Kế toán, kiểm toán - Chapter 16: Accounting for income taxes

Accounting for Income Taxes16 Learning ObjectivesDescribe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.LO1Identify and describe the types of temporary differences that cause deferred tax assets. LO2The Internal Revenue Code is the set of rules for preparing tax returns.Financial statement income tax expense.IRS income taxes payable.GAAP is the set of rules for preparing financial statements.Usually. . . Results in . . .Results in . . .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. Deferred Tax Assets/LiabilitiesTemporary DifferencesThese are called temporary differences.Often, the difference between pre-tax accounting income and taxable income results from items entering the income computations at different times.Temporary differences will reverse out in one or more future periods.Temporary DifferencesAccounting Income>Taxable IncomeFuture Taxable AmountsDeferred Tax LiabilityAccounting Income<Taxable IncomeFuture Deductible AmountsDeferred Tax AssetThe temporary differences in the yellow boxes create deferred tax assets because they result in deductible amounts in the future.The temporary differences in the gray boxes create deferred tax liabilities because they result in taxable amounts in the future.Deferred Tax LiabilitiesIn 2006, Baxter reports $300,000 of pretax income. Included in this amount is $100,000 resulting from revenue earned from an installment sale for which no cash was collected. The revenue will be taxed as the cash is collected in 2007 and 2008. Baxter expects to collect $70,000 in 2007 and the remaining $30,000 in 2008. In 2007 and 2008, Baxter reports $200,000 of pretax income. The company is subject to a 32% tax rate. There are no other temporary differences.Deferred Tax Liabilities2006 Income tax payable = $200,000 × 32% = $64,0002006 Deferred tax liability change = ($100,000 × 32%) - $0 = $32,000Deferred Tax LiabilitiesThe Deferred Tax Liability represents the future taxes Baxter will pay in 2007 and 2008.Deferred Tax LiabilitiesRecall this information for Baxter.2007 Income tax payable = $270,000 × 32% = $86,4002007 Deferred tax liability change = ($30,000 × 32%) - $32,000 = $22,400 Deferred Tax LiabilitiesFuture Taxable Amount ScheduleThe Deferred Tax Liability represents the future taxes Baxter will pay in 2008.Originating differenceReversing differenceDeferred Tax LiabilitiesRecall this information for Baxter.2008 Income tax payable = $230,000 × 32% = $73,6002008 Deferred tax liability change = ($0 × 32%) - $9,600  = $9,600 Deferred Tax LiabilitiesReversing differenceFuture Taxable Amount ScheduleThe Deferred Tax Liability represents the future taxes Baxter will pay.Health Magazine received $150,000 of subscriptions in advance during 2006. Subscription revenue will be earned equally in 2007, 2008 and 2009 for financial accounting purposes. The entire $150,000 will be taxed in 2006. There is additional income of $500,000 in each year. The company is subject to a 30% tax rate in each year.Deferred Tax AssetsDeferred Tax AssetsNow, let’s record the income tax entry for 2006.This is the computation for the Deferred Tax Asset.Deferred Tax Assets2006 Income tax payable = $650,000 × 30% = $195,000 2006 Deferred tax asset change = [($150,000 × 30%] - $0 = $45,000Deferred Tax AssetsAfter posting the entry, the Deferred Tax Asset account will have the desired ending balance of $45,000.Deferred Tax Assets2007 Income tax payable = $500,000 × 30% = $150,000 2007 Deferred tax asset change = [($100,000) × 30%] - $45,000 = ($15,000)Deferred Tax AssetsIn 2007, the balance in the Deferred Tax Asset should decrease to $30,000.Reversing differenceOriginating differenceCan you prepare the entries for 2008 and 2009?Deferred Tax AssetsThis would be the entry for 2008 and 2009.At the end of 2009, the balance in the Deferred Tax Asset would be zero.Learning ObjectivesDescribe when and how a valuation allowance is recorded for deferred tax assets.LO3A valuation allowance account is required when it is more likely than not that some portion of the deferred tax asset will not be realized.The deferred tax asset is then reported at its estimated net realizable value.Valuation AllowanceLearning ObjectivesExplain why nontemporary differences have no deferred tax consequences.LO4Nontemporary DifferencesCreated when an income item is included in taxable income or accounting income but will never be included in the computation of the other. Example: Interest on tax-free municipal bonds is included in accounting income but is never included in taxable income.Nontemporary DifferencesAlso called permanent differences.Disregarded when determining both taxes payable currently and the deferred tax asset or liability.Learning ObjectivesExplain how a change in tax rates affects the measurement of deferred tax amounts.LO5Tax Rate ConsiderationsDeferred tax assets and liabilities should be determined using the future tax rates, if known.The deferred tax asset or liability must be adjusted if a change in a tax law or rate occurs.InternalRevenueCodeLearning ObjectivesDetermine income tax amounts when multiple temporary differences exist.LO6Multiple Temporary DifferencesIt would be unusual for any but a very small company to have only a single temporary difference in any given year. Categorize all temporary differences according to whether they create Future taxable amountsFuture deductible amountsLearning ObjectivesDescribe when and how an operating loss carryforward and an operating loss carryback are recognized in the financial statements.LO7Net Operating Losses (NOL)Tax laws often allow a company to use tax NOLs to offset taxable income in earlier or subsequent periods.When used to offset earlier taxable income: Called: operating loss carryback. Result: tax refund.When used to offset future taxable income: Called: operating loss carryforward. Result: reduced tax payable.Net Operating Losses (NOL)Current Year-1-2Carryback Period+3+2+1. . .+20+4+5Carryforward PeriodThe NOL may first be applied against taxable income from two previous years. Unused NOL may be carried forward for 20 years. Net Operating Losses (NOL) In 2006 Garson, Inc. incurred an $85,000 net operating loss. The company is subject to a 30% tax rate. In 2004, Garson reported taxable income of $20,000, and in 2005, taxable income was $10,000. The company elects to carryback the NOL.Let’s look at the tax benefits of the operating loss carryback and carryforward.Net Operating Losses (NOL) Net Operating Losses (NOL) The deferred tax asset account created by the benefit of the carryforward will be used to lower income taxes payable in future years.Learning ObjectivesExplain how deferred tax assets and deferred tax liabilities are classified and reported in a classified balance sheet and describe related disclosures.LO8Disclose the following:Total of all deferred tax liabilities. Total of all deferred tax assets.Total valuation allowance recognized.Net change in valuation account.Approximate tax effect of each type of temporary difference (and carryforward).Deferred tax assets/liabilities are classified as current or noncurrent based on the classification of the related asset or liability.Balance Sheet ClassificationCurrent portion of tax expense (benefit)Deferred portion of tax expense (benefit), with separate disclosure for Portion that does not include the effect of the following separately disclosed amounts.Operating loss carryforwards.Adjustments due to changes in tax laws or rates.Adjustments to the beginning-of-the-year valuation allowance due to revised estimates.Investment tax credits.Additional DisclosuresLearning ObjectivesExplain intraperiod tax allocation.LO9Intraperiod Tax AllocationSFAS No. 109 requires intraperiod tax allocation for:Income from continuing operations.Discontinued operations.Extraordinary items.End of Chapter 16