CHAPTER
19
ACCOUNTING FOR INCOME TAXES
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
19-1
Chapter
19-2
Learning
Learning Objectives
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 purpose of a deferred tax asset valuation allowance.
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 deferred income taxes in financial statements.
10.
Indicate the basic principles of the asset-liability method.
Chapter
19-3
Accounting
Accounting for
for Income
Income Taxes
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
Chapter
19-4
Accounting for
Net Operating
Losses
Financial
Statement
Presentation
Loss carryback
Loss
carryforward
Loss carryback
example
Loss
carryforward
example
Balance sheet
Income
statement
Uncertain tax
positions
Review of AssetAssetLiability Method
Fundamentals
Fundamentals of
of Accounting
Accounting for
for Income
Income Taxes
Taxes
Fundamentals
Fundamentals of
of Accounting
Accounting for
for Income
Income Taxes
Taxes
Financial Statements
Corporations must file income tax returns following
the guidelines developed by the Internal Revenue
Service (IRS), thus they:
Illustration 19-1
vs.
calculate taxes payable based upon IRS code,
Exchanges
calculate income tax expense based upon GAAP.
Investors and Creditors
Amount reported as tax expense will often differ
from the amount of taxes payable to the IRS.
Pretax Financial Income
GAAP
Income Tax Expense
Chapter
19-5
LO 1 Identify differences between pretax financial income and taxable income.
Tax Return
Chapter
19-6
≠
Taxable Income
≠
Income Tax Payable
Tax Code
LO 1 Identify differences between pretax financial income and taxable income.
Book
Book vs.
vs. Tax
Tax Difference
Difference
Fundamentals
Fundamentals of
of Accounting
Accounting for
for Income
Income Taxes
Taxes
Illustration 19-2
Illustration: KRC, Inc. reported revenues of $130,000
and expenses of $60,000 in each of its first three
years of operations. For tax purposes, KRC reported
the same expenses to the IRS in each of the years.
GAAP
GAAPReporting
Reporting
2010
2011
2012
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
KRC reported taxable revenues of $100,000 in 2010,
Illustration 19-3
$150,000 in 2011, and $140,000 in 2012. What is the
effect on the accounts of reporting different amounts
of revenue for GAAP versus tax?
Chapter
19-7
LO 1 Identify differences between pretax financial income and taxable income.
Total
Tax
TaxReporting
Reporting
2010
2011
2012
Total
Revenues
$100,000
$150,000
$140,000
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
Chapter
19-8
$390,000
LO 1 Identify differences between pretax financial income and taxable income.
Book
Book vs.
vs. Tax
Tax Difference
Difference
Financial
Financial Reporting
Reporting for
for 2010
2010
Balance Sheet
Illustration 19-4
Comparison
Comparison
Income tax expense (GAAP)
Income tax payable (IRS)
Difference
2010
2011
2012
Total
$28,000
$28,000
$28,000
$84,000
16,000
36,000
32,000
84,000
$(8,000)
$(4,000)
$12,000
Assets:
Income Statement
2010
2010
Revenues:
$0
Expenses:
Are the differences accounted for in the financial statements?
Year
Reporting Requirement
2010
Deferred tax liability account increased to $12,000
2011
Deferred tax liability account reduced by $8,000
2012
Deferred tax liability account reduced by $4,000
Chapter
19-9
Yes
LO 1 Identify differences between pretax financial income and taxable income.
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?
Chapter
19-10
LO 1 Identify differences between pretax financial income and taxable income.
Temporary
Temporary Differences
Differences
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
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.
Illustration: In KRC’s situation, the only difference between
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 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.
the book basis and tax basis of the assets and liabilities
relates to accounts receivable that arose from revenue
recognized for book purposes. KRC reports accounts
receivable at $30,000 in the December 31, 2010, GAAP-basis
balance sheet. However, the receivables have a zero tax
basis.
Illustration 19-5
Illustration 1919-22 Examples of Temporary Differences
Chapter
19-11
LO 2 Describe a temporary difference that results in future taxable amounts.
Chapter
19-12
LO 2 Describe a temporary difference that results in future taxable amounts.
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Illustration: Reversal of Temporary Difference, KRC Inc.
Illustration 19-6
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Liability
A 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 (GAAP)
KRC assumes that it will collect the accounts receivable and report
the $30,000 collection as taxable revenues in future tax returns.
Income tax payable (IRS)
2010
2011
2012
Total
$28,000
$28,000
$28,000
$84,000
16,000
36,000
32,000
84,000
$(8,000)
$(4,000)
$12,000
Difference
$0
KRC does this by recording a deferred tax liability.
Chapter
19-13
LO 2 Describe a temporary difference that results in future taxable amounts.
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Chapter
19-14
LO 2 Describe a temporary difference that results in future taxable amounts.
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Liability
Deferred Tax Liability
Illustration: Because it is the first year of operations for
Illustration: KRC makes the following entry at the end of
KRC, there is no deferred tax liability at the beginning of the
2010 to record income taxes.
year. KRC computes the income tax expense for 2010 as
follows:
Chapter
19-15
Income Tax Expense
Illustration 19-9
LO 2 Describe a temporary difference that results in future taxable amounts.
Chapter
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
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Liability
Deferred Tax Liability
Illustration: Computation of Income Tax Expense for 2011.
Illustration: KRC makes the following entry at the end of
Illustration 19-10
2011 to record income taxes.
Income Tax Expense
Deferred Tax Liability
Income Tax Payable
Chapter
19-17
LO 2 Describe a temporary difference that results in future taxable amounts.
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Liability
Illustration: The entry to record income taxes at the end of
2012 reduces the Deferred Tax Liability by $4,000. The
Deferred Tax Liability account appears as follows at the end
of 2012.
Illustration 19-11
Chapter
19-18
28,000
8,000
36,000
LO 2 Describe a temporary difference that results in future taxable amounts.
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
E19E19-1: 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.
Chapter
19-19
LO 2 Describe a temporary difference that results in future taxable amounts.
Chapter
19-20
LO 2 Describe a temporary difference that results in future taxable amounts.
Future
Future Taxable
Taxable Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Ex. 19-1:
Current Yr.
INCOME:
2010
Financial income (GAAP)
Taxable income (IRS)
Tax rate
Income tax
Illustration: During 2010, Cunningham Inc. estimated its
2011
2012
2013
400,000
Temporary Diff.
(190,000)
55,000
60,000
75,000
a.
210,000
55,000
60,000
75,000
a.
63,000
30%
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
30%
16,500
30%
18,000
30%
22,500
warranty costs related to the sale of microwave ovens to be
$500,000, paid evenly over the next two years. For book
purposes, in 2010 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
b. Income tax expense (plug)
Chapter
19-21
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
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Illustration: Reversal of Temporary Difference, Cunningham Inc.
Illustration 19-13
Chapter
19-22
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Asset
A 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.
When Cunningham pays the warranty liability, it reports an expense
(deductible amount) for tax purposes. Cunningham reports this
future tax benefit in the December 31, 2010, balance sheet as a
deferred tax asset.
Chapter
19-23
LO 3 Describe a temporary difference that results in future deductible amounts.
Chapter
19-24
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Asset
Deferred Tax Asset
Illustration: Hunt Co. accrues a loss and a related liability
Illustration: Assuming that 2010 is Hunt’s first year of
of $50,000 in 2010 for financial reporting purposes because
operations, and income tax payable is $100,000, Hunt
of pending litigation. Hunt cannot deduct this amount for tax
computes its income tax expense as follows.
purposes until the period it pays the liability, expected in
2011.
Chapter
19-25
Illustration 19-16
Illustration 19-14
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Chapter
19-26
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Asset
Deferred Tax Asset
Illustration: Hunt makes the following entry at the end of
Illustration: Computation of Income Tax Expense for 2011.
2010 to record income taxes.
Income Tax Expense
80,000
Deferred Tax Asset
20,000
Income Tax Payable
Chapter
19-27
Illustration 19-17
100,000
LO 3 Describe a temporary difference that results in future deductible amounts.
Chapter
19-28
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Asset
Deferred Tax Asset
Illustration: Hunt makes the following entry at the end of
Illustration: The entry to record income taxes at the end of
2011 to record income taxes.
2011 reduces the Deferred Tax Asset by $20,000.
Income Tax Expense
Chapter
19-29
160,000
Illustration 19-18
Deferred Tax Asset
20,000
Income Tax Payable
140,000
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
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.
Chapter
19-30
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Illustration
Current Yr.
INCOME:
2010
Financial income (GAAP)
2011
2012
2013
200,000
Temporary Diff.
155,000
(50,000)
(65,000)
(40,000)
Taxable income (IRS)
355,000
(50,000)
(65,000)
(40,000)
34%
34%
34%
(17,000)
(22,100)
(13,600)
a.
Tax rate
Income tax
34%
a.
120,700
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.
Chapter
19-31
LO 3 Describe a temporary difference that results in future deductible amounts.
b. Income tax expense
Deferred tax asset
Income tax payable
Chapter
19-32
68,000
52,700
120,700
LO 3 Describe a temporary difference that results in future deductible amounts.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Deferred Tax Asset—Valuation 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
asset.
“More likely than not” means a level of likelihood of at
least slightly more than 50 percent.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
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 more likely than not that $30,000 of the
deferred tax asset will not be realized, prepare the journal
entries required for 2011.
Chapter
19-33
LO 4 Explain the purpose of a deferred tax asset valuation allowance.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
E19-14:
LO 4 Explain the purpose of a deferred tax asset valuation allowance.
Future
Future Deductible
Deductible Amounts
Amounts and
and Deferred
Deferred Taxes
Taxes
Current Yr.
INCOME:
2009
Financial income (GAAP)
2010
2011
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
Income tax expense
290,000
Deferred tax asset
50,000
Income tax payable
Income tax expense
Deferred Tax Asset—Valuation Allowance
725,000
Temporary difference
40%
(200,000)
E19-14 Balance Sheet Presentation
-
Assets:
40%
-
Deferred tax asset
Allowance for deferred tax
Deferred tax asset, net
340,000
2010
$ 200,000
(30,000)
170,000
30,000
Allowance for deferred tax asset
Chapter
19-35
Chapter
19-34
30,000
LO 4 Explain the purpose of a deferred tax asset valuation allowance.
Chapter
19-36
LO 4 Explain the purpose of a deferred tax asset valuation allowance.
Income
Income Statement
Statement Presentation
Presentation
Formula to Compute Income Tax Expense
Income tax
payable or
refundable
+
-
Change in
deferred
income tax
=
Illustration 19-20
Income tax
expense or
benefit
Income
Income Statement
Statement Presentation
Presentation
Given the previous information related to KRC Inc.,
KRC reports its income statement as follows.
Illustration 19-21
In the income statement or in the notes to the financial
statements, a company should disclose the significant
components of income tax expense (current and
deferred).
Chapter
19-37
LO 5 Describe the presentation of income tax expense in the income statement.
Chapter
19-38
Specific
Specific Differences
Differences
Temporary Differences
Taxable temporary differences - Deferred tax
liability
Deductible temporary differences - Deferred tax
Asset
Specific
Specific Differences
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 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 1919-22 Examples of Temporary Differences
Chapter
19-39
LO 6 Describe various temporary and permanent differences.
LO 5 Describe the presentation of income tax expense in the income statement.
Text Illustration 1919-24 Examples of Permanent Differences
Chapter
19-40
LO 6 Describe various temporary and permanent differences.
Specific
Specific Differences
Differences
Specific
Specific Differences
Differences
Do the following generate:
z Future Deductible Amount = Deferred Tax Asset
z Future Taxable Amount = Deferred Tax Liability
z A Permanent Difference
1. The MACRS depreciation system is used for tax
purposes, and the straightstraight-line depreciation method is
used for financial reporting purposes.
2. A landlord collects some rents in advance. Rents
received are taxable in the period when they are
received.
3. Expenses are incurred in obtaining taxtax-exempt income.
4. Costs of guarantees and warranties are estimated and
accrued for financial reporting purposes.
Chapter
19-41
Do the following generate:
z Future Deductible Amount = Deferred Tax Asset
z Future Taxable Amount = Deferred Tax Liability
z A Permanent Difference
Future
Taxable
Amount
Future
Deductible
Amount
Permanent
Difference
Future
Deductible
Amount
LO 6 Describe various temporary and permanent differences.
5. Sales of investments are accounted for by the accrual
method for financial reporting purposes and the
installment method for tax purposes.
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).
A
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
Chapter
19-42
LO 6 Describe various temporary and permanent differences.
Permanent
Permanent Differences
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.
Permanent
Permanent Differences
Differences
E19-4:
Current Yr.
Deferred
Deferred
INCOME:
2010
Asset
Liability
Financial income (GAAP)
LO 6 Describe various temporary and permanent differences.
$ 80,000
Excess tax depreciation
(16,000)
Excess rent collected
27,000
Fines (permanent)
102,000
Tax rate
(27,000)
30%
Income tax
$ 30,600
Income tax expense
Deferred tax asset
Deferred tax liability
Income tax payable
Chapter
19-44
$
16,000
$ (27,000)
11,000
Taxable income (IRS)
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.
Chapter
19-43
Future
Taxable
Amount
30%
$
(8,100) $
16,000
-
30%
4,800
-
27,300
8,100
4,800
30,600
LO 6 Describe various temporary and permanent differences.
Specific
Specific Differences
Differences
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
Tax Rate Considerations
Net operating loss (NOL) = tax-deductible expenses
A company must consider presently enacted changes in the
exceed taxable revenues.
tax rate that become effective for a particular future
year(s) when determining the tax rate to apply to existing
temporary differences.
The federal tax laws permit taxpayers to use the
losses of one year to offset the profits of other years
(carryback and carryforward).
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.
LO 7 Explain the effect of various tax rates and
tax rate changes on deferred income taxes.
Chapter
19-45
Chapter
19-46
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
Loss Carryforward
Loss Carryback
Back 2 years and forward 20 years
May elect to forgo loss carryback and
Losses must be applied to earliest year first
Carryforward losses 20 years
Illustration 19-29
Chapter
19-47
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Illustration 19-30
Chapter
19-48
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
BE19-12: (Carryback) Conlin Corporation had the following
tax information.
Year
Taxable
Income
Tax
Rate
Taxes
Paid
2008
$ 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 Valis’s entry to record the effect of the loss
carryback.
Chapter
19-49
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
BE19-12
Financial income
2009
2010
$ 325,000
$ 400,000
300,000
325,000
400,000
2011
Difference
Taxable income (loss)
Rate
35%
Income tax
30%
(480,000)
30%
$ 105,000
$ 97,500
$ 120,000
$ 300,000
$ 325,000
$ 400,000
29%
NOL Schedule
Taxable income
Carryback
Taxable income
Rate
Refund
Chapter
19-50
(325,000)
300,000
-
35%
Income tax (revised)
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
E19-12: Journal Entry for 2011
2008
$ 300,000
$ 105,000
30%
$
-
$ 97,500
(155,000)
(480,000)
480,000
245,000
-
30%
29%
$ 73,500
-
$ 46,500
$144,000
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
BE19-13: Rode Inc. incurred a net operating loss of
$500,000 in 2010. Combined income for 2008 and
Income tax refund receivable
Benefit due to loss carryback
2009 was $350,000. The tax rate for all years is 40%.
144,000
144,000
Rode elects the carryback option. Prepare the journal
entries to record the benefits of the loss carryback
and the loss carryforward.
Chapter
19-51
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Chapter
19-52
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
BE19-13
2008-2009
Financial income
$ 350,000
2010
2011
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
E19-13: Journal Entries for 2010
Difference
Taxable income (loss)
350,000
Rate
40%
Income tax
(500,000)
40%
Carryback
$ 350,000
(350,000)
Taxable income
-
Rate
40%
Income tax (revised)
Chapter
19-53
$
-
(500,000)
140,000
Deferred tax asset
60,000
Benefit due to loss carryforward
350,000
60,000
(150,000)
40%
(60,000)
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Chapter
19-54
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
BE19-14 (Carryback and Carryforward with Valuation
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Accounting
Accounting for
for Net
Net Operating
Operating Losses
Losses
E19-14: Journal Entries for 2010
Allowance): Use the information for Rode Inc. given in
Income tax refund receivable
BE19-13. Assume that it is more likely than not that the
realized in future years. Prepare all the journal entries
Deferred tax asset
necessary at the end of 2010.
140,000
60,000
Benefit due to loss carryforward
Benefit due to loss carryforward
Allowance for deferred tax asset
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
140,000
Benefit due to loss carryback
entire net operating loss carryforward will not be
Chapter
19-55
140,000
Benefit due to loss carryback
$ 140,000
NOL Schedule
Taxable income
Income tax refund receivable
Chapter
19-56
60,000
60,000
60,000
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
Valuation
Valuation Allowance
Allowance Revisited
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
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.
Financial
Financial Statement
Statement Presentation
Presentation
Balance Sheet Presentation
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:
¾ one for the net current amount, and
Text Illustration 19-38 Evidence to Consider in Evaluating the
need for a Valuation Account
Chapter
19-57
LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.
¾ one for the net noncurrent amount.
Chapter
19-58
Financial
Financial Statement
Statement Presentation
Presentation
LO 9 Describe the presentation of deferred
income taxes in financial statements.
Review
-Liability Method
Review of
of the
the Asset
Asset-Liability
Method
Income Statement Presentation
Companies apply the following basic principles:
Companies should allocate income tax expense (or
benefit) to continuing operations, discontinued
operations, extraordinary items, and prior period
adjustments.
(1) Recognize a current tax liability or asset for the
estimated taxes payable or refundable.
Companies should disclose the significant components
of income tax expense attributable to continuing
operations (current tax expense, deferred tax
expense, etc.).
(3) Base the measurement of current and deferred taxes on
provisions of the enacted tax law.
Chapter
19-59
LO 9 Describe the presentation of deferred
income taxes in financial statements.
(2) Recognize a deferred tax liability or asset for the
estimated future tax effects attributable to temporary
differences and carryforwards using enacted tax rate.
(4) Reduce the measurement of deferred tax assets, if
necessary, by the amount of any tax benefits that,
companies do not expect to realize.
Chapter
19-60
LO 10 Indicate the basic principles of the asset-liability method.
Review
-Liability Method
Review of
of the
the Asset
Asset-Liability
Method
Illustration 19-43
Procedures for Computing
and Reporting Deferred
Income Taxes
Chapter
19-61
LO 10 Indicate the basic principles of the asset-liability method.
¾
The classification of deferred taxes under iGAAP is always
noncurrent.
¾
Under iGAAP, an affirmative judgment approach is used, by which a
deferred tax asset is recognized up to the amount that is probable
to be realized. U.S. GAAP uses an impairment approach.
¾
iGAAP uses the enacted tax rate or substantially enacted tax rate.
(“Substantially enacted” means virtually certain.) For U.S. GAAP,
the enacted tax rate must be used.
Chapter
19-62
Fiscal Year-2009
Allman Company, which began operations at the beginning of 2009,
¾
¾
Chapter
19-63
The tax effects related to certain items are reported in equity
under iGAAP. 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 iGAAP, all potential liabilities must be
recognized. With respect to measurement, iGAAP uses an
expected-value approach to measure the tax liability, which differs
from U.S. GAAP.
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).
Chapter
19-64
LO 11 Understand and apply the concepts and
procedures of interperiod tax allocation.
Fiscal Year-2009
Fiscal Year-2009
Presented below is information related to Allman’s operations for 2009.
Chapter
19-65
1.
In 2009, 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
2009 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 2009, 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. For tax purposes, the assets fall in the fiveyear recovery class, and Allman uses the MACRS system.
LO 11
3.
Chapter
19-66
The company warrants its product for two years from the date of
completion of a contract. During 2009, 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 2010 and $100,000 in 2011.
LO 11
Taxable Income and Income Tax PayablePayable-2009
Fiscal Year-2009
4.
In 2009 nontaxable municipal bond interest revenue was $28,000.
The first step is to determine Allman Company’s income tax
5.
During 2009 nondeductible fines and penalties of $26,000 were paid.
payable for 2009 by calculating its taxable income.
6.
Pretax financial income for 2009 amounts to $412,000.
7.
Tax rates enacted before the end of 2009 were:
¾
2009 50%
¾
2010 and later years 40%
Illustration 19A-1
8.
The accounting period is the calendar year.
9.
The company is expected to have taxable income in all future years.
Illustration 19A-2
Chapter
19-67
LO 11
Chapter
19-68
LO 11
Computing Deferred Income Taxes – End of 2009
Deferred Tax Expense (Benefit) and the Journal
Entry to Record Income Taxes - 2009
Illustration 19A-3
Computation of Deferred Tax Expense (Benefit), 2009
Illustration 19A-5
Illustration 19A-4
Computation of Net Deferred Tax Expense, 2009
Chapter
19-69
LO 11
Illustration 19A-6
Chapter
19-70
LO 11
Deferred Tax Expense (Benefit) and the Journal
Entry to Record Income Taxes - 2009
Financial Statement Presentation - 2009
Computation of Total Income Tax Expense, 2009
current and noncurrent on the balance sheet based on the
Companies should classify deferred tax assets and liabilities as
Illustration 19A-7
classifications of related assets and liabilities.
Illustration 19A-8
Journal Entry for Income Tax Expense, 2009
Income Tax Expense
174,000
Deferred Tax Asset
62,400
Income Tax Payable
Chapter
19-71
Deferred Tax Liability
50,000
186,400
LO 11
Chapter
19-72
LO 11
Copyright
Copyright
Financial Statement Presentation - 2009
Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
Balance Sheet Presentation of Deferred Taxes, 2009
in Section 117 of the 1976 United States Copyright Act without
Illustration 19A-9
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
Illustration 19A-10
use of these programs or from the use of the information
contained herein.
Chapter
19-73
LO 11
Chapter
19-74