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Transcript of Accounting for Income Taxes C hapter 19 An electronic presentation by Norman Sunderman Angelo State...
Accounting for Income Taxes
Chapter19
An electronic presentation by Norman Sunderman Angelo State University
An electronic presentation by Norman Sunderman Angelo State University
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Intermediate AccountingIntermediate Accounting 10th edition 10th edition
Nikolai Bazley JonesNikolai Bazley Jones
2
1. Understand permanent and temporary differences.
2. Explain the conceptual issues regarding interperiod tax allocation.
3. Record and report deferred tax liabilities.
4. Record and report deferred tax assets.5. Explain an operating loss carryback
and carryforward.
Objectives
3
6. Account for an operating loss carryback.7. Account for an operating loss
carryforward.8. Apply intraperiod tax allocation.9. Classify deferred tax liabilities and
assets.
Objectives
4
1. Because there are differences between when an event is recognized for tax purposes and when it is recognized for financial purposes, there will be differences between tax expense on the income statement and taxes actually paid.
2. The objective of accounting for income taxes on the accrual basis is to recognize the amount of current and deferred taxes payable or refundable at the date of the financial statements.
1. Because there are differences between when an event is recognized for tax purposes and when it is recognized for financial purposes, there will be differences between tax expense on the income statement and taxes actually paid.
2. The objective of accounting for income taxes on the accrual basis is to recognize the amount of current and deferred taxes payable or refundable at the date of the financial statements.
ContinuedContinuedContinuedContinued
Differences Between Taxable and Financial Income
5
3. These differences require the use of Deferred Income Tax accounts to reflect the tax consequences of events recognized in different periods for financial and tax reporting.
4. Recognition of deferred tax liabilities and deferred tax assets is required for domestic federal income taxes, and foreign, state, and local (including franchise) taxes based on income.
3. These differences require the use of Deferred Income Tax accounts to reflect the tax consequences of events recognized in different periods for financial and tax reporting.
4. Recognition of deferred tax liabilities and deferred tax assets is required for domestic federal income taxes, and foreign, state, and local (including franchise) taxes based on income.
Differences Between Taxable and Financial Income
6
The objective of financial reporting is to provide
useful information about companies to decision
makers.
The objective of financial reporting is to provide
useful information about companies to decision
makers.
Income State-ment
Income Tax
Return
Overview and Definitions
7
Income State-ment
Income Tax
Return
Frees CorporationIncome Statement
For Year Ended 12/31/07Revenues $180,000 Cost of goods sold (78,000)Gross profit $105,000 Other expenses (60,000)Pretax income from continuing operations $ 45,000 Income taxes (11,000)Net income $ 34,000
Overview and Definitions
8
Income State-ment
Income Tax
Return
Frees CorporationIncome Tax Return
For Year Ended 12/31/07Revenues $170,000 Cost of goods sold (70,000)Gross profit $100,000 Other expenses (60,000)Pretax income from continuing operations $ 40,000 Income taxes ( 9,200)Net income $ 30,800
Overview and Definitions
9
Permanent differences.Temporary differences.Operating loss
carrybacks and carryforwards.
Tax credits.Intraperiod tax
allocations.
Causes of Differences
10
1. Should corporations be required to make interperiod income tax allocations for temporary differences, or should there be no interperiod tax allocation?
2. If interperiod tax allocation is required, should it be based on a comprehensive approach for all temporary differences or on a partial approach for certain temporary differences?
3. Should interperiod tax allocation be applied using the asset/liability method or the deferred method?
Conceptual Issues
11
The FASB concluded that-- Interperiod income tax allocation of
temporary differences is appropriate.
The comprehensive allocation approach is to be applied.
The asset/liability method of income tax allocation is to be used.
Conceptual Issues
12
Some items of revenue and expense that a corporation
reports for financial accounting purposes are
never reported for income tax purposes. These
permanent differences never reverse in a later accounting
period.
Permanent Differences
14
Revenues that are recognized for financial reporting purposes but are never taxable
1. Interest on state and local government bonds
2. Life insurance proceeds payable to a corporation upon death of insured
Revenues that are recognized for financial reporting purposes but are never taxable
1. Interest on state and local government bonds
2. Life insurance proceeds payable to a corporation upon death of insured
ContinuedContinuedContinuedContinued
Permanent Differences
15
Expenses that are recognized for financial reporting purposes but are never deductible for income tax purposes
1. Life insurance premiums on officers2. Fines resulting from a violation of the
law3. Expenses incurred in obtaining tax-
exempt income
Expenses that are recognized for financial reporting purposes but are never deductible for income tax purposes
1. Life insurance premiums on officers2. Fines resulting from a violation of the
law3. Expenses incurred in obtaining tax-
exempt income
ContinuedContinuedContinuedContinued
Permanent Differences
16
Deductions that are allowed for income tax purposes but do not qualify as expenses under generally accepted accounting principles
1. Percentage depletion in excess of cost depletion
2. Dividend received deduction
Deductions that are allowed for income tax purposes but do not qualify as expenses under generally accepted accounting principles
1. Percentage depletion in excess of cost depletion
2. Dividend received deduction
Permanent differences affect either a corporation’s reported pretax financial income or its taxable
income, but not both.
Permanent differences affect either a corporation’s reported pretax financial income or its taxable
income, but not both.
Permanent Differences
17
Corporations receive a 70% deduction for dividends received if
less than 20% of a U.S. corporation is owned, an 80% deduction for
dividends received if 80% or less of a U.S. corporation is owned, and a
100% deduction for dividends received if more than 80% of a U.S.
corporation is owned.
Corporations receive a 70% deduction for dividends received if
less than 20% of a U.S. corporation is owned, an 80% deduction for
dividends received if 80% or less of a U.S. corporation is owned, and a
100% deduction for dividends received if more than 80% of a U.S.
corporation is owned.
Dividend Received Deduction
18
A temporary difference causes a difference
between a corporation’s pretax financial income and taxable income that
“originates” in one or more years and
“reverses” in later years.
Temporary Differences
19
1. For example, a depreciable asset may be depreciated using MACRS over the prescribed tax life for income purposes, but using straight-line depreciation over a longer life for financial reporting purposes.
1. For example, a depreciable asset may be depreciated using MACRS over the prescribed tax life for income purposes, but using straight-line depreciation over a longer life for financial reporting purposes.
Future Taxable Income Will Be Higher Than Future Pretax Financial Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Taxable Amounts
TTOver Over
FF
TTOver Over
FF= Taxable= Taxable= Taxable= Taxable
20
2. Gross profit on installment sales normally is recognized at the point of sale for financial reporting purposes, but for income tax purposes, in certain situations it is recognized as cash is collected.
2. Gross profit on installment sales normally is recognized at the point of sale for financial reporting purposes, but for income tax purposes, in certain situations it is recognized as cash is collected.
Future Taxable Income Will Be Higher Than Future Pretax Financial Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Taxable Amounts
TTOver Over
FF
TTOver Over
FF= Taxable= Taxable= Taxable= Taxable
21
3. It is assumed that investment income reported under the equity method for financial purposes, but not received as a dividend, will eventually be received as dividends or as a gain when the stock is sold.
3. It is assumed that investment income reported under the equity method for financial purposes, but not received as a dividend, will eventually be received as dividends or as a gain when the stock is sold.
Future Taxable Income Will Be Higher Than Future Pretax Financial Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Taxable Amounts
TTOver Over
FF
TTOver Over
FF= Taxable= Taxable= Taxable= Taxable
22
4. Prepaid expenses are deductible when paid for tax purposes, but are not recorded as expenses under used for financial purposes.
5. Unrealized gains on trading securities are not taxable until realized.
4. Prepaid expenses are deductible when paid for tax purposes, but are not recorded as expenses under used for financial purposes.
5. Unrealized gains on trading securities are not taxable until realized.
Future Taxable Income Will Be Higher Than Future Pretax Financial Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Taxable Amounts
TTOver Over
FF
TTOver Over
FF= Taxable= Taxable= Taxable= Taxable
23
6. Profit recognized, but not realized, under the percentage of completion method for financial reporting that will not be taxable until a later year.
6. Profit recognized, but not realized, under the percentage of completion method for financial reporting that will not be taxable until a later year.
Future Taxable Income Will Be Higher Than Future Pretax Financial Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Taxable Amounts
TTOver Over
FF
TTOver Over
FF= Taxable= Taxable= Taxable= Taxable
24
1. For example, items such as rent, interest, and royalties received in advance are taxable when received but are not reported for financial reporting purposes until the service actually has been provided.
1. For example, items such as rent, interest, and royalties received in advance are taxable when received but are not reported for financial reporting purposes until the service actually has been provided.
Future Pretax Financial Income Higher Than Future Taxable Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Deductible Amounts
FFOver Over
TT
FFOver Over
TT= Deductible= Deductible= Deductible= Deductible
25
2. Product warranty costs may be estimated and recorded as expenses in the current year for financial reporting purposes but deducted, as actually incurred, for the determination of taxable income.
2. Product warranty costs may be estimated and recorded as expenses in the current year for financial reporting purposes but deducted, as actually incurred, for the determination of taxable income.
Future Pretax Financial Income Higher Than Future Taxable Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Deductible Amounts
FFOver Over
TT
FFOver Over
TT= Deductible= Deductible= Deductible= Deductible
26
3. Bad debts expense estimated for financial reporting, but not deductible until the receivable is written off for tax purposes.
4. Portion of depreciation capitalized for tax purposes into inventory.
3. Bad debts expense estimated for financial reporting, but not deductible until the receivable is written off for tax purposes.
4. Portion of depreciation capitalized for tax purposes into inventory.
Future Pretax Financial Income Higher Than Future Taxable Income
ContinuedContinuedContinuedContinued
Temporary Differences- Future Deductible Amounts
FFOver Over
TT
FFOver Over
TT= Deductible= Deductible= Deductible= Deductible
27
5. Accrued litigation losses for financial reporting, but not deducted until paid for tax purposes.
6. Losses on investments classified as trading securities.
7. Unrealized profit on sale and leaseback for financial reporting and a profit on the sale for tax purposes.
5. Accrued litigation losses for financial reporting, but not deducted until paid for tax purposes.
6. Losses on investments classified as trading securities.
7. Unrealized profit on sale and leaseback for financial reporting and a profit on the sale for tax purposes.
Future Pretax Financial Income Higher Than Future Taxable Income
Temporary Differences- Future Deductible Amounts
FFOver Over
TT
FFOver Over
TT= Deductible= Deductible= Deductible= Deductible
28
The FASB established four basic principles that a corporation is to apply
in accounting for its income taxes at the date
of its financial statements.
The FASB established four basic principles that a corporation is to apply
in accounting for its income taxes at the date
of its financial statements.
Conceptual Issues
29
1. A current tax liability or asset is recognized for the estimated income tax obligation or refund on its income tax return for the current year.
2. A deferred tax liability or asset is recognized for the estimated future tax effects of each temporary difference.
ContinuedContinuedContinuedContinued
Conceptual Issues
30
3. The measurement of deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax law or rates are not anticipated.
4. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that are not expected to be realized.
Conceptual Issues
31
1. The applicable income tax rates.
2. Whether a valuation allowance should be established for deferred tax assets.
The FASB addressed two issues regarding the measurement of deferred tax liabilities or deferred tax asset in its financial statements.
Measurement
32
Step 1. Measure the income tax obligation by applying the applicable tax rate to the current taxable income.
Step 2. Identify the existing temporary differences and classify each as either“taxable” or “deductible.”
Step 3. Measure the deferred tax liability for each taxable temporary difference using the applicable tax rate.
ContinuedContinuedContinuedContinued
Steps in Recording and Reporting of Current and
Deferred Taxes
33
Step 4. Measure the deferred tax asset for each deductible temporary difference using the applicable tax rate.
Step 5. Reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Step 6. Record the income tax obligation, change in deferred tax liabilities and/or deferred tax assets, change in valuation allowance (if any), and plug income tax expense.
Steps in Recording and Reporting of Current and
Deferred Taxes
34
In 2007, Track Company purchased an asset at a cost of $6,000. For financial reporting
purposes, the asset has a 4-year life, no residual value, and is depreciated by the units-of-output method over 6,000 units
(2007: 1,600 units). For income tax purposes the asset is depreciated under MACRS using
the 3-year life (33.33% for 2007). The taxable income is $7,500 and the income tax rate for
2007 is 30%.
In 2007, Track Company purchased an asset at a cost of $6,000. For financial reporting
purposes, the asset has a 4-year life, no residual value, and is depreciated by the units-of-output method over 6,000 units
(2007: 1,600 units). For income tax purposes the asset is depreciated under MACRS using
the 3-year life (33.33% for 2007). The taxable income is $7,500 and the income tax rate for
2007 is 30%.
Basic Entries
This button will be used laterThis button will be used later
35
In the future taxable income will be higher than financial income, so the taxable amount times the tax rate is the deferred tax liability.
In the future taxable income will be higher than financial income, so the taxable amount times the tax rate is the deferred tax liability.
Financial Income Tax Year Depreciation Depreciation Difference
2007 $1,600 $2,000 400
Deferred Tax Liability
36
Step 1. $7,500 (taxable income) x 30%
Step 2. The depreciation difference is identified as the only taxable temporary difference.
Step 3. The $120 total deferred tax liability is calculated by multiplying the total taxable temporary difference ($400) times the future tax rate (30%).
Steps 4 and 5. No deferred tax asset, so not required.
Step 6. A journal entry is made.
ContinuedContinuedContinuedContinued
Basic Entries
37
Income Tax Expense (plug) 2,370Income Taxes Payable 2,250Deferred Tax Liability 120
$2,250 + $120
Basic Entries
38
When future enacted tax rates change,
reversals are calculated at the future tax rates.
When future enacted tax rates change,
reversals are calculated at the future tax rates.
Future Tax Rates Differ
39
Assume the same facts as in Slide 34, except that the income tax rate for 2007 for 40%, but Congress has
enacted tax rates of 35% for 2008, 33% for 2009, and 30% for 2010 and beyond.
Assume the same facts as in Slide 34, except that the income tax rate for 2007 for 40%, but Congress has
enacted tax rates of 35% for 2008, 33% for 2009, and 30% for 2010 and beyond.
Financial Income Tax Year Depreciation Depreciation
2007 $2,800 $2,6672008 1,100 8892009 500 444
Click here to review Slide 34, then click the button on Slide 34 to return.
Example 2-Multiple Rates
40
2007 2008 2009
Deferred Tax Liability
Financial depreciation $2,800 $1,100 $500
Income tax depreciation(2,667 ) (889 ) (444 )
Taxable amount $ 133 $ 211 $ 56 = $400
Income tax rate 0.35 0.33 0.30
Deferred tax liability $ 47 $ 70 $ 17 = $134
Income Tax Expense (plug) 3,134Deferred Tax Liability 134Income Taxes Payable 3,000
Example 2-Multiple Rates
41
Klemper Company sells a product on which it provides
a 3-year warranty. For financial reporting purposes,
the company estimates its future warranty costs and
records a warranty expense/liability at year-end. For income tax purposes, the
company deducts its warranty costs when paid.
Klemper Company sells a product on which it provides
a 3-year warranty. For financial reporting purposes,
the company estimates its future warranty costs and
records a warranty expense/liability at year-end. For income tax purposes, the
company deducts its warranty costs when paid.
Deferred Tax Asset
42
At the beginning of 2007, the company had a deferred tax asset of $330 related to its warranty
plan. At the end of 2007, the company estimates that its ending warranty liability is $1,400. In 2007, the
company has taxable income of $5,000 and a tax rate of 30%. The ending Deferred Asset should be $1,400
X 30%, or $420.
At the beginning of 2007, the company had a deferred tax asset of $330 related to its warranty
plan. At the end of 2007, the company estimates that its ending warranty liability is $1,400. In 2007, the
company has taxable income of $5,000 and a tax rate of 30%. The ending Deferred Asset should be $1,400
X 30%, or $420.
Income Tax Expense (plug) $1,410Deferred Tax Asset ($420 - $330) 90
Income Taxes Payable ($5,000 x 30%) 1,500
Deferred Tax Asset
43
Deferred Tax Asset and Valuation Allowance
If it is “more likely than not” that a deferred tax
asset will not be realized, a valuation allowance must be established.
If it is “more likely than not” that a deferred tax
asset will not be realized, a valuation allowance must be established.
44
Negative Evidence
Negative evidence indicating the need for a valuation allowance include:
1. A history of operating loss or tax credit carryforwards expiring unused.
2. Losses expected in early future years (by a presently profitable entity).
3. Unrecognized loss contingencies that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years.
4. A carryback, carryforward period that is so brief that it would limit realization of tax benefits.
45
Positive EvidencePositive evidence as to whether existing net deductible
temporary differences and loss carryforwards will be realized include:
1. Existing contracts or firm sales backlog will produce more than enough future taxable income to realize the deferred tax asset based on existing sales prices and cost structures.
2. Income in carryback years prior to the present year.3. Feasible and presently available tax strategies would result
in more than enough taxable income to realize the deferred tax asset.
4. Appreciation of assets is sufficient to realize the deferred tax asset.
5. A strong earnings history exclusive of the charge to income that created the future deductible amount coupled with evidence indicating the transaction or event that created the charge to income (i.e. extraordinary item) is an aberration rather than a continuing condition.
46
Deferred Tax Assets and Valuation Allowance
At the end of 2007, Klemper Corporation decides that it is “more likely than not” that
$600 of the ending temporary difference will not be realized. (30% tax rate)
At the end of 2007, Klemper Corporation decides that it is “more likely than not” that
$600 of the ending temporary difference will not be realized. (30% tax rate)
Income Tax Expense 180Allowance to Reduce Deferred Tax Asset to Realizable Value 180
47
PPretax financial income XXAdd: Deductible temporary items XXFines XXExcess charitable contributions XXExpenses to earn tax exempt income XXExcess of bad debts expense over write-offs (deductible item) XX XX
XXLess: Taxable temporary items XXTax exempt interest XXProceeds of life insurance XXExcess of percentage depletion over cost depletion XXEquity income not received as dividends (taxable item) XXDividends received deduction XX XX
Taxable income XX
Determining Taxable IncomeBoth permanent and temporary differences are considered when determining taxable income.
48
Example 5-Pages 959 & 960
Assume the following for Sand Company for 2007:Interest on municipal bonds $1,500Gross profit on installment sales-financial 10,000Gross profit on installment sales-taxable 2,000Rent revenue-financial 3,000Rent revenue-taxable 9,000Pre-tax financial income 75,500Deferred tax liability-Jan. 1, 2007 300Deferred gross profit-installment sales-2006 1,000Make the journal entry for 2007.
49
PPretax financial income $75,500Add: Rent revenue collected in advance 6,000
$81,500Less: Tax exempt interest $1,500Difference in gross profit on installment sales 8,000 9,500Taxable income $72,000
Determining Taxable IncomeBoth permanent and temporary differences are considered when determining taxable income.
50
Deferred Tax Assets and Liabilities
Income Tax Expense (plug) 22,200Deferred Tax Asset 1,800
Deferred Tax Liability 2,400Taxes Payable 21,600
$8,000 (2007) + $1,000 (2006)$8,000 (2007) + $1,000 (2006)
51
FASB concluded in FASB Statement No. 109 that GAAP for operating
carrybacks and carryforwards are...
FASB concluded in FASB Statement No. 109 that GAAP for operating
carrybacks and carryforwards are...
Conceptual Issues
52
1. A corporation must recognize the tax benefit of an operating loss carryback in the period of the loss as an asset on its balance sheet and as a reduction of the operating loss on its income statement.
2. A corporation must recognize the tax benefit of an operating loss carryforward in the period of the loss as a deferred tax asset. However, it must reduce the deferred tax asset by a valuation allowance if it is more likely than not that the corporation will not realize some or all of the deferred tax asset.
Conceptual Issues
54
Monk Company reports a pretax operating loss of $90,000 in 2007 for both financial reporting and income tax purposes, and that reported pretax
financial income and taxable income for the previous 2 years had been: 2005--$40,000 (tax rate 25%); and
2006--$70,000 (tax rate 30%).
Monk Company reports a pretax operating loss of $90,000 in 2007 for both financial reporting and income tax purposes, and that reported pretax
financial income and taxable income for the previous 2 years had been: 2005--$40,000 (tax rate 25%); and
2006--$70,000 (tax rate 30%).
Income Tax Refund Receivable 25,000 Income Tax Benefit From Operating Loss Carryback 25,000
2005 $40,000 x 0.25 =2005 $40,000 x 0.25 = $10,000$10,0002006 $50,000 x 0.30 =2006 $50,000 x 0.30 = 15,00015,000
$25,000$25,000
Operating Loss Carryback
ContinuedContinuedContinuedContinued
55
Income Statement
An operating loss is reduced by the benefit, not by the total carryback.
Pretax operating loss $(90,000)
Less: Income tax benefit from operating loss carryback$40,000 x 25% + $50,000 x 30% 25,000
Net loss $(65,000)
56
Lake Company reports a pretax operating loss of $60,000 in 2007 for both financial reporting and
income tax purposes. The income tax rate is 30% and no change in the tax rate has been enacted for
future years. The deferred tax asset is calculated to be $18,000 ($60,000 x 0.30).
Lake Company reports a pretax operating loss of $60,000 in 2007 for both financial reporting and
income tax purposes. The income tax rate is 30% and no change in the tax rate has been enacted for
future years. The deferred tax asset is calculated to be $18,000 ($60,000 x 0.30).
Deferred Tax Asset 18,000 Income Tax Benefit From Operating Loss Carryforward 18,000
ContinuedContinuedContinuedContinued
Operating Loss Carryforward
57
If the company establishes a valuation allowance for the entire amount of the deferred tax asset, it also
makes the following journal entry at the end of 2007.
If the company establishes a valuation allowance for the entire amount of the deferred tax asset, it also
makes the following journal entry at the end of 2007.
Income Tax Benefit From Operating Loss Carryforward 18,000 Allowance to Reduce Deferred Tax Asset to Realizable Value 18,000
Operating Loss Carryforward
ContinuedContinuedContinuedContinued
58
In 2008, Lake Company operates successfully and earns pretax operating income of $100,000 for both
financial reporting and tax purposes.
In 2008, Lake Company operates successfully and earns pretax operating income of $100,000 for both
financial reporting and tax purposes.
Income Tax Expense 12,000Allowance to Reduce Deferred Tax Asset to Realizable Value 18,000 Income Taxes Payable 12,000 Deferred Tax Asset 18,000
Operating Loss Carryforward
$40,000 x 0.30$40,000 x 0.30$40,000 x 0.30$40,000 x 0.30
59
Income tax allocation within a period is mandatory under
GAAP.
Income tax allocation within a period is mandatory under
GAAP.
Intraperiod Tax Allocation
60
Intraperiod Tax AllocationIncome tax may appear in five different places
in the financial statements for a period.
1. Income from continuing operations
2. Discontinued operations
3. Extraordinary items
4. Prior period and retrospective adjustments
5. Other comprehensive income
61
Income from continuing operations [$270,000 (revenues) – $190,000 (expenses)] $80,000 Gain on disposal of discontinued Segment X 18,000 Loss from operations of discontinued Segment X (5,000 )Extraordinary loss on bond redemption (10,000 )Cumulative effect of change in accounting principle (accelerated depreciation to S/L) 15,000 Prior period adjustment (error) (8,000 )Amount subject to income taxes $90,000
ContinuedContinuedContinuedContinued
Intraperiod Tax AllocationKalloway Company reports the following items of
pretax financial and taxable income for 2007:
Kalloway Company reports the following items of pretax financial and taxable income for 2007:
62
Kalloway Company is subject to income tax rates of 20% on the first $50,000 of
income and 30% on all income in excess
of $50,000.
Kalloway Company is subject to income tax rates of 20% on the first $50,000 of
income and 30% on all income in excess
of $50,000.
Let’s take a look at Kalloway
Company’s income statement for 2007.
Let’s take a look at Kalloway
Company’s income statement for 2007.
ContinuedContinuedContinuedContinued
Intraperiod Tax Allocation
63
Pretax Amount
Income Tax Rate
Income Tax
Expense (Cr.)Component (Pretax)
Income from continuingoperations $50,000 0.20
$10,00030,000 0.30
9,000Gain on disposal of
discontinued Division X 18,000 0.305,400
Extraordinary loss from tornado(5,000)0.30(1,500)
x =
ContinuedContinuedContinuedContinued
Intraperiod Tax Allocation
64
Pretax Amount
Income Tax Rate
Income Tax
Expense (Cr.)Component (Pretax)
Cumulative effect of change in accounting principle on prior year’s income $15,000 0.20
$ 4,300Prior period adjustment (8,000) 0.30 (2,400)Total income tax expense
$22,000
x =
Intraperiod Tax Allocation
65
Now, let’s examine Kalloway Company’s income statement for
2007.
Now, let’s examine Kalloway Company’s income statement for
2007.
Intraperiod Tax Allcoation
66
(0.20 x $50,000) + (0.20 x $50,000) + (0.30 x $30,000)(0.30 x $30,000)
Kalloway CompanyIncome Statement
for Year Ended December 31, 2007
Revenues (listed separately) $270,000 Expenses (listed separately) (190,000)Pretax income from continuing operations$ 80,000 Income tax expense (19,000)
Intraperiod Tax Allocation
67
Kalloway CompanyIncome Statement
for Year Ended December 31, 2007
Revenues (listed separately) $270,000 Expenses (listed separately) (190,000)Pretax income from continuing operations $ 80,000 Income tax expense (19,000)Income from continuing operations $ 61,000 Results of discontinued operations: Gain on disposal of discontinued Segment X (net of $5,400 tax) $12,600
Loss from operations of discontinued Segment X (net of $1,500 tax credit) (3,500) 9,100
Income before extraordinary item $ 70,100
Statement ContinuedStatement ContinuedStatement ContinuedStatement Continued
$18,000 x 0.30$18,000 x 0.30
($5,000) X .30($5,000) X .30
68
Income before extraordinary item $70,100 Extraordinary loss from tornado (net of $3,000 income tax credit) (7,000)Net Income $63,100
Prior period adjustments on the statement of
retained earnings also would be shown net of tax.
Prior period adjustments on the statement of
retained earnings also would be shown net of tax.
($10,000) x 0.30($10,000) x 0.30
69
A corporation must report its deferred tax liabilities and assets in
two classifications...
A corporation must report its deferred tax liabilities and assets in
two classifications...
…a net current amount and a net
noncurrent amount.
…a net current amount and a net
noncurrent amount.
Balance Sheet Presentation
70
Deferred tax liabilities and assets are classified
as current or noncurrent based upon their related
assets or liabilities for financial reporting.
Deferred tax liabilities and assets are classified
as current or noncurrent based upon their related
assets or liabilities for financial reporting.
Balance Sheet Presentation
71
Any deferred tax liability or asset not related to an asset or liability
is classified according to the expected reversal date of the
temporary difference.
Any deferred tax liability or asset not related to an asset or liability
is classified according to the expected reversal date of the
temporary difference.
Balance Sheet Presentation
72
Current and Noncurrent
RelatedAsset orLiability Classification
Installment sales Accounts Receivable CurrentInventory differences Inventory CurrentAllowance for Doubtful Accounts Receivable CurrentDepreciation differences Plant Assets Noncurrent
Estimated ReversalsAccrued Pension Expense Probably noncurrentWarranty Liability Probably currentUnearned RevenueNOL
73
Account Related BalanceDeferred Tax Accounts Balance Sheet Account
Deferred Tax Liabilities
Installment sales $ 6,000 credit Accounts receivable
Depreciation $12,000 credit Property, plant, and equipment
Deferred Tax Assets
Warranty costs $ 3,400 debit Warranty liability
Rent revenue $ 2,500 debit Unearned revenue
Balance Sheet Presentation
CurrentCurrent
CurrentCurrent
NoncurrentNoncurrent
NoncurrentNoncurrent
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The next slide presents an illustration that includes
several temporary differences. Assume taxable
income of $700,000 at a 30% tax rate.
The next slide presents an illustration that includes
several temporary differences. Assume taxable
income of $700,000 at a 30% tax rate.
75
Comprehensive Illustration
Balance Balance sheet sheet
amountsamountsDeferred Tax Asset 25,500 Income Tax Expense (plug) 194,500
Deferred Tax Liability 10,000Taxes Payable 210,000ContinuedContinuedContinuedContinued
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Current and Deferred Amounts on INCOME STATEMENT
Taxes Payable (current) $210,000
Deferred Tax Asset (net)
($25,500 asset - $10,000 liability) 15,500
Income Tax Expense $194,500