Chapter 16 Discussion Notes Fall 2014 Essay

16-1

Accounting for Income Taxes
Chapter 16
Deferred Tax Asset/Liability: “Balance Sheet”
Approach
- Acct Income > Tax Income (Temp): Deferred
Tax Liability
- Acct Income < Tax Income (Temp): Deferred
Tax Asset
Permanent Differences (No Deferred
Asset/Liability)
Net Operating Losses and Carryforwards

16-2

Deferred Tax Assets and
Deferred Tax Liabilities
GAAP
GAAPis isthe theset setof of rules rules for for preparing preparing financial financial statements. statements. Results in . . .

Financial
Financialstatement
statement income incometax taxexpense. expense.

The
TheInternal
InternalRevenue
Revenue
Code
Codeis
is the theset set of of rules rules for for preparing preparing tax taxreturns. returns.
Results in . . .
Usually. . .

IRS
IRSincome
incometaxes taxes payable. payable. The
Theobjective
objectiveof of accounting accountingfor for income incometaxes taxes is isto to recognize recognizeaa deferred deferred tax tax liability liability or or deferred deferred tax tax asset asset for for the thetax taxconsequences consequencesof ofamounts amountsthat that will will become become taxable taxableor or deductible deductible in in future future years years as asaaresult result of of transactions transactionsor or events events that that already already have have occurred. occurred. 16-3

Temporary Differences
The
The difference difference in in the the rules rules for for computing computing between between pretax pretax accounting accounting income income (according
(according to to GAAP)
GAAP) and and taxable taxable income income (according
(according to to the the IRS)
IRS) often often causes causes amounts amounts to to be be reported reported in in different different years. years. This results in temporary differences.

16-4

Temporary Differences
Temporary
Temporary differences differences will will reverse reverse in in one one or or more more future future periods. periods. Accounting Income > Taxable Income

Accounting Income < Taxable Income

Future Taxable Amounts

Future Deductible Amounts

Deferred Tax Liability

Deferred Tax Asset

16-5

Deferred Tax Liabilities
Kent Land Management reported pretax accounting income in 2013,
2014, and 2015 of $100 million, plus additional 2013 income of $40 million from installment sales of property. However, the installment sales income is reported on the tax return when collected, in 2014 ($10 million) and 2015 ($30 million). The enacted tax rate is 40% each year.

A temporary difference originates in one period and reverses, or turns around, in one or more subsequent periods. 16-6

Deferred Tax Liabilities

Calculate
Calculate income income tax tax that that is is currently currently payable: payable: $100
$100 ×× 40%
40% == $40
$40
Calculate
Calculate change change in in deferred deferred tax tax liability: liability: ($40
($40 ×× 40%)
40%) == $16
$16
Combine
Combine the the two two to to get get the the income income tax tax expense: expense: $40
$40 ++ $16
$16 == $56
$56

Income tax expense
Income tax payable
Deferred tax liability

56
40
16

16-7

The FASB’s Balance Sheet Approach

16-8

Types of Temporary Differences

Deferred
Deferredtax
taxassets assets result resultin indeductible deductible amounts amountsin inthe thefuture. future.

Deferred
Deferredtax
taxliabilities liabilities result resultin intaxable taxableamounts amounts in inthe thefuture. future.

16-9

Deferred Tax Liabilities
Courts Temporary Services reported pretax accounting income in 2013, 2014,
2015, and 2016 of $100 million. In 2013, an asset was acquired for $100 million.
The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is deducted (by MACRS) over 2013–2016 as follows: $33 million, $44 million, $15 million, and $8 million. No other depreciable assets were acquired. The enacted tax rate is 40% each year.

A temporary difference originates in one period and reverses, or turns

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