax asset
Benefit due to loss carryforward
19-51
140,000
60,000
60,000
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
BE19-14: Use the information for Rode 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 at the end of 2010.
19-52
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting for Net Operating Losses
E19-14: Journal Entries for 2010
Income tax refund receivable
Benefit due to loss carryback
19-53
140,000
140,000
Deferred tax asset
Benefit due to loss carryforward
60,000
Benefit due to loss carryforward
Allowance for deferred tax asset
60,000
60,000
60,000
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Valuation Allowance Revisited
Whether the company will realize a deferred tax asset depends on
whether sufficient taxable income exists or will exist within the
carryforward period.
Text Illustration 19-37: Possible Sources of Taxable Income
To the extent that it is not probable that taxable profit will be
available against which the unused tax losses or unused tax
credits can be utilized, the deferred tax asset is not recognized.
19-54
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Financial Statement Presentation
Statement of Financial Position
The net deferred tax asset or net deferred tax liability is reported
in the non-current section of the statement of financial position.
Illustration 19-38
19-55
LO 9
Financial Statement Presentation
Income Statement
Companies allocate income tax expense (or benefit) to
19-56

continuing operations,

discontinued operations,

other comprehensive income, and

prior period adjustments.
LO 9 Describe the presentation of income taxes in financial statements.
Income Statement
Components of income tax expense (benefit) may include:
1. Current tax expense (benefit).
2. Any adjustments recognized in the period for current tax of prior
periods.
3. Amount of deferred tax expense (benefit) relating to the
origination and reversal of temporary differences.
4. Amount of deferred tax expense (benefit) relating to changes in
tax rates or the imposition of new taxes.
5. Amount of the benefit arising from a previously unrecognized
tax loss, tax credit, or temporary difference of a prior period that
is used to reduce current and deferred tax expense.
19-57
LO 9
Financial Statement Presentation
Tax Reconciliation
Companies either provide:
19-58

A numerical reconciliation between tax expense (benefit)
and the product of accounting profit multiplied by the
applicable tax rate(s), disclosing also the basis on which
the applicable tax rate(s) is (are) computed; or

A numerical reconciliation between the average effective
tax rate and the applicable tax rate, disclosing also the
basis on which the applicable tax rate is computed.
LO 9 Describe the presentation of income taxes in financial statements.
Review of the Asset-Liability Method
Companies apply the following basic principles:
Illustration 19-42
19-59
LO 10 Indicate the basic principles of the asset-liability method.
Review of the Asset-Liability Method
Illustration 19-43
Procedures for Computing
and Reporting Deferred
Income Taxes
19-60
LO 10 Indicate the basic principles of the asset-liability method.
19-61

U.S. GAAP classifies deferred taxes based on the classification of the
asset or liability to which it relates. The classification of deferred taxes
under IFRS is always non-current.

U.S. GAAP uses an impairment approach for deferred tax assets. In
this approach, the deferred tax asset is recognized in full. It is then
reduced by a valuation account if it is more likely than not that all or a
portion of the deferred tax asset will not be realized. Under IFRS, an
affirmative judgment approach is used, by which a deferred tax asset is
recognized up to the amount that is probable to be realized.
19-62

For U.S. GAAP, the enacted tax rate must be used. IFRS uses the
enacted tax rate or substantially enacted tax rate. (“Substantially
enacted” means virtually certain.)

The tax effects related to certain items are reported in equity under
IFRS. That is not the case under U.S. GAAP, which charges or credits
the tax effects to income.

U.S. GAAP requires companies to assess the likelihood of uncertain
tax positions being sustainable upon audit. Potential liabilities must be
accrued and disclosed if the position is “more likely than not” to be
disallowed. Under IFRS, all potential liabilities must be recognized.
With respect to measurement, IFRS uses an expected-value approach
to measure the tax liability, which differs from U.S. GAAP.
Fiscal Year-2010
Allman Company, which began operations at the beginning of 2010,
produces various products on a contract basis. Each contract
generates a gross profit of $80,000. Some of Allman’s contracts provide
for the customer to pay on an installment basis. Under these contracts,
Allman collects one-fifth of the contract revenue in each of the following
four years. For financial reporting purposes, the company recognizes
gross profit in the year of completion (accrual basis); for tax purposes,
Allman recognizes gross profit in the year cash is collected (installment
basis).
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LO 11 Understand and apply the concepts and
procedures of interperiod tax allocation.
Fiscal Year-2010
Presented below is information related to Allman’s operations for 2010.
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1.
In 2010, the company completed seven contracts that allow for the
customer to pay on an installment basis. Allman recognized the related
gross profit of $560,000 for financial reporting purposes. It reported only
$112,000 of gross profit on installment sales on the 2010 tax return. The
company expects future collections on the related installment
receivables to result in taxable amounts of $112,000 in each of the next
four years.
2.
At the beginning of 2010, Allman Company purchased depreciable
assets with a cost of $540,000. For financial reporting purposes, Allman
depreciates these assets using the straight-line method over a six-year
service life. The following is the depreciation schedule for both financial
and tax purposes.
LO 11
Fiscal Year-2010
3.
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The company warrants its product for two years from the date of
completion of a contract. During 2010, the product warranty liability
accrued for financial reporting purposes was $200,000, and the amount
paid for the satisfaction of warranty liability was $44,000. Allman expects
to settle the remaining $156,000 by expenditures of $56,000 in 2011 and
$100,000 in 2012.
LO 11
Fiscal Year-2010
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4.
In 2010 nontaxable municipal bond interest revenue was $28,000.
5.
During 2010 nondeductible fines and penalties of $26,000 were paid.
6.
Pretax financial income for 2010 amounts to $412,000.
7.
Tax rates enacted before the end of 2010 were:
►
2010 50%
►
2011 and later years 40%
8.
The accounting period is the calendar year.
9.
The company is expected to have taxable income in all future years.
LO 11
Taxable Income and Income Tax Payable-2010
The first step is to determine Allman Company’s income tax
payable for 2010 by calculating its taxable income.
Illustration 19A-1
Illustration 19A-2
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LO 11
Deferred Income Taxes – End of 2010
Illustration 19A-3
Illustration 19A-4
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LO 11
Deferred Tax Expense (Benefit) and the Journal
Entry to Record Income Taxes - 2010
Computation of Deferred Tax Expense (Benefit), 2010
Illustration 19A-5
Computation of Net Deferred Tax Expense, 2010
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Illustration 19A-6
LO 11
Deferred Tax Expense (Benefit) and the Journal
Entry to Record Income Taxes - 2010
Computation of Total Income Tax Expense, 2010
Illustration 19A-7
Journal Entry for Income Tax Expense, 2010
Income Tax Expense
Deferred Tax Asset
Income Tax Payable
Deferred Tax Liability
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174,000
62,400
50,000
186,400
LO 11
Financial Statement Presentation - 2010
Companies should classify deferred tax assets and liabilities as
current and noncurrent on the balance sheet based on the
classifications of related assets and liabilities.
Illustration 19A-8
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LO 11
Financial Statement Presentation - 2010
Statement of Financial Position 2010
Illustration 19A-9
Income Statement 2010
Illustration 19A-10
19-72
LO 11
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