University:
California State University, Northridge
Course:
ACCT 352 | Intermediate Financial Accounting III
Academic year:

2024
Views:

302

Pages:

16
Author:

Terrell Cohen

16 Accounting for Income Taxes Part 1 Deferred Tax Assets and Deferred Tax Liabilities GAAP is the set of rules for preparing financial statements. Results in . . . Financial statement income tax expense. The Internal Revenue Code is the set of rules for preparing tax returns. Usually. . . Results in . . . IRS income taxes payable. The objective of accounting for income taxes is to recognize a deferred tax liability or deferred tax asset for the tax consequences of amounts that will become taxable or deductible in future years as a result of transactions or events that already have occurred. 16 - 2 Temporary Differences The difference in the rules for computing between pre-tax accounting income (according to GAAP) and taxable income (according to the IRS) often causes amounts to be reported in different years. This results in temporary differences. 16 - 3 Temporary Differences Temporary differences will reverse in one or more future periods. Accounting Income > Taxable Income Accounting Income < Taxable Income Future Taxable Amounts Future Deductible Amounts Deferred Tax Liability Deferred Tax Asset 16 - 4 Deferred Tax Liabilities A temporary difference originates in one period and reverses, or turns around, in one or more subsequent periods. 16 - 5 Deferred Tax Liabilities Calculate income tax that is currently payable: $100 × 40% = $40 Calculate change in deferred tax liability: ($40 × 40%) = $16 Combine the two to get the income tax expense: $40 + $16 = $56 Income tax expense Income tax payable Deferred tax liability 16 - 6 56 40 16 The FASB’s Balance Sheet Approach 16 - 7 Types of Temporary Differences 16 - 8 Deferred tax assets result in deductible amounts in the future. Deferred tax liabilities result in taxable amounts in the future. Deferred Tax Liabilities A temporary difference originates in one period and reverses, or turns around, in one or more subsequent periods. 16 - 9 Deferred Tax Liabilities Calculate income tax that is currently payable: $92 × 40% = $36.8 Calculate change in deferred tax liability: ($25 - $33) × 40% = $3.2 Combine the two to get the income tax expense: $36.8 + $3.2 = $40 Journal entry at the end of 2011 Income tax expense Income tax payable Deferred tax liability 16 - 10 40.0 36.8 3.2 Deferred Tax Liabilities Calculate income tax that is currently payable: $81 × 40% = $32.4 Calculate change in deferred tax liability: (($25 - $44) × 40%)) = $7.6 Combine the two to get the income tax expense: $32.4 + $7.6 = $40 Journal entry at the end of 2012 Income tax expense Income tax payable Deferred tax liability 16 - 11 40.0 32.4 7.6 Deferred Tax Liabilities Calculate income tax that is currently payable: $110 × 40% = $44 Calculate change in deferred tax liability: (($25 - $15) × 40%)) = $4 Combine the two to get the income tax expense: $44 – 4 = $40 Journal entry at the end of 2013 Income tax expense Deferred tax liability Income tax payable 16 - 12 40 4 44 Deferred Tax Liabilities Journal entry at the end of 2014 Income tax expense Deferred tax liability Income tax payable 16 - 13 40.0 6.8 46.8 Deferred Tax Assets RDP Networking reported pretax accounting income in 2011, 2012, and 2013 of $70 million, $100 million, and $100 million, respectively. The 2011 income statement includes a $30 million warranty expense that is deducted for tax purposes when paid in 2012 ($15 million) and 2013 ($15 million). The income tax rate is 40% each year. 16 - 14 Deferred Tax Assets Calculate income tax that is currently payable: $100 × 40% = $40 Calculate change in deferred tax asset: $30 × 40% = $12 Combine the two to get the income tax expense: $40 – 12 = $28 Journal entry at the end of 2011 Income tax expense Deferred tax asset Income tax payable 16 - 15 28 12 40 Deferred Tax Assets Journal entry at the end of 2012 and 2013 Income tax expense Deferred tax asset Income tax payable 16 - 16 40 6 34